“There’s more information than ever on ESG investing, but it isn’t helping,” reads James Mackintosh’s recent opinion piece in The Wall Street Journal. He argues that the costs of integrating environmental, social, and governance information into investing outweighs the benefits.
Mackintosh claims that ESG integration is not proven to help investors consistently beat the market or reduce portfolio volatility over the long term, or to deliver performance over and above that of strategies that only integrate conventional financial information.
In my opinion, that’s broadly true. Claims that ESG integration could consistently achieve these outcomes over the long term were always wide of the mark. To beat the market, an investor must do things most of the rest of the market isn’t doing. As the use of ESG information becomes more widespread, its potential to drive outperformance decreases. Reflecting this, the latest research by Morningstar Sustainalytics indicates that selecting stocks for low ESG risk delivered only a “modest” outperformance in recent years.
Despite all this, I have to disagree with Mackintosh’s conclusion. (And not just because Morningstar owns one of the largest ESG data and research businesses, Morningstar Sustainalytics.) ESG information is definitely helping investors; it’s just happening in different ways.
ESG: Part of the Investor’s Mosaic
One of my favorite investing concepts is “mosaic theory.” It’s the idea that investor decisions are driven by many small pieces of information which may be individually unimportant but together make up a mosaic of knowledge that can be financially material.
ESG data and research are no longer new and shiny in financial markets. They’re just part of the mosaic now, like much of the standardized financial information we take for granted which had to be developed and refined over the last century.
Mackintosh alludes to this in his piece: “Such problems [the lack of persistent outperformance generated by using ESG information] aren’t unique to ESG. Financial researchers spent decades identifying factors such as accruals, earnings smoothness or stock liquidity that beat the market, only to find that almost all of them stopped working as soon as the work was published.”
Nobody would argue that the use of accounting information isn’t useful just because it’s hard to squeeze out information that can help investors beat the market. It’s the same with ESG information.
Investor Priorities Extend Beyond Financial Returns
What Mackintosh’s article ignores is that though investors prioritize financial returns, that has never been their only consideration. For hundreds of years, investors have also considered the real-world impacts of the companies they invest in so they can tailor their holdings to their personal values and priorities. And information on companies’ governance practices has long been essential to ensure investors’ rights are respected and companies are not run primarily for the benefit of management and other corporate insiders.
Morningstar research shows that despite recent outflows, over $3 trillion remains invested in sustainability-focused funds globally as at the end of March 2025, with over $1.7 trillion of that managed by just 20 asset managers.
Global Top 20 Sustainable Fund Managers
So clearly there’s still a significant population of investors who rely on ESG information to make decisions on what to include or exclude from these funds, and in what quantity.
And that’s before we include the growing number of strategies that are using ESG information as an alternative indicator of where value lies in the market. Examples of this include:
- The steep rise in energy usage by big tech companies focusing on implementing artificial intelligence, like Alphabet GOOG and Microsoft MSFT.
- The growing strategic relevance of healthy labor relations and workforce management practices in industry sectors selling into increasingly socially conscious and politicized consumer markets. Amazon AMZN, Target TGT, and WalMart WMT have all been affected by this.
Detecting trends like this requires ESG information to be overlaid onto conventional financial information. And that’s important whether you consider yourself an ESG-focused investor or not.
Don’t Be Too Quick to Hit the Cancel Button
“The easiest way to make money from ESG might be to cancel the subscription to ESG data,” concludes Mackintosh. Cancelling subscriptions you don’t need is a financially sound decision. For example, I cancelled my subscription to The Wall Street Journal not long ago, as part of a regular cull of monthly discretionary payments. I resubscribed after a short pause, because while I don’t agree with a lot of the opinions expressed in the Journal these days, in a complicated world, it’s still useful to know those opinions. That’s a perfect illustration of why investors continue to value data and insights on ESG factors.
Investors don’t all agree on what ESG information is financially material and what isn’t. And they certainly don’t always agree with ratings and research conclusions provided by Morningstar and its competitors. And overall, that’s a good thing. If every investor agreed on what’s important, we wouldn’t need financial markets. But investors’ do agree that in a complicated world, it’s better to be aware.
