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If you’re thinking about buying a car, it’s important to consider how the purchase will fit into your overall financial responsibilities, including student debt. You’ll want to be sure you can afford both the cost of the car and the ongoing expense of driving and maintaining it.

Refinancing student loans to buy a car is one option that may allow you to free up money to put toward the cost of a car or monthly car payments. Here’s what to know about refinancing student loans to buy a car, if you can use student loans to buy a car, and how to make the choice that’s right for you.

Can I Use Student Loans to Buy a Car?

Federal student loans (and many private ones) are for “qualified” educational expenses, such as tuition, room and board, and books and supplies. And while the cost of transportation (for example, commuting to school) is considered a qualified expense, purchasing a car is not.

So can you use student loans to buy a car if you’re using the car to drive to class? No – only an allowance for the cost of driving the car to school would be an eligible expense. It’s an important distinction: A borrower caught misusing student loan funds can face serious repercussions, including having their loan revoked and the balance becoming immediately due.

Some private loans may have broader criteria for what constitutes an educational expense, and fewer penalties for how you use the loans. Still, using a private student loan to buy a car may not be the most efficient or smartest use of funds. You may end up paying more interest than you would on a typical car loan, and then have fewer funds to go toward the educational expenses you need.

So what do you do if you have student debt and need to buy a car? Refinancing may be an option, and can free up money in your budget to open a car loan. Here’s what to consider before refinancing student loans to buy a car.

Recommended: Should I Buy a New or Used Car?

Refinancing Student Loans to Buy a Car

When you refinance a student loan, you pay off all or some of your loans with a new loan with new terms from a private lender. The primary benefit of refinancing is that you can save money over the life of the loan if you’re able to lower your interest rate.

You can also change the terms of your payment, potentially spreading your payment over a longer period of time, and paying less each month. If you go this route, however, you may end up paying more in interest over the life of your loan.

Refinancing student loans can help lower your monthly payments and have more room in your budget to cover the costs of a car. However, it’s important to understand that if you refinance federal student loans, you’ll lose access to federal benefits and protections, such as income-driven repayment plans and forgiveness. If you’re planning to take advantage of any of these federal programs, refinancing is likely not a good option for you.

Pros of Refinancing Student Loans to Buy a Car

Considering the pros and cons of refinancing student loans to buy a car can help you decide if this choice is right for you. You’ll want to be able to cover the costs of the car as you continue to pay your student loans back. Some of the pros of refinancing a student loan to buy a car include:

Lower Monthly Student Loan Payments Can Offset Car Costs

Refinancing your student loans can lower your monthly student loan payment if you’re able to secure a lower interest rate or extend your loan term. A lower monthly student loan payment can mean that you have more funds to cover the costs of buying or maintaining a new car.

Recommended: Guide to Student Loan Refunds

As mentioned, lowering your interest rate can save you money over the life of a loan. Extending your loan term may not save you money, but it can free up cash to have more funds to put toward the costs of a car.

Simplified Payments Can Make Tracking Car Expenses Easier

When you refinance multiple loans into a single new loan, you’ll have one new monthly payment. This can make it easier to keep track of your student loan payments and be sure you’re making them on time.

And if you’re looking for ways to get a car loan, having a simplified student loan payment can make budgeting easier as you add a new loan to the mix. As mentioned earlier, you may find lower interest rates on car loans than what you’re paying on your student loans — another reason using student loans funds toward car expenses may not be the best choice even if they’re allowed according to your loan terms.

Saving Money on Student Loans Can Help Pay for a Car

Many people explore refinancing even when they don’t need to make an immediate purchase like a car. That’s because refinancing may help save money over the life of the loan if you can lower your interest rate.

And while applying for student loans can be arduous, applying to refinance student loans is relatively straightforward. You can check your rate and get an estimate of loan terms before you officially apply, and an application can generally be completed online. You can also compare refinancing rates without triggering a hard credit check—a credit check is only done once a formal loan application is submitted.

Cons of Refinancing Student Loans to Buy a Car

While refinancing student loans to buy a car can be one way to cover car payments when you have existing student debt, there are cons to this option as well. Here are some of the cons of refinancing a student loan to buy a car.

Recommended: How To Save Up For a Car

Losing Access to Original Loan Terms

If you refinance your loans, you lose access to the terms of the original loan. This may be important to consider if you’re refinancing federal loans.

Refinancing federal loans not only means potentially missing out on federal forgiveness or repayment programs, but also the opportunity for deferment or forbearance if you qualify.

As mentioned earlier, if you plan to take advantage of federal programs, refinancing is likely not a good option for you. Some people may choose only to refinance private loans.

Repayment May Take Longer

If you extend the length of your student loan term when you refinance to lower your monthly payments to offset the costs of a new car, it will take longer to repay your loan and you may end up paying more in interest over the life of the loan.

Overstretching Your Budget

It’s important to make sure that you can afford any car loan that you take out. If you’re planning on getting a car loan or leasing a car, will you be able to comfortably cover your student loans, the car payment, and other bills? What would happen if you were to lose a job or source of income? Those questions can help you assess whether a car payment would stretch you financially.

A borrower who can’t make the payments risks having the car repossessed and damaging their credit. If you ever think you’ll miss a monthly car payment, reach out to your lender to find out what your options are. Down the road, refinancing your car loan is also an option if you’re able to secure better terms.

Pros of refinancing student loans to buy a car	Cons of refinancing student loans to buy a car
Lower monthly student loan payments can offset car costs	Losing access to federal benefits and protections if you refinance federal loans
Simplified payments can make tracking car expenses easier	Longer repayment time if you extend your term
Saving money on student loans can help pay for a car	Overstretching your budget if you’re not able to afford the costs of a new car

Recommended: Passive Income Ideas

Refinancing Your Student Loans With SoFi

When you need a new car, you may need to rethink your finances in order to cover the costs. Refinancing student loans to buy a car is one option that can help you free up funds. You may be able to lower your monthly payments and save money over the life of the loan if you qualify for a lower interest rate. You can calculate your potential savings using a student loan refinance calculator.

Refinancing can be a good option if you’re able to qualify for a lower interest rate and are not planning to use any federal programs. When you refinance a federal loan, you lose access to federal benefits and protections.

If you’re considering refinancing your student loans, SoFi offers flexible terms, competitive rates, and no fees.

Learn more about whether refinancing student loans with SoFi is right for you.

FAQ

Do car dealerships look at student loans?

Your student loans appear on your credit report. If you apply for a car loan from a dealership, then they may be able to see your payment history and your credit score on your credit report. Student loans also count toward your debt-to-income ratio which may affect your ability to secure a car loan.

Does financing a car affect student loans?

Financing a car won’t affect your current student loans, but consider how taking on another loan will impact your finances. It’s important to be certain that you’ll be able to pay both your student loan payments and any new car loan payments on time. Refinancing a student loan can help offset the costs of a new car if you can save money by qualifying for a lower interest rate. It can be a good option if you’re refinancing private loans or not planning to take advantage of any federal programs.

Is it smart to buy a car after college?

Buying a car after college is a personal decision. But keep in mind that a lot can change in a few years, and a new car or a lease may be a liability if your plans change. It may make sense to consider buying a used car or holding off on buying a car until you have a sense of what your commute and lifestyle will look like.

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Photo credit: iStock/LeoPatrizi

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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While student loan debt can make it harder to qualify for a mortgage, that isn’t necessarily the case for every student loan borrower.

Keep reading to learn more about buying a home when you have student loan debt and how to make the process easier.

How Student Loan Debt Might Affect Buying a Home

Student loan debt isn’t singled out by mortgage lenders, but when someone applies for a mortgage, all of their debt is taken into account when the lender decides whether or not to loan them money and what rates or terms to offer — particularly when it comes to their DTI, or debt-to-income ratio.

More on that in a minute.

Does the Government Have a Student Loan Home Buying Program?

The government doesn’t have a home buying program whose goal is to help people with student loans secure a mortgage, but it does have programs designed to help first-time and repeat homebuyers buy a single-family home, condo, or other primary dwellings, which may be a good fit for borrowers with student loan debt.

FHA loans (guaranteed by the U.S. Federal Housing Administration) are the best known. Applicants with a minimum 580 FICO® credit score qualify for the 3.5% down payment advantage; someone with a 500 to 580 score might be able to get an FHA loan with 10% down.

Lenders of VA loans (backed by the Department of Veterans Affairs or, in the case of Native American Direct Loans, issued directly) and USDA loans (backed or issued by the Department of Agriculture) often accept lower credit scores than would be required for a conventional mortgage.

VA loans usually require no down payment, and USDA loans never do.

Do Student Loans Affect Your Credit Scores?

When it comes to student loan debt and buying a home, what matters more during the mortgage application process than having student loans is a potential borrower’s credit score.

Credit scores, usually from 300 to 850, are made up of factors such as a history of on-time debt payments, how much debt someone has, and what type of debt it is. Mortgage lenders use FICO scores for applications, with some exceptions.

FICO created different scoring models for Experian, Equifax, and TransUnion, the three main credit reporting bureaus. Mortgage lenders often receive a single report that contains an applicant’s three credit reports and FICO scores.

Student loan debt can help or hurt your credit scores. If you have a history of making on-time payments to your student loans and having them improves your credit mix, that debt could help your credit scores. If you have a history of making late student loan payments, your credit scores can be negatively affected.

Student Loan Debt-to-Income Ratio

Because debt can, clearly, strain a monthly budget, mortgage lenders evaluate the applicant’s DTI ratio. This is one of the factors mortgage lenders take most seriously, as the ratio accounts for how much of your gross monthly income is spent on your debt payments, including student loans.

DTI = monthly debts / gross monthly income x 100

Typically lenders want to see a DTI of 36% or less, though that is not necessarily the maximum.

If your DTI ratio is high and it makes it hard for you to qualify for a mortgage, there are steps you can take to lower your DTI.

Pay Down Your Debts

One straightforward way for aspiring homebuyers to lower their DTI is to pay off more of their student loan debt.

If they can’t pay off the debt in full, they can try to increase their monthly payments or make principal-only payments. Each month as they pay down their debt, their DTI will improve as long as they don’t take on more debt.

Increase Your Income

One way to improve your DTI is to increase your income by applying for a new job, plotting a promotion, or starting a side hustle. An income boost will make the ratio of debt to income smaller.

Increasing your income can serve a second purpose: You can put the extra funds toward debt repayment, which also will decrease your DTI.

Recommended: Passive Income Ideas

Refinance Your Student Loans

Refinancing student loans can be appealing if you can get a lower interest rate or a better-fitting repayment term.

When someone refinances a private or federal student loan, they take out a new loan from a private lender and use it to pay off the existing loan. If you can secure a lower interest rate and keep or reduce the term, you will spend less on total interest and put more money each month toward principal. It might help to crunch some numbers with a student loan refinancing calculator.

A better interest rate when refinancing is not guaranteed, so it’s worth shopping around for the best deal to see if refinancing is worthwhile. Let’s say you find a good deal but later find a better deal. Can you refinance student loans more than once? Indeed.

It’s important to note that although refinancing a federal student loan into a private one can potentially save the borrower money on interest, the conversion will mean losing access to federal deferment, income-driven repayment programs, and public service loan forgiveness.

Borrowers with federal student loans can consolidate them, but doing so doesn’t save money on interest because the new rate for a Federal Direct Consolidation Loan is simply an average of the loan rates, rounded up to the next one-eighth of a percentage point. Still, the consolidation loan remains eligible for federal benefits.

Income-Based Repayment Plan

A potential homeowner who has federal student loans may choose income-based repayment. Those who enroll tend to have big loan balances and/or lower income.

The four income-driven repayment (IDR) plans base payments on family size and state of residence in addition to income. After 20 or 25 years of payments, borrowers are eligible to have any remaining balance forgiven.

An IDR plan lowers monthly payments, which could free up money to save for a down payment. But the longer loan term may slow down progress toward paying off your debt, so it’s worth thinking about how an IDR plan will affect your DTI ratio over time.

Fannie Mae Guidelines

Lenders often follow Fannie Mae guidelines when deciding whether to approve a conventional home loan, which is one not backed by the federal government and is the most common type of mortgage.

Here are some key guidelines:

•  Minimum credit score: 620

•  DTI ratio: usually up to 45%

•  Income: two years of stable income and employment, with some exceptions

•  Down payment minimum: 3%

•  Private mortgage insurance: required when down payment is under 20%

The Fannie Mae HomeReady® Mortgage is an option for low-income first-time homebuyers and repeat buyers. The loan has pricing that is better than or equal to standard loan pricing and has lower than standard mortgage insurance coverage requirements.

The Takeaway

Having student loans doesn’t necessarily make it harder to qualify for a mortgage, but borrowers may find that refinancing or paying off their student loans frees up room in their monthly budget, which can make homeownership more accessible.

Student loan borrowers dreaming of buying a house may want to consider student loan refinancing with SoFi.

Choose from low fixed or variable rates on a SoFi refi.

FAQ

Does student loan debt have a negative impact on buying a home?

Not necessarily, but student loan debt can lower or nix borrowers’ chances of mortgage approval if their DTI ratio is too high, and late student loan payments can ding credit scores.

Is it possible to buy a home with student loan debt?

Yes, it’s quite possible to buy a home with student loan debt, especially if the mortgage applicant’s income is much higher than their monthly debt payments.

Should you pay down your student loans before buying a house?

It’s not necessary to pay down a student loan before trying to buy a house, but doing so can’t hurt. The student loan balance affects a mortgage applicant’s DTI ratio, and any money freed up in the budget can go toward the down payment, closing costs, or future mortgage payments.

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Photo credit: iStock/tonefotografia

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Global inflation and supply chain issues have derailed a lot of people’s post-COVID plans, including renovating or remodeling their homes. The cost of remodeling and renovating has risen partly because there’s a shortage of supplies, so retailers have raised prices on the supplies and materials they do have. Plus, the Federal Reserve Bank has raised interest rates in an effort to slow inflation, meaning home improvement loans cost more. This doesn’t necessarily mean homeowners must put off renovations, but it does mean that sticking to your home reno budget may require more creativity and planning.

How to Keep Inflation From Ruining Your Home Renovation Budget

Here are some strategies for keeping inflation from blowing your home reno budget:

1. Understand Renovation vs Remodel

People use the terms renovation and remodel interchangeably, but they are not the same thing. A renovation is fixing up what’s already there; a remodel is changing what’s there. That may mean expanding a room, or converting a pantry to a breakfast nook. Remodeling is usually more expensive because it is more involved and can include the need for permits, whereas renovations are often smaller projects that you can sometimes DIY. Before getting started with either, it can be smart to budget for the level of transformation you can reasonably afford in this economic climate.

2. Invest Wisely

One thing experts agree on is that the best home renovation or remodel investments are projects that can raise the value of a home at resale. Some of these projects include a kitchen or bathroom makeover, expanding outdoor space, and even just replacing the garage door. SoFi’s home improvement ROI calculator can help you identify some of these home investment opportunities.

3. Finance Carefully

Since you’re investing in your home, especially with the idea of improving its value, it’s smart to look for the right partner to help you strategize how to finance your project. It’s possible your project may be eligible for a home equity loan where you borrow against the value of your home for funds. Another financing option is a personal loan. Unlike the home equity loan, a personal loan for home improvement projects requires no collateral.

💡 Learn more about how home improvement loans work.

4. Have a Plan

Home renovation projects notoriously run over budget. Global supply chain issues are making that even worse. Many projects must happen according to a specific sequence, like receiving a delivery of plumbing supplies and scheduling workers before you gut the bathroom. If something goes wrong with the sequencing, it might mean you lose your workers to another job that’s ready to go, or you have to pay extra to expedite shipping. These hold ups can be expensive. That’s why it’s important to plan meticulously before you begin.

5. Be Flexible

Can’t get the Italian granite you were eyeing for the kitchen counters? What about slate, which can be a fourth of the price and can look just as stunning. Or Sintered Stone? Or steel? Deciding from the beginning to be flexible on the things you can, and uncompromising only on the materials or designs that really matter to you, can save you thousands.

6. Consider High Quality Items

Because there is generally lower demand for slightly higher quality and pricier items, those appliances and materials haven’t risen as much in price . So you might have an opportunity to get something you might have considered out of your price range for about the same as the more standard one.

7. Oversee the Project

The typical contractor fee for most general contractors to oversee renovation projects is 20% of the project , so if you’re planning a $50,000 remodel and you do the contracting yourself, you could save $10,000 right off the bat. But it will be your job to source and schedule the experts you need — plumbers, electricians, etc. — and oversee the work. Just remember: It’s not uncommon to pay to have a job done twice during renovations, so it’s wise to stay on top of workers if you choose this option.

8. Do Something Yourself

Using skills you already have, or picking up a few through online videos and in-person workshops, can save you some time and money. If you decide you can do the job yourself, and it isn’t one that requires permitting and licensing, you may be happy with your results. Doing it yourself does have its risks such as not ending up with the quality you could have by using a professional. On the other hand, if you have some skills, you might do a better job than a mediocre contractor who isn’t as invested in your home as you are.

9. Vet Your Craftsman

Hiring someone who does a poor job or damages your home is a common risk of home renovation projects. Shopping for carpenters, painters, plumbers, and others solely on the basis of price can very easily lead to problems, which can require more time and investment on your part to correct. Choosing a contractor that’s skilled and reliable requires taking the time to look at portfolios, ask questions, and seek recommendations and reviews.

10. Collect a few Bids

It can take more time, but getting bids from several different companies is a smart way to help keep your renovation costs low. Not only does this type of “shopping” give you options for how much you can pay for specific tasks, but it can also give you an idea of how different contractors would approach your project.

11. Shop Wisely

It can be easy to order items online or pick up everything from your local home remodeling store, but high shipping costs and limited in-store options can actually increase your expenditures. If you’re looking to minimize costs, settling for what’s most convenient isn’t likely to help you. Instead, taking the time to shop around thoroughly and think creatively about your renovation plans can help save you a bundle.

12. Price Match

If you find an appliance online that you really love, you may want to try bringing a copy of that ad to your local retailer, and asking them to match the deal. This way you not only save yourself shipping costs, but you also get the best price for the item you prefer.

13. Try Repurposing

Before you spend money replacing what you have, consider transforming your items instead. Perhaps you could refinish or paint your kitchen cabinets instead of replacing them. Changing the hardware and interior panels are also simpler options that can reflect your style. Sometimes small changes can result in big transformations.

14. Consider Salvaged Materials

You can sometimes save big using salvaged materials. Secondhand shops like Habitat ReStores can sell old kitchen cabinets, flooring, light fixtures, plumbing fixtures, and furnishings for a fraction of the original sale price. You can even find unused paint, hardware, and art. For additional options, online sites like Craigslist and Facebook Marketplace can provide useful, previously used items as well.

15. Be Creative Side

Pinterest can be a great source of budget friendly renovation ideas. You can spend a few hundred dollars on a mason jar light fixture; or you could make your own. How about creating a room divider with used pallets? Necessity is often the mother of invention, and you may discover a creative side you didn’t know you had by looking for creative design solutions.

The Takeaway

Inflation and supply chain problems can make home renovations and remodeling on a budget much more challenging, but not impossible. If you choose the best projects for added value; plan and shop for materials and craftspeople with care; and are willing to be creative and flexible, you can wind up investing less money, time and worry.

If your home renovation budget is a tad bit short of your dream, a home improvement loan from SoFi could give you the extra boost you need. With no collateral, no fees and the opportunity for same-day funding, SoFi can help get your project up and running in no time.

Explore how a home improvement loan can kick off your home renovation.

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Photo credit: iStock/LightFieldStudios

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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There are over half a dozen institutions and nonprofits involved in establishing metrics, providing disclosure guidelines, and constructing surveys in the name of establishing ESG metrics. ESG refers to companies that try to meet higher environmental, social, and governance standards, as well as securities based on those organizations.

Given the growing interest in sustainable investing, and new research that suggests these strategies can be as profitable as conventional investing, investors will benefit from the ability to measure and compare outcomes.

That said, the SEC only recently took steps to propose ESG-disclosure requirements for investment advisors and fund managers, and these have yet to be implemented. As such, there’s currently wide variance in disclosure practices as the industry continues to consolidate.

Those interested in learning more about ESG investing and the standards currently in use, should be ready for a throng of different metrics that can vary widely across industries. We cover nine of the most common below.

What Are ESG Metrics?

While ESG investing actually began in the 1960’s, the investment philosophy didn’t really catch on in the mainstream until the past couple of decades, with the increase in popularity of socially responsible investing (SRI). Socially responsible investing is a broader term in the industry, and can be used interchangeably with ESG, although the two are different.

As noted above, ESG stands for environmental, social, and governance factors, each of which represents a set of standards that can be used to measure the risks and sustainability of a business. Each factor features its own set of qualitative and quantitative metrics on how firms perform in terms of environmental responsibility, social wellness, and corporate governance.

As it stands, two of the most prominent organizations that set disclosure standards for ESG metrics include the Global Reporting Initiative (GRI) and the Value Reporting Initiative (VRI), which is a merger of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC).

While there is much overlap amongst the existing standards for ESG, at their core, each organization seeks to establish a framework that 1) allows firms to accurately represent their ESG metrics, and 2) allows those metrics to be comparable across firms.

The Importance of ESG Metrics

ESG metrics are important because they allow investors to fairly gauge a firm’s impact on environmental issues, societal issues, and issues of corporate responsibility against a set of comparable peers. Since many investors who are interested in ESG strategies are also committed to making an impact with their money, being able to measure outcomes is important.

In theory, companies that perform well in ESG categories have lower costs of capital, are more innovative, and may help to support positive environmental, social, and corporate governance outcomes. However, it can be difficult to properly measure ESG policies across companies, as no official regulations for standardized ESG reporting currently exist.

Still, two recent studies suggest that socially responsible funds tend to outperform conventional mutual funds. The Morningstar “Sustainable Funds U.S. Landscape Report” from February 2022 found that “two-thirds of sustainable offerings in the large-blend category topped the U.S. market index last year compared with 54% of all funds in the category.”

Also, a Morningstar analysis of European-based funds found that the majority of ESG funds outperformed non-ESG strategies over one-, five-, and 10-year periods.

Investors also face difficulty when comparing ESG metrics across different industries. For example, it’s difficult to compare energy companies and financial institutions on emissions-related issues, as the two represent entirely different industries. This can easily lead to apples-to-oranges comparisons, if not monitored closely.

Finally, some of these standards are qualitative and may be prone to subjectivity, which can make the ESG evaluation process difficult to quantify. These can all present challenges if you’re trying to apply ESG principles to your investing strategy. It’s therefore important to identify an appropriate widely accepted set of ESG metrics to ensure that investors evaluate investments using the right framework.

9 Common ESG Metrics Businesses Track

Commonly employed ESG metrics are varied and consist of both qualitative and quantitative metrics across all three sub-categories of environmental, social, and governance.

We break down some of the most commonly tracked ESG factors in the industry, organized by category.

3 Common Environmental Metrics

Environmental metrics measure the long-term ecological sustainability of a firm’s actions. These can be related to emissions, finite natural resources, and the environment, among other things.

Many of these metrics can be tracked on an aggregate basis or relative to another operating metrics (per capita, per unit produced, etc).

•   Emissions: Quantifies how much a firm emits in greenhouse gases, or is working to reduce carbon emissions, through its operations.

•   Waste: Measures how much waste a company generates or recycles in their operations. Can also deal with a company’s impact on its surrounding ecology.

•   Resource Usage: Tracks the efficiency and intensity of a firm’s operations when it comes to using energy, water, or other key resources.

3 Common Social Metrics

Social metrics evaluate how a firm’s policies impact its human capital and society at large. Attempts to quantify these metrics have largely been implemented on a per-occurrence basis or as a rate over time.

•   Human resources: Evaluates how a company treats its workforce, frequency/magnitude of any workplace litigation, and employee turnover.

•   Labor safety: Tracks a firm’s commitment to safe labor practices via metrics like frequency of workplace accidents and lost productivity.

•   Products: Examines a firm’s product quality and sustainability through metrics like number of recalls, complaints, or even frequency of litigation. Can also be linked to environmental when it comes to how product inputs are sourced.

3 Common Governance Metrics

Governance metrics pertain to issues relating to business ethics, mitigation of agency risks, and reporting transparency. These can be measured in terms of how executives are compensated, board policies, and accounting choices, among others.

•   Ownership Structure: Reviews how faithful a firm is to its shareholders when it comes to metrics like the number of independent directors on the board, or how voting rights are distributed between management and shareholders.

•   Executive Compensation: Measures executive compensation relative to industry standards or company profitability. Can also be tied to social when measuring how compensation structures vary for different genders/minorities.

•   Financial Reporting: Tracks a firm’s accounting policies and how comprehensive and accurate they are. Could involve reviewing a firm’s books for key disclosures or frequency of one-off exceptions.

How Can Investors Use ESG Metrics?

Investors will want to adopt a long-term perspective when it comes to evaluating investments using ESG metrics, as the principles of ESG are built off the basis of long-term secular trends when it comes to technology and social issues. The goal is to invest in companies with positive ESG traits while avoiding or underweighting firms with negative ESG traits.

Investors will want to be discerning when investing in specific firms or funds that advertise an ESG approach. The wide range of ESG frameworks mean that some firms may cherry-pick which ESG metrics they wish to disclose. Investment funds and exchange-traded funds (ETFs) that tout an ESG-based approach may use their own proprietary metrics when deciding how to allocate ESG investments; which may make them difficult to compare.

When using ESG metrics, you’ll want to examine all ESG-related disclosures closely and ensure that there’s consistency in the data being reported. Depending on the metric you’re examining, you may wish to avoid making comparisons across disparate industries and focus on identifying “best-in-class” investments for a single industry.

How do Firms Report ESG Metrics?

How each firm reports its ESG metrics depends on its policies regarding disclosures.

When it comes to policy implementation, firms often set ESG targets to meet or exceed guidelines set by governments, non-profits, or agencies; they may survey their own stakeholders and shareholders to gauge how they view company performance on ESG issues, or hire third parties to survey their customer base on their behalf.

Keep in mind, the adoption of ESG frameworks can vary widely by firm and disclosure of these metrics is still voluntary. Additionally, certain metrics may be difficult to quantify and in some cases, management, stakeholders, or shareholders may disagree on the impact of certain ESG factors.

As a result, professional money managers sometimes may solicit the assistance of third-party ESG consultants to obtain an independent assessment of how a company actually performs on ESG metrics.

The Takeaway

When used properly, ESG metrics offer another useful dimension for evaluating investments, as it focuses on a unique set of risk factors for firms that typically isn’t captured by using traditional fundamental metrics.

However, the adoption of a unifying set of standards among firms still remains elusive, and will likely remain so until regulators choose to codify their own ESG reporting requirements.
As with any investment strategy, investors will want to manage their expectations appropriately and employ ESG metrics as part of a larger toolbox for investment analysis.

Ready to explore sustainable investing — or add ESG-focused investments to your portfolio? It’s easy when you open an Active Invest account with SoFi Invest. SoFi’s investing platform offers commission-free trades on stocks and ETFs, as well as fractional shares, IPO shares, and more.

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