What is ethical or ESG investing, and does it actually do anything?
Investing that considers environmental, social and governance factors alongside financial ones — and the honest assessment is that it does something, that the something is frequently not what investors imagine, and that the label covers approaches that differ enormously.
The approaches, which are genuinely different:
Negative screening — excluding sectors such as tobacco, weapons or fossil fuels. The oldest approach and the one most people mean.
ESG integration — considering ESG factors as financial risk factors, not as ethics. A fund doing this may hold an oil company it judges well managed, which surprises investors who expected exclusion.
Positive or best-in-class screening — holding the highest-rated companies in each sector, including sectors you might expect to be excluded.
Thematic investing — targeting renewable energy, water or healthcare.
Impact investing — seeking measurable outcomes alongside return, usually in private markets, and the only approach where capital additionality is genuinely plausible.
Stewardship — holding shares and using voting rights and engagement to change behaviour.
Does it actually change anything? The uncomfortable part:
Buying a listed share on the secondary market gives no money to the company. You buy from another investor. Divestment does not directly deprive a company of capital, and its mechanism is indirect — affecting cost of capital at the margin, and social and political legitimacy.
Engagement has a better-evidenced mechanism than exclusion, since a shareholder who sells has no vote. This is the argument for holding rather than excluding, and it is a serious one.
Impact and primary market investment do supply capital directly.
Ratings disagree substantially. The same company is rated very differently by different providers, because they measure different things with different weightings — which undermines any assumption that an ESG score means something specific.
Greenwashing is a real and regulated problem, and fund labelling rules now impose requirements on what may be called sustainable.
On returns, the evidence is mixed and broadly neutral — the claim that ethical investing necessarily costs return is not supported, and neither is the claim that it reliably improves it.
General information, not financial advice.