ESG Criteria in Investments: Practical Guide to Optimize Your Portfolio Strategy

What ESG Means in the Modern Financial World

ESG is the acronym that identifies three fundamental pillars in corporate evaluation: Environmental, Social, and Governance. But beyond these three letters, ESG meaning represents a revolution in how investors understand corporate performance. It’s not just about seeking profits, but about investing in organizations that demonstrate responsibility in their environmental operations, social impact, and leadership structures.

For over a decade, investors have experienced a paradigm shift. The pursuit of maximum profitability has coexisted with the desire to align with personal values. Global sustainable investment market data reached $30.7 trillion in 2020, reflecting a 38% increase compared to 2019. This trend is especially intensifying among younger generations such as Millennials and Generation Z.

The Three Essential Components of ESG Strategies

Environmental Pillar: Assesses a company’s commitment to environmental sustainability. Includes indicators such as carbon emissions, energy efficiency, waste management, and responsible natural resource consumption. A company with high environmental standards demonstrates the ability to adapt to future regulations without significant operational disruption.

Social Pillar: Examines how a company interacts with its employees, communities, and supply chains. Key factors include labor equity policies, respect for human rights in all jurisdictions where it operates, and positive contributions to local communities. Social performance reinforces corporate reputation and stakeholder loyalty.

Governance Pillar: Analyzes leadership structure, transparency, and accountability mechanisms. Includes board composition, executive compensation policies, and financial disclosure standards. Strong governance reduces risks of fraud and poor strategic decisions.

Differentiation Between Sustainable Investment Concepts

Although commonly used as synonyms, there are important nuances between different responsible investment strategies:

ESG investments apply objective non-financial criteria to evaluate corporate behaviors. In contrast, SRI (Socially Responsible) investments go further: in addition to applying ESG metrics, they actively exclude sectors considered harmful such as tobacco, arms, fossil fuels, and gambling.

Green investing focuses exclusively on the environmental dimension, promoting renewable energy, sustainable agriculture, and clean technology. Impact investing, on the other hand, prioritizes solving specific social problems—education, affordable housing, health—often above maximizing financial returns.

Scientific Evidence of ESG Performance

Consistent academic research shows that companies with robust ESG practices exhibit lower volatility and better resilience during economic crises. Analysis of European companies revealed that those with higher ESG scores achieved a return on equity (ROE) 1.59% higher than the market average.

In the long term, investments in ESG assets outperform traditional investments in risk management and financial performance. These companies are better positioned to navigate anticipated regulatory changes, such as the new climate disclosure standards proposed by the US SEC in 2022 and the Sustainable Finance Disclosure Regulation implemented in Europe since January 2023.

How to Evaluate Companies’ ESG Performance

Investors have multiple tools to investigate ESG credentials:

Official Corporate Reports: Companies publish Governance, Sustainability, and Social Responsibility reports. Although mandatory in many Western jurisdictions, these documents lack rigorous external auditing, raising questions about data accuracy.

Information Available on Corporate Websites: Most organizations now highlight their ESG commitments online. However, the risk of Greenwashing—false or exaggerated claims about environmental benefits designed to attract investors—persists.

Ratings from Specialized Agencies: Firms like MSCI, Sustainalytics, and Fitch Ratings assign ESG scores based on publicly available criteria and research. These ratings enable standardized comparison across assets.

Fund Composition Analysis: Observing which companies are included in ESG funds and how their positions change provides real insight into the criteria applied in management.

Industry Giants in ESG: Funds and Companies

Leading ESG Investment Funds

The 20 largest ESG funds according to MSCI totaled over $150 trillion in combined assets at the end of 2020, representing approximately 13% of the total globally traded ESG equity funds.

Among the top ten by asset volume are:

• Parnassus Core Equity Fund ($22.94 billion USD): Focused on the US, with a cumulative return of 155% since its founding in 1993
• iShares ESG Aware MSCI USA ETF ($13.03 billion USD): Launched in 2016 with an 82% return
• Vanguard FTSE Social Index Fund ($10.87 billion USD): Positioned since 2019 with 45% gains
• Stewart Investors Asia Pacific Leaders Sustainability Fund ($9.87 billion USD): Diversified in the Pacific, with a 34% return
• Northern Trust Worldcustom ESG Equity Index ($8.69 billion USD): Global portfolio with 88% performance since 2015

Additional funds include global options like Pictet—Global Environmental Opportunities ($8.31 billion USD), rated AA(, and Nordea1–Global Climate and Environmental ) $7.37 billion USD###, rated AA(.

) Notable Companies in ESG Criteria

Technology companies dominate sector representation in ESG funds. Google/Alphabet appears in 12 funds with an average weighting of 1.9%, making it the most frequently held stock.

The best ESG companies according to specialized analysis include: Microsoft (MSFT), Nvidia (NVDA), Salesforce (CRM), and Accenture (ACN) in technology; Linde (LIN), J.B. Hunt (JBHT), and Gildan Activewear GIL in other sectors. These organizations combine financial strength with leadership in sustainability.

Paradoxically, although the energy sector accounts for 11% less in ESG allocations, eleven of the top twenty funds maintain positions in fossil fuel companies.

Historical Performance: The 2022 Dilemma

2022 exposed significant vulnerabilities in ESG funds. The Ukraine War, energy crisis, accelerated inflation, and interest rate hikes severely punished sustainable assets. The massive exposure of ESG funds to technology—sector that plummeted dramatically—amplified losses.

Paradoxically, fossil fuel companies experienced historic gains close to 55% in the stock market, a sector typically excluded from ESG portfolios. Comparisons between ESG funds and traditional funds show significantly lower returns for the former in 2023 due precisely to this sector bias.

Over longer horizons, however, ESG funds maintain positive trajectories. Long-term investors experienced net gains despite the volatility of 2022.

2023 Outlook: Uncertainty and Opportunity

Morningstar data indicates that sustainable funds attracted $147 billion during the first three quarters of 2022, down 72% compared to $528 billion in the same period of 2021. The current anti-ESG sentiment, along with poor performance this year, has generated skepticism.

However, recent projections from Dow Jones forecast a 150% growth in the ESG market by 2025. The medium- to long-term trend remains upward despite current turbulence.

Investment Opportunities in ESG Criteria

Lower Risk of Losses: Companies with strong ESG practices demonstrate greater resilience during economic recessions.

Regulatory Adaptation: Solid ESG companies absorb new regulations without drastic changes to business models or significant cost increases.

Social and Environmental Impact: Investors directly contribute to positive transformations through capital allocated to sustainability.

Demand Growth: Millions of young investors seek to align portfolios with personal values, ensuring liquidity and growth of ESG assets.

Inherent Risks in ESG Investments

Limited Options: Especially in sectors like energy, ESG alternatives are scarce, reducing diversification opportunities and increasing portfolio concentration risk.

Lack of Standardization: Absence of auditing and regulation in ESG criteria creates inconsistencies between corporate reports, making objective comparisons difficult.

Greenwashing: Companies make false claims about environmental credentials. When fraud is uncovered, they often suffer drastic reputational and valuation declines.

Cyclical Volatility: As demonstrated in 2022, sector biases can cause significant underperformance in short cycles.

Conclusion: A Personalized Decision

Sustainable investments offer tangible benefits for long-term portfolios while aligning capital with environmental and social values. Companies committed to ESG show greater preparedness for future regulatory challenges, reducing volatility over the long term.

However, investors seeking maximum short-term returns may miss opportunities if they limit themselves exclusively to ESG. The decision to invest in ESG funds fundamentally depends on personal financial goals, risk tolerance, and value convictions.

For those wishing to align with sustainable principles, options include direct shares in high-ESG-rated companies like Microsoft, Google, Apple, or Nvidia. Investors with higher risk tolerance can explore market volatility through derivatives on authorized platforms.

The core advice remains unchanged: thorough analysis of target companies or funds, professional advice before financial decisions, and recognition that no investment is free from inherent market risks.