ESG Investing: Evolution, Performance Impact & Future Trends

Posted by Helena Eaton on 3rd December 2025

“The emphasis has shifted from investment strategies based on exclusion to other approaches.”

Bedrock’s Head of Advisory, Helena Eaton, recently participated in the Next Frontier podcast, “Rethinking the ESG Investment Case“, hosted by Business Reporter. She shared insights on ESG (environmental, social and governance) investing – exploring its definition, origins, impact on performance, and future direction*.

Below she shares a summary of the key themes and takeaways from the discussion**.

The evolution of ESG investing

The term “ESG investing” gained prominence in the early 2000s, evolving from socially responsible investing focused on values-based exclusions (excluding certain sectors or stocks from investment portfolios) and shareholder activism. From the investor perspective the acronym “ESG” means environmental, social and governance issues, which are important to consider when deciding to invest in a company. This includes any risks related to energy transition, potential environmental liability, workplace health and safety, corporate governance issues, such as lack of independence of the Board of Directors or auditors and other similar issues.

Early ESG ratings emerged alongside efforts by the UN Global Compact and financial institutions to integrate environmental, social, and governance factors into mainstream investment analysis. The intention was to encourage equity analysts, asset managers, and investors to consider ESG factors when valuing companies and making investment decisions, as well as to prompt companies to mitigate the relevant risks and provide disclosures.

Over time, the emphasis has shifted from investment strategies based on exclusion to other approaches, such as ESG integration, engagement, impact and thematic investing. The ESG integration approach, when an asset manager considers ESG factors in companies’ selection, is the most dominant. Other approaches such as impact investing (investing with the aim of solving certain social or environmental problems) and thematic investing (focusing on specific areas such as climate or circular economy) also gained some traction.

During my career in wealth management I have observed that initially clients merely sought to exclude certain sectors like tobacco and weapons from their portfolios. But gradually demand grew for more sophisticated ESG-related strategies.

Today, the industry is well-developed, supported by robust regulation and disclosure requirements. In my opinion the industry is gradually adopting a more pragmatic approach to ESG investing with the focus on materiality. The focus is increasingly shifting from the process to outcomes, emphasizing ESG metrics that materially affect business models, corporate profitability, as well as contribute to broader social and environmental impact.

“Adopting a more pragmatic approach to ESG investing with the focus on materiality is key”

Impact of ESG factors on performance

Numerous research over the past two decades shows a consistent positive correlation between strong ESG ratings and better financial performance at a company level. According to the research, companies in the top quintile by ESG ratings generally outperform those in the lowest¹. I believe the outperformance is likely driven by better earnings and fundamentals as companies with robust ESG practices tend to be more sustainable, supporting stronger long-term performance.

At the investment strategy level, the findings are more mixed. Generally, ESG integration has modest positive effects on the strategy performance, whereas exclusion strategies – for example omitting energy or defence sectors – could lead to underperformance under certain economic or geopolitical conditions, for example when the oil prices are going up or defence becomes one of the top priorities in Europe². Therefore, generalising ESG impact on returns at the investment strategy level is not straightforward***.

Understanding ESG ratings

ESG scores and ratings are useful tools for investors, similar in concept to credit ratings. Scores typically range from 0 to 100 and are compiled by providers like Sustainalytics, MSCI, Moody’s, and S&P, based on how companies manage environmental, social, and governance issues.

These scores are then translated into ratings (e.g., AA, CCC) to aid interpretation. While helpful as a starting point for analysis, these ratings have limitations. Methodologies can lack transparency and ratings for the same security can differ materially between providers depending on how various metrics are weighted and assessed.

The relevance of underlying data to a company’s financial performance or societal impact also isn’t always clear. I think materiality (how ESG factors affect a company’s business model or external impact) is key. Therefore, investors and analysts must conduct their own due diligence, engaging directly with companies to understand the real-world significance of ESG factors.

“The focus is shifting toward fundamentals, emphasizing financial performance and materiality: how environmental, social, and governance factors directly impact a company’s business model and long-term value”

Future Outlook: Embedding ESG factors in investment strategy

Over the next 3–10 years, I believe that the assessment of ESG factors will become more pragmatic and deeply embedded in mainstream financial analysis. The focus is shifting toward fundamentals, emphasizing financial performance and materiality: how environmental, social, and governance factors directly impact a company’s business model and long-term value. ESG should no longer be viewed as a standalone category but as a component of investment analysis across all asset classes and strategies.

This approach to investing is “common sense” in my opinion, as companies with strong corporate governance, fair treatment of employees, and proactive environmental practices are more likely to be stable, competitive, and resilient. On the other hand, indicators of weak ESG practices, such as high employee turnover, failure to adapt to the energy transition requirements or insufficient audit practices may undermine performance in the long-run. As such, ESG considerations are becoming essential due diligence questions for any investor, forming part of the basic evaluation of a company’s sustainability and future prospects.

For those who wish to listen to the podcast, you can access it here.

References

1. 17 years of MSCI ESG Ratings and long-term corporate performance, MSCI Institute, 2024 https://www.msci-institute.com/themes/risk-return/long-term-corporate-performance/?cookie_settings_updated=true

1. How do ESG goals impact a company’s growth performance?, McKinsey, 2023 https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/next-in-growth/how-do-esg-goals-impact-a-companys-growth-performance

2. Investigating the link between ESG and investment performance, Robeco, 2024 https://www.robeco.com/en-uk/insights/2024/01/is-esg-investing-more-hype-than-help-for-investment-portfolios

2. Sustainability and portfolio returns, J.P. Morgan Asset Management, 2024 https://am.jpmorgan.com/gb/en/asset-management/liq/insights/market-insights/market-updates/on-the-minds-of-investors/the-impact-of-esg-factors-on-portfolio-returns/

Disclaimers

*The views presented in this podcast are Helena Eaton’s own views and might not necessarily reflect the investment approach of Bedrock Group. Bedrock Group’s Responsible Investing Policy incorporates governance-first approach to responsible investing: “The analysis of material risk factors, including those relating to environmental and social issues, is incorporated into the investment process across all asset classes through an explicit focus on the governance quality of prospective investees… We believe that supporting strong corporate governance and internal risk controls is the most efficient and effective way to mitigate risks associated with the poor management of environmental and social issues (which can emerge during the lifetime of an investment and may be hard to identify and evaluate a priori).”

**This discussion does not represent an investment advice and is intended for information purposes only.

***Past performance is not a reliable indicator of current and future results. The performance research overview is provided for information purposes only.

Certain statements included within constitute ‘forward-looking statements.’ These statements, which may include words like ‘believes,’ ‘expects,’ or similar expressions, are subject to numerous risks and uncertainties. Actual results may differ materially.