Does investing in ESG make sense?

Investors attempting to make ethical purchases lose out on favorable returns for no apparent reason due to arbitrary ESG investing regulations

In order to evaluate and promote corporate "sustainability," the London Stock Exchange recently commemorated the 25th anniversary of its FTSE4Good index series. Businesses engaged in contentious industries like tobacco and firearms were strictly prohibited. Fossil fuels, gambling, and the defense sector were soon left out of the restrictions.

The list expanded to include airlines, mining, alcohol, and anything else that offended progressive sensibilities in the ensuing rush to ESG (environment, social, and governance) issues.

This appeared to be effective for a while since the favored sectors, like renewable energy, benefited from investment flows. Even though the overall difference with broader indices has been minimal, performance has improved recently due to a heavy weighting in the tech sector (44 percent in the FTSE4Good All-World series versus 35 percent in the FTSE All-World index).

However, the series for the UK, a country with limited technological exposure, reveals a concerning trend for ESG enthusiasts. While the All-Share index has increased by 67.5% and the FTSE 100 by 70% over the past ten years, FTSE4Good has only increased by 57%. FTSE4Good has increased by 35% over the past five years, while the FTSE 100 has increased by 46.5% and the All-Share by 38%.

An increase in unethical investing.

For instance, British American Tobacco shares have increased by almost 70% since Terry Tanaka wrote about them in BFIA in October 2024, when they also yielded 9%. Although smoking may be declining, BAT is rapidly expanding into smokeless products, which are predicted to account for more than 50% of sales by 2035.

Despite a 20 percent decline since early February, Imperial Brands' shares are still up almost 60 percent since spring 2024 (when they also yielded 9 percent).

It's true that the oil and gas industry had a terrible few years prior to the Gulf War driving up prices. Shell's stock is up 10% so far this year after rising more than 30% in the first quarter. BP's stock is up 16% so far this year after rising 40% in the first quarter. ExxonMobil's stock has more than doubled over the past five years and is up 20% this year, despite the company never trying to reinvent itself as a renewable energy company.

Then, in 2022, the Russian invasion of Ukraine brought about a sudden shift in defense-related attitudes. Since then, BAE Systems' share price has tripled, but during the past year, it has fluctuated due to concerns about the practicality of a large portion of its hardware in contemporary conflicts. In the same period, the share price of Rolls-Royce increased tenfold.

Although Babcock's shares didn't move until the middle of 2023, they have since increased by 250%. Although it is currently down 40% from its late 2025 peak, shares in Palantir, which progressives despise for its ties to Israel and for providing significant efficiency gains to the NHS, have increased in value by 20 times since the end of 2022.

However, the shift from the high street to the fiercely competitive online market has proven difficult for gambling companies. Rank Group (Mecca and Grosvenor Casinos) has been declining for ten years, Flutter Entertainment (Paddy Power, Sportsbet, and Sky) flourished until a year ago but has since fallen by two thirds, and Entain, the owners of Ladbrokes and Coral, has dropped 75% since a peak in late 2021.

Because they extract rare metals that are necessary for technology and renewable energy, miners are frequently absolved of criticism, but this is only a small portion of their business. The majority of it is involved in the illicit mining of coal, aluminum, iron ore, and precious metals. Admittedly, Rio Tinto, which has increased by 75% in the past year, left the majority of its coal business in 2018; however, the proposed merger with Glencore, which has increased by 87% in a year and is one of the biggest coal producers and traders in the world, would bring it back.

Although Anglo American recently sold its Australian coal business, both BHP (up 80 percent in a year) and Anglo American (up 84 percent) have substantial coal interests. Even though fuel prices have increased, International Airlines has increased 51% in a year and 177% in two, despite the disapproval of net-zero advocates. Jet2 and EasyJet have experienced mostly sideways trading.

ESG investing's problem.

Because it depends on what was purchased instead, the conclusion is not that ethical investing has always resulted in lower performance. A portfolio would have been concentrated in a high-risk area if there had been more technology. As with defense, opinions on what is and is not ethical are subject to change over time. Should it not be encouraged that tobacco companies are switching to smokeless products?

Although mining is a dirty industry, it plays a crucial role in the world economy. It is undoubtedly desirable to switch to renewable energy in order to lessen reliance on fossil fuel imports from some of the world's most dubious and corrupt nations, but this can only happen at the rate that economics, technology, and consumer adoption permit.

Lotteries, which Samuel Johnson referred to as "a tax on fools," have funded numerous good deeds. Gambling, whether it be online or in betting shops, is addictive and destitute, but could horse racing survive without it?

Limiting fund managers' options for investments makes it more difficult for them to perform well and makes it simpler to justify poor performance. However, charity trustees who do so run the risk of denying much-needed returns to worthy causes. The harm to the companies they refuse to invest in is, at most, negligible, but the harm to their beloved causes is substantial. Is that morally right?