Does ESG Investing Mean Giving Up Returns? A Look at the Facts
It is the single most common question we hear about ESG investing, and it is a fair one: if I invest in line with my values, am I tacitly agreeing to earn less?
The concern is understandable. There is an intuition that anything chosen for a reason other than pure profit must cost something in profit. It is worth examining that intuition honestly because the real answer is more reassuring, and more nuanced, than the myth suggests.
Where the myth comes from
The belief that values cost money has a logical-sounding origin. If you remove certain companies or industries from the universe of things you might own, you have a smaller menu to choose from — and a smaller menu, the reasoning goes, must mean worse options.
That logic contains a hidden assumption: that the excluded investments were destined to be the winners. There is no reason that must be true. A narrower investable universe is still an enormous one, and a thoughtfully built portfolio can pursue strong long-term results from within it. The "smaller menu" argument feels right, but it does not hold up on its own.
What the evidence actually suggests
A large and growing body of research has examined how ESG-oriented investments perform relative to conventional ones. The honest summary is this: the findings are mixed, but they do not support the idea that ESG investing requires sacrificing returns. Many studies have found that ESG strategies performed comparably to conventional ones over various periods; some found modest advantages; some found modest disadvantages. Our clients do hold ESG investments within their portfolios, and many of these investments are performing well relative to non-ESG investments in the same asset classes. As the range of ESG-focused investment options continues to expand, industry leaders are increasingly recognizing that environmental and social considerations can go hand in hand with greater efficiency, stronger risk management, and long-term financial performance.
ESG-conscious companies may also be better positioned to mitigate certain business risks by reducing regulatory exposure, minimizing waste, limiting potential legal liabilities, and protecting the value of their brands.
Innovation is another important part of this evolution. New materials, technologies, and processes are continually being developed with the goal of reducing environmental impact and potential harm to people. Microbial and antimicrobial innovations are just one example, with applications that extend across numerous industries, including healthcare, agriculture, transportation, and natural resource conservation. These developments illustrate how ESG-related considerations can drive innovation while also creating opportunities for businesses and investors.
Why ESG factors can be financially relevant
There is also a deeper point that the "values versus returns" framing tends to miss. ESG factors are not only ethical considerations. Many of them are, quite straightforwardly, measures of business risk and quality.
Strong corporate governance, the "G", is a long-respected marker of a well-run company, and weak governance has been behind some of the most damaging corporate failures in memory. A business exposed to serious environmental liabilities carries a real financial risk, whether or not an investor cares about the environment. A company with poor labor practices or an unhappy workforce faces genuine operational and reputational costs.
Seen this way, considering ESG factors is not necessarily a departure from sound financial analysis. It can be an extension of it, another lens for identifying durable, well-managed businesses and avoiding hidden risks.
So, does ESG investing mean giving up returns? The evidence says: not inherently. What it asks for is the same thing every sound investment strategy asks for — care, diversification, cost-awareness, and a long-term perspective.
Final Thought
The choice of whether and how much to invest in line with your values is a personal one, and it should be made with clear eyes. But it should not be made under the shadow of a myth. Aligning your portfolio with your values and pursuing your financial goals are not opposing forces. With thoughtful planning, they can travel comfortably together.
The Legacy Foundation has invested in the tools that allow us to access the metrics of companies, mutual funds or ETF’s and how they score in each ESG category compared to their peers, giving them a sustainable rating. Because of our independence when choosing investments, we aren’t limited to proprietary investments but rather a universe of choices. We are proud to be a Certified B Corporation®, reflecting our belief that doing well and doing good can go hand in hand. Our certification represents a commitment to considering the impact we have on our clients, our community, and the world around us—and to using our business as a force for positive change.
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Disclaimer:
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.
Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller