ESG investing trends: Performance, debates, and more

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From smokestacks to windmills, which way is the market heading?

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ESG investing remains viable, despite headwinds. As of 2024, $6.5 trillion—or 12% of the total U.S. assets under professional management—is invested in assets that follow ESG principles, according to the U.S. SIF Foundation.

ESG means investing in companies that aim to meet high environmental, social, and governance standards. Examples include businesses that limit their environmental impact, advance social causes, or maintain strong oversight and accountability. An ESG-focused company might emphasize hiring locally or have a diverse board of directors. Many say they are working toward a better world, but whether they succeed is debatable.

ESG investing appeals to many investors because it connects financial decisions with personal values. Studies show that’s especially true for women and millennials. But it’s still investing, and performance remains key in determining whether a stock belongs in your portfolio.

ESG investing grew out of socially responsible investing (SRI), which encouraged companies to consider not just shareholders, but also other stakeholders like employees, customers, and communities affected by the business. SRI often involved screening companies based on specific values. For example, environmentally focused investors may have avoided fossil fuel stocks, while others refused to invest in tobacco companies. These approaches could have meant missing out on market returns when those sectors performed well, but for many, aligning their investments with their beliefs was worth the risk.

Over time, some investors moved beyond simply screening out certain stocks and began using their power as shareholders to push for change or to support companies making progress. That shift laid the groundwork for ESG investing, which typically follows one of two main approaches:

Some ESG index funds use a best-in-class approach to mirror the broader market, which means they may include companies from traditionally high-impact sectors like energy or industrials. An investor’s job is to decide whether those holdings align with their values.

There’s no single way to approach ESG investing. For some investors, it’s a way to reflect their personal values in their investments. For others, it’s a framework for assessing business risks and long-term performance. No company is perfect, and you may have to decide whether E, S, or G matters more. You might avoid fossil fuel companies because you’re concerned about climate change, or steer clear of tobacco stocks because of how they affect public health. But excluding certain sectors may crimp your portfolio returns if those stocks outperform the overall market.

Others approach ESG as a way to assess risk, especially by looking at governance, although environmental and social factors play a role too. This approach considers how management pursues its business strategy and monitors risks throughout the supply chain and the potential impact on consumers. A textile company, for example, might examine working conditions on farms where its cotton is grown and harvested and in its garment factories to understand how employees are treated.

The company may also work to reduce pollution throughout the production process, from raw materials to finished goods. A company that looks beyond cost when monitoring its supply chain may be better positioned to identify issues that could disrupt operations or damage its reputation. This approach may lag when the market favors short-term results from companies with weaker governance or environmental practices.

ESG investing often involves difficult trade-offs. A mining company, for instance, might have a strong board of directors and provide jobs where they are sorely needed, but its business model involves extracting metal, rare earth elements, or other commodity, which causes environmental damage. Do the social and governance benefits outweigh the environmental costs?

If you’re considering an ESG-focused exchange-traded fund (ETF) or mutual fund, review the prospectus to see how investments are chosen and whether the fund is actively managed or tracks an index. A fund’s fact sheet provides a quick summary, but the prospectus lays out the full strategy, including what types of companies are included or excluded.

Some ESG funds, for instance, avoid all fossil fuel producers or utilities that rely heavily on fossil fuels. Others take a different approach, holding shares in companies that are expanding the use of renewable energy or aiming to reduce emissions. In some cases, fund managers, as shareholders, may include fossil fuel companies specifically to advocate for change. A fund’s mission statement and portfolio holdings can help explain those choices.

Understanding individual companies’ roles within a fund requires a closer look. Corporate responsibility or ESG reports (typically posted on company websites) can help you gauge a given company’s commitment to sustainability. These reports often show whether the company allocates budget and staff to research, operations, or broader sustainability goals.

A fund’s name alone may not tell the full story. Under Securities and Exchange Commission (SEC) regulations, at least 80% of a fund’s assets must be invested in the types of securities suggested by its name. A clean energy fund, for instance, should focus on renewable energy companies, while a gender diversity fund should invest in companies with inclusive leadership or board representation. A revised SEC “Names Rule” took effect in 2023, but the agency delayed enforcement. Larger fund groups must comply by June 2026, and smaller ones by December 2026.

ESG investing has become a political target, particularly among conservative lawmakers who argue that it promotes social agendas over financial returns. Some states, including Texas, have moved to cut ties with asset managers over ESG practices.

In 2024, the Texas State Board of Education voted to terminate an $8.5 billion investment managed by BlackRock (BLK) on behalf of the $53 billion Texas Permanent School Fund. Officials cited a state law that prohibits investing in firms seen as hostile to the fossil fuel industry. BlackRock pushed back, calling the move “reckless,” and defended its investments in energy companies, including more than $120 billion in Texas-based public energy companies.

The backlash has also gained momentum at the federal level. After returning to the White House in January 2025, President Donald Trump signed an executive order opposing diversity, equity, and inclusion (DEI) policies in federal agencies, triggering broader resistance to ESG principles.

Many companies have responded by downplaying their public statements about sustainability or avoiding the term ESG altogether, a trend known as greenhushing. A June 2025 report from The Conference Board found that 80% of large U.S. and multinational companies were revising their ESG strategies in response to shifting political and regulatory pressures. And 90% of executives expected ESG-related resistance to persist or grow, especially in response to climate-related commitments.

When a company downplays its ESG efforts through greenhushing, it becomes harder to determine whether the business is truly committed to ESG goals or simply avoiding scrutiny. Reviewing current and past corporate responsibility or ESG reports can help. These documents often reveal whether a company is maintaining its commitments, scaling them back, or shifting its priorities.

But silence isn’t the only concern. Sometimes companies exaggerate their sustainability efforts. That practice is known as greenwashing, and it typically shows up in news releases, corporate executives’ speeches, or ad campaigns. For instance, a company might claim to support reforestation or renewable energy while spending far more on marketing than on environmental initiatives.

There’s no standardized enforcement governing greenwashing, which is why it’s important to scrutinize what companies do, not just what they say. Company disclosures on emissions, supply chain ethics, and other factors like data privacy can help you determine whether ESG claims are backed by action. ESG-focused funds should also clearly define how companies are selected or excluded to meet their stated strategies.

The link between ESG and investment performance is complex. One reason is the lack of standardized data and ratings across companies. Factors such as geography, company size, and industry sector can also affect results. And performance may depend in part on investor objectives—whether the goal is financial return, alignment with personal values, or both.

Some studies, including those from index provider MSCI and consulting firm McKinsey & Company, suggest that companies with strong ESG ratings may outperform peers because of stronger earnings fundamentals. These companies are often seen as higher quality and more focused on long-term results. But other research, including a Vanguard analysis of Russell 3000 companies, suggests that broader market trends and investment styles play a bigger role.

Sustainable indexes have also held up well over time. Morningstar’s U.S. and global sustainability indexes outperformed their conventional counterparts over one-, three-, and 10-year periods. During the first three and a half months of 2025, despite a market sell-off triggered by Trump’s new tariffs, the fund researcher’s U.S. Sustainability Index declined 6.2%, compared with 8.96% for the broader U.S. market. Similarly, its Global Sustainability Index fell 4.54% while the broader global market dropped 5.69%.

Still, short-term performance often depends on sector exposure and market cycles. ESG funds are typically underweight in fossil fuels and overweight in technology. When oil prices rise and tech stocks fall, as they did in early 2022, ESG investments can lag. Holdings, investor flows, and broader economic trends all influence returns over shorter periods.

ESG investing is nuanced. It often requires more effort than simply buying a low-fee index fund. Because ESG is rooted in values, what counts as a good investment depends on your priorities—whether it’s environmental sustainability, workplace equity, ethical governance, or all three.

If you’re considering ESG investing, find out how the fund you’re interested in selects companies, what it includes or avoids, and whether its investments reflect its stated purpose. The same goes for individual stocks. Reviewing company reports can help you assess whether a business’s actions match its claims.