What Are ESG Student Investments? The Reality Behind Values-Based Investing (and All the Drawbacks That Go Along With It)

ESG investing has swept college campuses with promises that you can "do good while doing well." But before you let activism drive your portfolio decisions, it's crucial to understand what ESG really is.

ESG stands for Environmental, Social, and Governance, and while marketed as objective business analysis, it's increasingly criticized as a way to force companies into political compliance rather than focus on profitability. This post will explain what ESG investing actually is.

Key takeaways

• ESG scoring systems are highly subjective and often reflect political biases rather than sound business analysis
• Companies waste shareholder resources chasing ESG scores instead of maximizing profits
• Limited investment options reduce diversification and growth potential

What does ESG stand for?

ESG investing claims to evaluate companies on Environmental, Social, and Governance factors alongside financial performance.

In practice, it often means excluding profitable companies that don't align with current political fashions while rewarding businesses that embrace trendy causes, regardless of their actual business performance.

• The Environmental factor penalizes companies in traditional energy, manufacturing, and agriculture, which are essential to modern life.
• Social criteria push companies toward specific diversity policies and social activism.
• Governance increasingly means adopting progressive corporate policies rather than just good management practices.

Rather than finding the best businesses, ESG investing artificially constrains your investment universe based on subjective political judgments about which industries and practices are "acceptable."

How ESG investments actually work

ESG investing relies on rating agencies like MSCI and Sustainalytics that score companies based on their adherence to particular environmental and social orthodoxies. These aren't objective business metrics; they're political report cards that often penalize profitable, well-managed companies for operating in disfavored industries.

The absurdity is evident in real examples: Tesla was kicked out of the S&P 500 ESG Index despite being the world's largest electric vehicle manufacturer, while ExxonMobil remained included.

This highlights how ESG scoring often defies common sense and reflects arbitrary political judgments rather than meaningful analysis.

The core problem: When rating agencies can arbitrarily decide that a profitable energy company is "bad" while a money-losing solar company is "good," you're not making investment decisions; you're making political statements with your money.

Companies now spend enormous resources trying to game these subjective scoring systems instead of focusing on what should matter: delivering value to customers and shareholders. This misallocation of corporate resources ultimately hurts everyone, including investors.

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Why ESG appeals to college students

College campuses have become hotbeds of political activism, and ESG investing conveniently packages that activism as financial strategy. Students are told they can fight climate change and social injustice through their investment choices, a seductive but fundamentally flawed premise.

The reality is that ESG investing mainly serves to make activists feel good about themselves while potentially sabotaging their financial futures. When you're starting your investment journey with limited capital, the last thing you should do is artificially constrain your options based on political considerations.

The campus echo chamber: University environments often present ESG investing as obviously correct without exploring serious criticisms or alternative viewpoints. This one-sided presentation does students a disservice by not preparing them for the real-world tradeoffs involved.

Many campus investment clubs now focus exclusively on ESG strategies, depriving students of experience with traditional value investing, growth investing, and other proven approaches that might better serve their long-term financial interests.

TuitionHero Tip

ESG / sustainable funds tend to survive longer. Around 77% of ESG funds from 10 years ago are still operational today, compared to roughly 46% for traditional funds.

ESG investment options

• ESG mutual funds and ETFs: These pooled investments exclude entire sectors and companies based on political criteria rather than business fundamentals. While marketed as "diversified," they're actually deliberately under-diversified, excluding profitable industries like traditional energy, defense, and others.
• Impact bonds: Allow you to accept below-market returns in exchange for funding politically favored projects. This directly sacrifices your financial returns for activist goals.
• Individual ESG stocks: Require you to research not just business fundamentals but also navigate subjective and constantly changing ESG criteria that may have little relationship to actual business performance.
• Robo-advisors with ESG options: Automate the process of constraining your investment universe and potentially reducing your returns—hardly an improvement over traditional diversified investing.

The ESG performance

Despite marketing claims, ESG investing faces a fundamental performance problem that proponents often downplay or ignore entirely.

• The mathematical reality: When you artificially exclude profitable companies and entire sectors from your investment universe, you mathematically reduce your potential returns. This isn't opinion—it's basic portfolio theory.
• The evidence: Multiple studies show ESG funds underperforming broad market indices over meaningful time periods. Higher management fees compound this performance drag, potentially costing investors tens of thousands of dollars over their investing lifetime. However, more recent studies show that performance may not be as bad as it once was—more on that in the FAQ section below.
• The excuse-making: ESG proponents often cherry-pick short time periods or use questionable methodologies to claim performance parity. They rarely account for the higher fees or the reduced diversification that comes with ESG constraints.
• The opportunity cost: Every dollar you put into ESG funds is a dollar not invested in strategies with better long-term track records. For young investors with decades to compound returns, this opportunity cost can be massive.

TuitionHero Tip

About 83% of total ESG assets are in Europe, significantly more than in North America or Asia.

Evidence supporting higher ESG fund fees

• Historical data (2021): A Morningstar study found ESG funds had higher asset-weighted average expense ratios (0.61%) compared with traditional funds (0.41%); that's a 0.20% difference, or about 50% higher fees.
• Significant fee gaps in some categories: YCharts analysis found "AUM-weighted average expense ratios for ESG-marketed funds were between three to ten times higher than non-ESG-marketed funds, with the largest gap appearing in the Allocation fund category".
• ETF-specific data: According to Morningstar data, "the average ESG U.S. stock ETF charges 0.17% in annual fees, 0.05 percentage points more than non-ESG funds".

The fundamental problems with ESG investing

The criticisms of ESG investing go far deeper than just performance concerns; they strike at the heart of what investing should be about.

• Political weaponization of capital: ESG investing essentially uses financial markets to enforce political compliance. Companies are pressured to adopt specific political positions on climate change, social issues, and governance—regardless of whether these positions serve shareholders or customers.
• Corporate resource misallocation: Companies now waste enormous resources on ESG compliance, diversity initiatives, and environmental programs that may have little business justification. These resources could instead go toward research, development, customer service, or other activities that actually create value.
• Subjective and biased scoring: Different ESG rating agencies frequently give the same company wildly different scores, proving these aren't objective business metrics. The scoring often reflects the political biases of rating agency employees rather than meaningful business analysis.
• Greenwashing and virtue signaling: Many companies engage in performative ESG activities—adopting trendy policies and making grandiose announcements—while their core business practices remain unchanged. ESG investing rewards this theater rather than substance.
• Anti-competitive effects: ESG investing can essentially blacklist entire industries and companies, reducing competition and potentially harming consumers through higher prices and reduced innovation.
• Regulatory and legal risks: As ESG investing becomes more controversial, it faces growing regulatory scrutiny. Several states have restricted government pension investments in ESG strategies, viewing them as politically motivated rather than financially sound.
• The fiduciary problem: For institutional investors, ESG investing raises serious questions about fiduciary duty. Are fund managers serving their clients' financial interests when they prioritize political goals over returns?
• Limited real impact: Most ESG funds buy stocks on secondary markets, providing no new capital to companies. The actual impact on corporate behavior is questionable at best, making ESG investing largely performative rather than substantive.

TuitionHero Tip

Over 60% of Americans believe investment funds should consider sustainability/ESG factors, but far fewer actually put money into ESG or sustainable-themed investments.

Getting started with ESG

If you want to explore ESG investing, it’s important to do it with clear eyes and a plan:

1. Clarify your motivation: Decide whether your main goal is maximizing returns, aligning investments with your values, or a mix of both. This will shape how much of your portfolio should go into ESG versus traditional funds.
2. Choose the right account: You can access ESG funds through most brokers (Fidelity, Vanguard, Schwab) or beginner apps like Stash and Acorns. Just remember—marketing often emphasizes values over performance, so look closely under the hood.
3. Compare ESG fund options
   • Index-based ESG ETFs usually have lower fees and broader diversification.
   • Actively managed ESG funds may promise more impact but tend to charge higher fees.
   • Read the fund’s methodology to see how it defines “ESG” (exclusions vs. best-in-class companies).
4. Start small: ESG doesn’t have to be all-or-nothing. Consider allocating a portion of your portfolio to ESG while keeping a strong foundation in low-cost, diversified index funds.
5. Review performance and fees regulary: ESG funds can underperform or carry higher costs, so monitor them as you would any other investment. Make sure they’re contributing to your long-term goals, not just your short-term feelings.

TuitionHero Tip

In 2022, there was a 76% drop in global investments (net inflows) into ESG funds vs the previous year.

What students should consider instead

Rather than constraining your investment options through ESG criteria, consider approaches that might better serve your long-term financial goals:

• Broad market index funds: Provide maximum diversification at minimal cost, capturing returns from the entire economy rather than artificially excluding profitable sectors.
• Value investing: Focus on buying profitable companies at reasonable prices, regardless of political fashion. This time-tested approach has produced superior long-term returns.
• Growth investing: Target companies with strong business fundamentals and growth prospects, letting business performance rather than political considerations drive decisions.
• Direct charitable giving: If you want to support causes you care about, maximize your investment returns through traditional approaches and then donate the profits directly. This is typically more effective than accepting reduced returns through ESG investing.

Free resources and alternative perspectives

Students interested in developing a more complete understanding of investing should seek out diverse viewpoints:

• Read critics of ESG investing, not just proponents
• Study traditional value and growth investing approaches
• Learn about the efficient market hypothesis and portfolio theory
• Understand the historical performance of different investment strategies
• Consider the perspectives of successful investors who don't use ESG criteria

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Frequently asked questions (FAQ)

Don't ESG companies perform better over the long term?

The evidence is mixed. They have traditionally underperformed; however, Morgan Stanley data shows sustainable equity funds had median returns of 5.2% vs traditional funds at 5.1% in 2024, essentially matching performance.

According to Morgan Stanley, a $100 investment in sustainable funds in December 2018 would be worth $136 by December 2024, while traditional funds would be $131.

Some sources indicate ESG funds have "matched or surpassed traditional funds over most time periods" and "median ESG ETF outperformed the median traditional ETF in three of the last four years.

Isn't ESG investing about risk management?

This is largely marketing spin. Traditional diversified investing already accounts for business risks. ESG adds political and ideological risks that may have little relationship to business fundamentals.

Won't ESG become more important as climate change concerns grow?

Climate change concerns are already reflected in market prices. ESG investing often goes far beyond climate issues to encompass broad political agendas that may hurt rather than help environmental goals.

Shouldn't companies consider stakeholders beyond shareholders?

Companies that serve customers well and treat employees fairly tend to be more profitable long-term. But ESG goes far beyond these basic business principles to enforce specific political positions.

Isn't it hypocritical to profit from companies that cause harm?

This assumes ESG scoring accurately identifies harmful companies, which is questionable. Many "harmful" companies provide essential products and services that improve human welfare.

Final thoughts

ESG investing represents the politicization of financial markets, prioritizing activist goals over investor returns. While marketed as a win-win strategy, the evidence suggests it's often a lose-lose proposition: worse financial performance combined with questionable real-world impact.

As a college student beginning your investment journey, you have decades for your money to grow through compound returns. The difference between a well-diversified, low-cost investment approach and one constrained by ESG criteria could easily amount to hundreds of thousands of dollars over your lifetime.

Your generation faces real financial challenges: student loan debt, housing costs, and an uncertain economic future. In this environment, letting political considerations drive your investment decisions may be a luxury you can't afford.

If you truly want to make the world better, focus first on building wealth through sound investment principles. Then use your financial success to support causes you care about directly and effectively. This approach serves both your financial interests and your values better than accepting reduced returns through politically-motivated investment constraints.

Source

• Environmental, social, and governance - Wikipedia
• What is ESG Investing?
• What is ESG investing? | CFA Institute
• Sustainable Fund Performance: 2024 | Morgan Stanley
• S&P 500 ESG Index: Tesla Out, ExxonMobil In - ETF Focus on TheStreet: ETF research and Trade Ideas