Trail Financial Planning, LLC is a fee-only financial planning and investment management firm located in Bellingham, WA

ESG Investing – what gives?

ESG Investing – what gives?

It’s Earth Day 2023.  The annual reminder to pay explicit attention to, and say thanks for, all the food prep and housecleaning done for us by our planet!  Food prep and housecleaning?  Yes!!  Have you ever filled a 5-gallon bucket of water and walked it the x number of miles from your nearest Ocean to your house?  Imagine doing that 60 times per day to represent the average household water usage.  That would be a tremendous amount of work.  Thankfully, the water cycle (through fusion in the Sun) and gravity do the lion’s share of the effort for us.  And, as a special offer, this process also de-salinates the water!  All for the price of free!  Wow, what a deal.  I love a deal, and I don’t think there is a better one out there than the water cycle.  Photosynthesis may be on par.  I haven’t done the math.  In addition, I want to acknowledge the supporting cast of humans – the water engineers, plumbers, farmers and grocers whose efforts all combine so that I can simply turn on a faucet for a drink, or trade a piece of paper for a red pepper.  What a life! 

This blog is a place where I write about financial matters that matter to life.  In this blog post, on Earth Day, I am going to engage with the intersection between our investments and environmental values, also known as “Environmental, Social and Governance” or ESG investing.  Not so much about whether we should bring values into investments, but rather what research tells us are the results of doing so. 

First, however, a note about the controversy of ESG Investing.

Over the last year, Environmental, Social and Governance investing (ESG Investing) has entered the fray of the cultural discourse, also known as the culture wars.  In the cartoon version (overly simplified) of this philosophical debate, there is one one side calling for investors to exert influence by de-vesting from investments that do not align with some set of values, whether social or environmental.  On the other side of the debate are voices calling for investors to “stay in their lane,” and to focus only on the financials.  There are challenging that make this issue both interesting and complex.  Questions such as,

  • Are non-financial matters like diversity or environmental impact actually non-financial, or do those considerations actually have downstream financial impacts? 
  • What happens when one entity makes decisions on behalf of other people?  Who gets to decide the values? 

The issue is far more complex than I could hope to delve into in this blog post.  Rather than delve into the “should you?”, I will explore the “what if you?” questions.  Specifically, I will engage two questions:

  • Does ESG investing give up on the opportunity for returns?
  • Does ESG investing have a lower risk than non-ESG investing?

My responses are based on a conference on Sustainable Investing that I attended virtually last Fall.  The conference was organized and sponsored by Dimensional Fund Advisors (DFA), a for-profit investment company that creates and maintains investment products for sale to the public, including ESG investment products.  Thus, the conference could skew towards promotion over knowledge and understanding.   However, I found that the presenters and information were objective, following data rather than opinion.  There was lots of time spent on topics like uncertainty or “how could our analysis be wrong?”  I find such analysis and thinking a hallmark of objective thinking, or at least the earnest attempt at such.  To read more about DFA, and their efforts towards sustainability, please see the end notes of this post.  

Do you give up on returns with ESG Investments?

The short answer is that we don’t expect future returns to be better or worse than the market.  The actual results will vary from one time period to another.  Details:

Over the last decade (2010-2020), investments with higher sustainability scores (AKA green investments) have generally outperformed investments with lower sustainability scores (AKA brown investments).  However, the difference is modest, and the reason may not have to do with sustainability at all.  The reason may be economic.  For example, technology companies generally score well on sustainability criteria.  Technology companies out-performed most sectors of the market over the last decade.  In the future, because we believe in markets to be efficient, we believe that the current market prices already have the best available information factored into today’s prices.  Thus, any expectation of better-than-average performance will be baked into a higher investment price on the stock or bond. 

For example consider a car company like Ford Motors (symbol F).  Ford builds cars.  The industrial process of building cars has an environmental impact.  Cars have an ongoing impact on the environment.  The types of cars produced will have environmental impacts going forward.  Ford has stated on its ESG page a commitment to being carbon neutral by 2050 (see Ford Sustainability page for their own words).  As governments and consumer behavior changes, so will the business landscape, costs and opportunity for Ford.  Guess who knows all of this?  Me!  You!  The Business managers of Ford!  Investors around the world!  The share price of Ford Motors!  Why?  Because the price is driven by the buying and selling from all market participants.  Our core investment philosophy at Trail FP is that we believe that there is information in pricing, and that we cannot reliably out-guess that pricing.  This is called the efficient market hypothesis.  If Ford’s efforts were expected to be more productive in the future, then the share price would already reflect that expectation, or vice-versa.  

Likewise for expectations of lower-than-average performance.  Thus, while companies and investments certainly will be impacted by environmental considerations, those impacts, as best as we understand them today, are already accounted for.  This is true for individual investments, and for broadly diversified funds, whether green vs. brown investments.  So, why did ESG investments out-perform non-ESG investments in the 2010-2020 decade?  A dive into the data suggests the relationship was correlational, and likely not causal.  During the 2010-2020, the investments that performed the best (think Apple and Amazon) also scored well on ESG metrics.  I do not expect sustainable investments to either underperform OR outperform similar investments without sustainable considerations.  

Disclosure:  Past performance is not a predictor of future performance. 

From the DFA Sustainability report (2022):  We (meaning DFA) believe that ESG-related information may be material to the performance of portfolio companies. However, we believe publicly available ESG information is quickly incorporated into market prices, meaning that investors cannot generally gain an advantage over the market by considering such information. An investment approach that uses information in current market prices about expected returns is an effective way to harness the market’s ability to process complex information about ESG-related issues every day.

Do ESG Investments have a lower risk profile (or higher for that matter)?

Again, only time will tell, but similar to return expectations, there is little reason to expect less (or more) risk from ESG investments as compared to similar non-ESG screened investments.  The reason is similar to the discussion about returns.  In essence, if there is a lesser business risk due to higher scores on sustainability measures, then such information would already be factored into the share price.

Let’s stay with Ford as as the example.  Suppose Ford comes out and says that it will be shifting its strategy away from gas-powered F150 trucks to an all-electric offering.  In doing so, they may avoid future risks associated with consumer preference for electric vehicles.  Of course other risks emerge such as Ford’s ability to obtain the materials they need to produce electric cars.  Who else can consider these publicly known risks and use them to inform investment decisions?  The answer:  Everyone.  Thus, the price for Ford shares already reflects future expectations of risk. 

This is true for individual investments and broadly diversified funds, whether green vs. brown investments.  Since applying ESG considerations will result in a decrease in diversification, albeit a small decrease there might be a slightly higher risk within a less diversified portfolio.  However, in the case of a globally-diversified portfolio such as those managed by DFA, the number of investments is so large (over 11,000 in the sustainable portfolios, vs. over 13,000 in the non-sustainable), that the accompanying loss of diversification should have a minimal impact on risk.  In addition, the market knows about such reductions in diversification.

From the DFA Sustainability report (2022):  Dimensional believes that the market’s aggregate assessment of a company’s ESG risks is incorporated into security prices.  

The Bottom Line about Sustainable Investing

While there is not compelling evidence that ESG investing will produce better (or worse) returns, or lower (or higher) risk than non-ESG investing, as an investor it still might make sense for you to invest in ESG-related investments if they align with your values.  Voting with one’s dollars, whether as a consumer or an investor, does impact the economic world.  It may not be obvious how or where, but impacts are noted and felt.

End notes – Other resources

Disclosure:  Past investment performance, whether talking risk or reward, should not be used to predict future performance.  There is always the risk of loss when investing.  

John Chesbrough

John is a financial planner and investment manager. He, along with his business partner Elizabeth Snyder, founded, a fee-only, independent financial advisory firm called Trail Financial Planning (Trail FP) in Bellingham, WA. John and Liz enjoy working with people who care for others and their community – parents, firefighters, therapists, doctors, nurses, and teachers. They work with people by appointment. To learn more, or to schedule some time with John or Liz directly, please visit