ESG Investing: Aligning Values with Financial Goals in a Divided Landscape

By Allen Giese, CLU®, ChFC®, ChSNC®

ESG investing—short for environmental, social, and governance—has been a recognized investing approach for decades, including throughout my 35-year career as a financial advisor. Over the years, it has been referred to by various names, such as socially conscious investing, sustainable investing, and green investing. Today, ESG serves as the umbrella term encompassing these strategies. Regardless of the label, ESG investing enables individuals to align their investment portfolios with their values, particularly in areas such as sustainability, ethics, and corporate responsibility. It represents an intentional approach to investing that seeks both financial returns and meaningful impact.

Despite its well-meaning objectives, ESG investing is frequently the subject of debate and controversy. In this post, I explore the various factors—from political dynamics to differing views on investment performance—that contribute to the skepticism and criticism surrounding ESG strategies.

Ideological and Political Perceptions

ESG investing has become politically charged, particularly here in the United States. Critics argue that ESG investing pushes political and ideological agendas into what should be purely financial decisions. In the culture war, conservatives often refer to ESG investing as “woke capitalism,” as they feel it overreaches with progressive social or cultural values. They criticize companies embracing ESG of promoting progressive values. On the progressive side, ESG investing is often looked at as just greenwashing without any real impact.

At the state level, several conservative states have enacted or proposed legislation restricting or prohibiting the consideration of ESG factors in public pension funds. In Florida, for example, Gov. Ron DeSantis signed legislation in 2023 that forbids public pension funds, such as the Florida Retirement System (FRS), from investing in funds that incorporate ESG criteria. The state of Texas prohibits public pension funds from investing in financial companies deemed to boycott fossil fuel companies, effectively restricting ESG investing practices that are perceived to disadvantage the fossil fuel industry. A handful of other states have similar prohibitions, including West Virginia, Kentucky, Tennessee, Oklahoma, and Idaho.

Progressives argue that ESG factors like climate risk and labor practices are material risks and could significantly affect company returns in the future. They believe ESG is a tool to hold corporations accountable for climate change, diversity, and governance failures. Contrary to legislation conservative states have passed, progressive states and some large asset managers continue to support ESG, particularly on climate-related risks.

Lack of Standards

Another criticism is that ESG has no universal rating system, and different rating agencies often score the same company differently. This makes it difficult to compare ESG funds, assess their impact, and trust the metrics. Additionally, having no universal rating system makes it easier for companies and funds to pretend to be environmentally or socially responsible so they can attract lucrative ESG investment dollars. Referred to as “greenwashing,” this practice erodes trust. It should be noted that the SEC adopted rules for clearer ESG disclosures in 2024, which have been challenged with multiple legal filings. As of March 2025, the SEC announced it would cease defending the climate disclosure rules, coinciding with the change in SEC leadership.

Just the term “ESG”—encompassing such a broad umbrella with environmental, social, and governance—means it covers everything from climate risk to broad diversity to supply chain ethics. This wide scope makes some investors think it’s covering too much, adding to the mission creep, confusion around its goals, and diluted accountability.

Performance Debate

There has long been a performance debate around ESG investing centering on whether integrating ESG factors leads to better, worse, or neutral returns compared to traditional strategies.

On the better, or improved, returns side, proponents argue that ESG analysis can help avoid companies with environmental liabilities, labor controversies, or governance issues, thus reducing downside risk. Further, it’s thought that companies with strong ESG performance may be better positioned to benefit from shifting consumer preferences and evolving regulations. And finally, there has been some empirical support, with studies showing a positive or neutral correlation between ESG performance and financial returns (Morgan Stanley Institute for Sustainable Investing 2019 Report and the NYU Stern Center for Sustainable Business 2021 Meta Study).

On the side that ESG factors may hurt returns, critics claim that excluding certain sectors or companies, like oil and tobacco, can reduce diversification and opportunities for higher returns. They feel that ESG funds may underperform during periods when excluded sectors outperform. Additionally, they think (as mentioned earlier) that inconsistent ESG ratings and self-reported data can mislead investors and ultimately undermine performance.

There is also a performance-neutral perspective where the stance is that ESG investing doesn’t hurt or help. Proponents here argue that ESG information is increasingly priced into markets, reducing any consistent advantage. Further, investment portfolios can still remain highly diversified even with a limit on the investment universe from ESG filters, and this limit doesn’t always reduce returns if the remaining assets perform well.

Should You Consider ESG Investing?

Investing is inherently personal, with each individual guided by unique goals and objectives. If your aim is to align your portfolio with values that extend beyond financial returns, consider speaking with your Northstar advisor to explore how environmental, social, and governance investing can be integrated into your overall financial strategy.