What ESG actually measures
ESG is an acronym for three broad categories of non-financial factors that analysts believe can affect a company's long-term performance and risk profile.
| Factor | What it covers | Example metrics |
|---|---|---|
| Environmental (E) | Carbon emissions, water use, waste, biodiversity | CO₂ per £ revenue, energy intensity |
| Social (S) | Labour practices, supply chain, community impact, diversity | Staff turnover, injury rates, gender pay gap |
| Governance (G) | Board composition, executive pay, shareholder rights, auditing | Board independence, CEO-to-worker pay ratio |
The growth of ESG
ESG assets under management have grown from near-zero in 2010 to an estimated $35+ trillion globally by 2024 — roughly one-third of all professionally managed assets. This growth has been driven by institutional investors (pension funds, sovereign wealth funds) responding to beneficiary demand and regulatory pressure, particularly in Europe.
Does ESG investing deliver better returns?
The evidence is genuinely mixed. During 2018–2021, many ESG funds outperformed — partly because they were overweight tech (which has strong governance scores) and underweight energy. During 2022, when oil prices surged, most ESG funds underperformed significantly. The academic literature shows ESG tilts can reduce portfolio risk (by excluding companies with hidden environmental liabilities or governance scandals) but doesn't consistently demonstrate a return premium over full market cycles.
The greenwashing problem
Not all ESG funds are created equal. Rating agencies give the same company wildly different ESG scores — one study found the correlation between major ESG raters was only 0.5 (far lower than credit ratings, which correlate at 0.9). Many funds labelled "ESG" include oil companies, arms manufacturers, and fossil fuel banks — because their governance scores are high. Investors should read fund methodologies, not just the label.
"ESG is not inherently virtuous or profitable — it depends entirely on what you measure and how." — a fundamental truth often lost in the marketing
What this means for you
If ESG matters to you as a values expression, that's a completely legitimate reason to invest this way — accepting that you may underperform or outperform in any given period. If you're investing purely for return, the evidence doesn't strongly support paying higher fees for ESG labelling. Either way, check what's actually in a fund before assuming it aligns with your values.