Understanding ESG ‘Green’ Investments
ESG stands for Environmental, Social, and Governance — three key factors used to assess the sustainability and ethical impact of an investment.
Environmental: How a company impacts the planet (e.g., carbon footprint, renewable energy use, waste reduction).
Social: How a company treats its employees, customers, and communities (e.g., diversity, worker rights, supply chain ethics).
Governance: How a company is run (e.g., board diversity, executive pay, transparency, shareholder rights).
ESG investing combines traditional financial analysis with these non-financial factors to build a more complete picture of an investment’s risks and opportunities.
Why ESG Matters
Risk management: Companies with poor ESG practices can face reputational damage, legal issues, and regulatory penalties.
Performance potential: Some ESG-aligned businesses may be better positioned for long-term success as global regulations tighten and consumer expectations shift.
Values alignment: Investors can align their portfolios with their personal or corporate values.
ESG and the EU’s SFDR Classification
Under the Sustainable Finance Disclosure Regulation (SFDR), investment funds in the EU must be classified into one of three categories based on their sustainability focus:
Article 6 – No specific environmental focus
Do not promote environmental or social characteristics.
May still consider ESG risks if they affect returns, but sustainability is not a key factor.
Example: A global equity fund with no ESG screening.
Article 8 – “Light Green” funds
Promote environmental and/or social characteristics, but sustainability is not their core investment objective.
ESG criteria are applied when choosing investments, but alongside other financial factors.
Example: A European equity fund that screens out fossil fuel companies but still invests broadly across industries.
Article 9 – “Dark Green” funds
Have sustainability as their primary investment objective.
Investments are specifically chosen for their environmental or social impact.
Example: A renewable energy fund investing solely in wind and solar projects.
Common ESG Investment Approaches
Negative screening – Avoiding companies or industries that do not meet ESG criteria (e.g., tobacco, weapons, coal mining).
Positive screening – Proactively selecting companies that score highly on ESG metrics.
Thematic investing – Focusing on themes such as clean energy, water management, or gender equality.
Impact investing – Targeting investments that deliver measurable positive environmental or social outcomes alongside financial returns.
Considerations Before Investing in ESG Funds
Greenwashing risk – Some funds claim to be ESG-focused without making meaningful sustainability efforts.
Performance trade-offs – While many ESG funds perform competitively, exclusions or thematic focus may reduce diversification.
Personal priorities – ESG covers a broad range of issues; not all ESG funds focus on the same areas.
Regulatory changes – ESG reporting and classifications continue to evolve under EU rules.
Key Takeaway
ESG investing allows you to combine financial goals with ethical or sustainability values. The EU’s SFDR Articles 6, 8, and 9 provide a clear framework for understanding a fund’s level of environmental and social commitment. However, due diligence is essential — not all ESG-labelled funds are created equal.
How ESG Fits into Your Portfolio
Incorporating ESG funds doesn’t have to be an “all or nothing” decision — it’s about finding the right balance between sustainability goals, risk profile, and return expectations.
Example approaches:
Balanced approach
Mix of Article 6, 8, and 9 funds
Article 6 for diversification and exposure to sectors not covered by ESG funds.
Article 8 for steady integration of ESG principles.
Article 9 for targeted sustainability impact.
ESG-tilted approach
Heavier allocation to Article 8 and 9 funds.
Article 6 may be used sparingly to maintain exposure to key markets.
Good for investors who value sustainability but also want a broad market base.
Impact-driven approach
Primarily Article 9 funds with a small allocation to Article 8.
Suitable for those prioritising measurable environmental or social outcomes.
Often thematic — e.g., renewable energy, water conservation, or sustainable agriculture.
Practical tip:
ESG doesn’t necessarily mean lower returns. The right blend of sustainability-focused and traditional investments can help you meet both financial and ethical objectives. Regularly review fund classifications and holdings, as SFDR rules and fund strategies can evolve over time.