ESG Investing Pros And Cons: What Changed After The SEC Pullback

n today’s market, a company’s bottom line isn’t the only number investors watch. Many also want to know how a company treats the planet, its workers, and its shareholders. If you want to do well while doing good, you may be considering ESG investing — short for environmental, social, and governance investing, also called socially responsible investing (SRI) or sustainable investing.

But the landscape looks very different than it did a few years ago. After explosive growth through 2021, sustainable investing has hit real headwinds: years of fund outflows, a political backlash, and a federal retreat from climate disclosure rules. At the same time, trillions of dollars still sit in ESG-screened strategies, and surveys show steady interest among younger investors.

Here’s an honest look at the pros and cons before you decide whether ESG investing belongs in your portfolio.

Where ESG Investing Stands In 2026

It helps to separate two very different numbers you’ll see quoted.

The broad figure — counting any assets that incorporate ESG factors in some way — is large but has actually shrunk. After a methodology change by the Global Sustainable Investment Alliance, global ESG assets fell from roughly $35 trillion in 2020 to about $30 trillion in 2022, and Bloomberg Intelligence now projects around $40 trillion by 2030 — well below the $50-trillion-by-2025 estimates that circulated in 2021.

The narrower (and arguably more meaningful) figure counts dedicated sustainable funds and ETFs. By Morningstar’s count, that universe held a little over $3.9 trillion globally at the end of 2025, with the US accounting for only about 9% of it. US sustainable funds have now seen net outflows for three straight years.

That split matters: ESG is still a major force in Europe, but it’s a much smaller, and currently shrinking, slice of the US market.

Invest for the Future You Want

ESG investing isn’t only about avoiding harm. Large, publicly traded companies have the scale and resources to push for change — whether by reducing emissions, improving labor practices, or producing products that serve people well. If those outcomes matter to you, aligning your dollars with your values is a legitimate reason to invest this way, regardless of where the broader market sentiment sits.

Build a Portfolio That Will Keep You Invested in Tough Times

Overtrading can be hazardous to wealth. Many investing thought leaders have cited a study that Fidelity’s best investors are dead because they can’t overtrade. The study appears to be debatable, but its point remains. Common investors do best when they buy and hold over the long run.

But sticking with a portfolio allocation can be tough. Investors use all kinds of heuristics to avoid eroding their wealth through common mistakes. Some never look at their portfolio. Others dedicate a small portion of their money to “Vegas money.” 

If ESG investors believe that their portfolio is bringing positive social effects, they may be more likely to stay invested in the long run. They won’t have as much incentive to chase the hot new stock because it needs to fit into their socially curated portfolio.

ESG Investing May Produce Returns on Par with Traditional Investing

A common worry is that screening for ESG means sacrificing returns. The long-run evidence is mixed-to-reassuring: multiple studies, including a widely cited Morgan Stanley Institute for Sustainable Investing analysis of thousands of funds, have found that diversified ESG funds performed roughly in line with comparable conventional funds, net of fees.

The key word is roughly. Performance swings with the economic cycle. In 2024, for example, the median US large-blend sustainable fund returned about 20.7%, trailing the 21.5% median for conventional funds, as energy and defense stocks — sectors many ESG funds underweight — rallied. Over a full cycle the gap may close, but you should expect stretches of underperformance, especially during energy booms.

You May Pay a ‘Greenium’

ESG and SRI funds have historically carried higher expense ratios than plain index funds, and that’s still true — though the gap has narrowed dramatically as competition and asset flows have driven fees down. At a robo-advisor like Betterment, for instance, the SRI portfolio ETFs run modestly higher than the standard portfolio, a difference now measured in a handful of basis points rather than a full percentage point.

That premium may be worth it to you. But over decades, even small fee differences compound, so it’s worth knowing what you’re paying.

You Have to Pick Your Issues

No company can lead across every ESG dimension. Some promote women in leadership positions, others reduce pollution and carbon emissions. Others avoid cronyism and other misbehaviors that threaten democratic ideals at home and abroad. Few companies do everything well. And most companies choose to report their most impressive records.

Even if clear metrics for ESG efforts existed (which they don’t), investors would still have to choose the issues they care about. For example, oil companies extract and burn fossil fuels, but they are also heavily invested in renewable energy research and development. Even more dubiously, agricultural companies produce food that feeds the planet and lifts millions of farmers out of poverty, but they may be polluters or engaging in unsustainable environmental practices.

One company may have a strong record of women in leadership positions, but over index on polluting and carbon emission activities. Another may have a strong environmental record but have poor employee-management relationships. 

When vetting an ESG fund or platform, make sure that you understand which issues are most important to the fund manager. If those values align with yours, then the fund or the platform may make sense for you.

No Clear Environmental, Social, or Governance Standards

The Securities and Exchange Commission (SEC) regulates reporting for publicly traded companies. While the SEC requires companies to report certain metrics, its governance of ESG metrics is loose. As a result, every company manages its own ESG reporting.

An external agency, International Sustainability Standards Board (ISSB) is slowly working towards setting international environmental standards, but this work is slow. Today, investors must depend on company-defined and reported metrics. In some cases, these may be credible sources of information, but they may gloss over some poor business practices.

You either need to trust your fund manager to dig into these metrics for you, or you’ll need to spend a lot of time researching individual companies to add to your portfolio.

US Standards Are In Flux

This has shifted in both directions since 2023.

On one hand, real standards now exist. The International Sustainability Standards Board (ISSB) published global disclosure standards (IFRS S1 and S2) in 2023, and more than 35 jurisdictions worldwide have adopted or are aligning with them.

On the other hand, the US has pulled back. The SEC adopted climate disclosure rules in March 2024, stayed them weeks later amid legal challenges, and in March 2025 voted to end its defense of the rules before moving to rescind them entirely. The SEC also stepped back from the ISSB. For now, federal ESG disclosure for US companies is effectively on hold. What fills the gap is a patchwork: state laws such as California’s SB 253 and SB 261, plus the EU’s Corporate Sustainability Reporting Directive for companies with European operations.

The practical takeaway: US company ESG reporting is still largely self-defined and inconsistent. You’ll need to trust your fund manager’s research or do significant homework yourself.

You May Become Underdiversified

As an ESG investor, you aren’t precluded from investing in any sector of the economy, but you run the risk of becoming under diversified due to your ESG standards. For example, a person who requires a strong track record of women and minorities in leadership positions would find very few large U.S. stocks in their portfolio.

If you don’t actively seek out energy alternatives, you’re likely to miss out on this important sector. Figuring out an appropriate asset allocation becomes very important if you’re an ESG. Using a portfolio analysis tool may be critical to keeping your portfolio on track.

Political And Flow Risk Is Real

ESG investing has become politically polarized in the US, and that has consequences for investors. Several states have passed laws restricting ESG considerations in public-fund investing. Asset managers have responded by quietly dropping “ESG” from fund names, scaling back commitments, and in some cases closing funds. In 2024, for the first time, more US sustainable funds were liquidated or dropped their ESG mandates than were launched.

This doesn’t necessarily affect a diversified fund’s day-to-day returns, but it does mean more fund closures, mergers, and rebranding — which can be disruptive if a fund you own changes course or shuts down.

Does ESG Investing Make Sense for You?

There are hundreds of ESG mutual funds available. Robo-advisors like Betterment and Wealthfront offer ESG options for investors seeking passive options. Take a look at the table below for a quick comparison. 

Only you can decide whether to include environmental, social, and governance factors in your portfolio. If you decide to use those factors in your portfolio, you need to choose which issues are most important to you and select your portfolio based on those criteria (and profitability).