does values-aligned investing cost you returns?
“One of the truest tests of integrity is its blunt refusal to be compromised.”
Pursue life with your values at all costs.
Strain is not limited to machinery. A consistent push against one’s internal value system burdens the heart with weight. This weight is tangible—you may feel it manifest as something feeling off.
what people assume about values-aligned investing
You can do good or you can do well—that’s what most people think when they hear about values-aligned investing (aka: ESG investing, impact investing, and socially responsible investing). To be fair, loud voices in high places have spoken against ESG. Former BlackRock (the world's largest asset manager) Chief Investment Officer for Sustainable Investing, Tariq Fancy, likened sustainable investing to a “dangerous placebo that harms the public interest.” Elon Musk has called ESG “the devil” (notably, after Tesla was removed from the S&P 500 ESG Index). Vivek Ramaswamy, 2024 presidential candidate, went as far as creating “anti-ESG” funds like DRLL where over 40% of the fund is in Exxon and Chevron.
The general assumption: ESG is not worth it—from a performance or technical point of view. Fortunately, this short-hand assumption made by [disgruntled] folk isn’t exactly right. Unfortunately, it also isn’t black-and-white. The reality lives in the grey areas.
the jist
Most people treat values-aligned investing like a trade-off: do good or do well. Even the loud guys (Musk, Fancy, Ramaswamy) speak out against the idea.
Turns out that assumption is shaky. Friede et al. (2015) reviewed 2,000+ studies and found roughly 90% showed ESG didn't drag down performance. Flammer (2015) went further—causal evidence that social responsibility can move the needle at the company level. It's not black and white; Asness reminds us theory says virtue might still cost you a bit. But the "you'll get punished for caring" story doesn't hold.
But the most important question isn’t, “does values-aligned investing cost you returns?” It’s, “can my money reflect what I actually care about?” And the answer diverts from the do-good-or-do-well assumption: your money can reflect your values.
So, stop obsessing about performance. Find the funds that match your values first, then let other financial information break the tie. Your values aren't the sacrifice—they're the point.
what research shows about values-aligned investing
Values-aligned investing hit its stride back in 1970 mostly because of the Vietnam war. The first socially responsible mutual fund was opened by two Methodists to divest from companies involved in the production of Agent Orange. Since then, over 2,000 individual studies have been conducted to measure the relationship between environmental, social, and governance (ESG) criteria and corporate financial performance (CFP): does ESG improve or hurt financial performance?
I’m a slow reader. I’d have better luck finishing an Ironman race than 2,000+ research papers. And I don’t even know what an Ironman race is.
Gunnar Friede, Timo Busch, and Alexander Bassen understood this conundrum and fixed it. In 2015, they conducted a meta-analysis (big word for a study of studies) on roughly 2,200 individual studies to see what actually happened with ESG and CFP. The results would vindicate the Lorax: ~90% of the 2,200 studies find a non-negative (roughly half positive, most of the rest neutral, and only about 1 in 10 negative) relationship between ESG and CFP.
Let’s break it down 🕺. Friede and the boys studied other studies. Each individual study was structured differently but they all aimed to find a correlation between ESG and CFP. Through this, they found a correlation: companies that scored higher on an ESG metric also tended to show higher or neutral financial performance on some metric. The vagueness around the word metric comes from each study measuring ESG and performance differently.
But (there’s always a but), this does not tell us what ESG criteria do to a company’s stock. Yeah, maybe a company performs better financially, but their stock performance is much more nuanced. Caroline Flammer understood this different conundrum. In 2015, she released a study asking, does corporate social responsibility lead to superior financial performance? Where the Friede et al. paper provides correlational (suggestive) evidence on corporate financial performance, the Flammer study provides causal (conclusive) evidence on stock market and financial performance.
Let’s break it down, again 💃. Flammer examined over 2,700 corporate social responsibility shareholder proposals at U.S. public companies between 1997 and 2012. These are items shareholders can vote on such as CEO pay, wastewater management, etc. She filtered these proposals based on different criteria and found that companies adopting socially responsible practices led to positive stock market returns and better financial performance.
it’s not that black-and-white
But (as I said, there’s always a but)...
These studies do not tell us that ESG criteria directly and undoubtedly improve corporate financial performance or a company’s stock price. The Friede et al. study provides a correlational link between ESG criteria and non-negative CFP, but the individual studies were far from identical. And the Flammer study measured a subset of the 2,700+ proposals. She studied the proposals that passed by a hair-thin margin—not every single proposal. This helped prove her point that social responsibility does move the needle, but its evidence is local to only those types of companies.
Theory also pushes back on the idea of “better” performance due to ESG criteria. Cliff Asness, an American hedge fund manager and co-founder of AQR Capital Management, wrote, "Pursuing virtue should hurt expected returns… accepting a lower expected return is not just an unfortunate ancillary consequence to ESG investing, it’s precisely the point.”
Performance, whether corporate financial or stock market, is one of those things that can’t be attributed to any single thing. ESG criteria, while fair to point out, is only one set of many—many—factors when it comes to performance. Some studies point to positive data about ESG criteria while others point to negative data—and of course then there’s neutral data. But I believe a heavier question stands away from all this empirical noise: why do you want to know about ESG’s efficacy?
what is values-aligned investing being compared to?
The whole point of values-aligned investing is in the name: to align your values and investments. It’s not called profit-maxxing investing, low-risk investing, etc. It goes by a few names (ESG investing, impact investing, socially responsible investing) but even still—the point lives in your values.
I’d be a naive financial planner if I told you returns do not matter. Investment returns make a substantial difference for most people’s ideal life. But here’s the thing: ESG criteria has not been shown to negatively impact risk and return on average. It has, on the other hand, been shown to be mostly either neutral or positive on average. So, stop obsessing over returns.
Here’s an example. If you’re a passionately pacifist investor who wants to avoid, at all costs, weapons manufacturers, what good is it doing you to compare the ROR of one fund to another? If your primary goal is to avoid weapons, how is the rate of return helping you fulfil this value of yours? Instead, you can use non-profits like Invest Your Values to compare how many weapons manufacturing companies are in each fund. You can do this for other ESG criteria as well: deforestation, gender equality, gun free, etc.
Eventually you’ll find multiple funds that meet your values characteristics. From there, you can start using financial criteria to determine which fund is best for you. This can include size, expense ratio, age, and yes, returns history.
what this means for you, practically
So—you can do good, or you can do well. Remember that? Turns out that assumption is misguided.
The evidence is grey though. One meta-analysis said ESG doesn’t drag down corporate performance and another showed social responsibility can improve company stock price and financial performance. But we’re also reminded that, in theory, virtue should cost you.
It’s not about "do my values cost me returns?" It’s about "can my money actually mean something?"—and the research is clear enough. Your money can reflect what you value and stop supporting what you don't.
So stop measuring your values against financial returns. Flip it: find the funds that match what you care about first, then let other financial factors break the tie. Your values aren't the thing you sacrifice for performance—they're the whole point.
Disclosures:
Just Advising LLC is a Registered Investment Adviser in the state of North Carolina. Advisory services are only offered to clients or prospective clients where Just Advising LLC and its representatives are properly registered or exempt from registration. Justin Horowitz is an investment adviser representative of Just Advising LLC. The firm is a registered investment adviser and only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
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The information presented on this post is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Comments should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell the investments mentioned. A professional adviser should be consulted before implementing any of the strategies discussed. Investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. All investment strategies can result in profit or loss.
Environmental, Social, and Governance (ESG) investing is qualitative and subjective by nature. There is no guarantee that the criteria used or the investments selected will reflect the beliefs or values of any particular investor. ESG strategies may limit the types and number of investment opportunities available, which could cause a portfolio to underperform the broader market or other strategies that do not utilize ESG criteria. Past performance of ESG-related investments is not an indicator of future results, and there is no assurance that an ESG-oriented approach will result in better performance or lower risk.
