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Are Ethical Investing and ESG Investing the Same?
November 27, 2025
Ethical investing and ESG investing often get mentioned together, but they’re not quite the same. Both aim to make money matter, but they take slightly different routes to get there. Understanding how they differ can help you find the approach that best fits your values and investment goals.
Table of Contents
What Is Ethical Investing and How Does it Work?
Ethical investing is grounded in personal values or moral principles. It’s where an investor chooses to avoid industries or companies that conflict with those beliefs.
This might mean steering clear of companies involved in areas like gambling, tobacco, fossil fuels or the manufacture of guns and ammunition. For some, it may also include avoiding firms linked to practices they find socially or environmentally harmful.
The emphasis here is on exclusion – choosing not to invest in sectors or businesses that go against personal values.
What Is ESG Investing?
ESG investing stands for Environmental, Social and Governance. This approach evaluates companies based on how responsibly they manage three key areas. These are their impact on the planet, how they treat people and how well they are governed.
Rather than focusing on exclusion alone, ESG investing looks at how companies handle long-term risks and opportunities beyond traditional financial results. It asks if the company is well managed, forward-looking and sustainable over time.
Does Ethical or ESG Investing Affect Returns?
One of the most frequently asked questions is whether adopting ethical or ESG criteria leads to worse financial performance.
Analysis from the Morgan Stanley Institute for Sustainable Investing found that sustainable funds outperformed traditional funds in the first half of 2025. Sustainable investing generated median returns of 12.5% compared to 9.2% for traditional investing. This followed a short period of underperformance in the second half of 2024, showing how performance varies.
In general, ESG-focused funds tend to perform much like traditional investments – sometimes a little ahead, sometimes a little behind. Results can shift depending on the sector, region and market conditions. The research shows taking ESG factors into account can help build resilience and stability.
Ethical investing has a smaller pool of options to choose from. That doesn’t mean weaker performance. It just means outcomes depend on how the industry exclusions are managed within a broader investment plan.
Both ethical and ESG investing aim to balance strong financial performance with a sense of purpose. With the right strategy, they can help grow wealth in a way that reflects investor values.
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Choosing Between Ethical Investing and ESG Investing
Deciding between ethical investing and ESG investing comes down to what the priority is:
- If an investor’s main objective is to avoid supporting certain industries or companies entirely, then ethical investing (value-based exclusions) may be the clearer fit
- If the objective is to invest in companies that are well-managed, forward-looking and mindful of environmental, social and governance factors, while still aiming for performance, then ESG investing may be more appropriate
- Many investors adopt a hybrid approach, combining strong ESG credentials with exclusions aligned to personal values
Building Long-Term Value with Sustainable Investing
Ethical investing and ESG investing are not the same thing, though they do overlap. Ethical investing centres on values-based exclusion. ESG investing centres on evaluating how companies manage environmental, social and governance risks and opportunities and how it may impact long-term business performance. Both approaches recognise that investing is no longer purely about financial returns, but about how businesses create value in a changing world.
Whether you lean ethical or ESG investing (or both), the important step is to understand the approach and make sure it aligns with both your values and financial goals.
Like to know more about ethical or ESG investing? Contact our team for a complimentary consultation and review of your existing investments.
Frequently Asked Questions – Sustainable Investing
Ethical investing is based on personal values. It avoids industries or companies that conflict with an investor’s principles. ESG investing looks at how companies manage environmental, social and governance factors that may affect long-term performance, risk and sustainability.
Yes. Many investors combine the two approaches, selecting companies with strong ESG practices while excluding industries that don’t align with their personal values. This hybrid strategy balances financial performance with personal principles.
Research shows that ESG and sustainable funds often perform in line with, or even ahead of, traditional investments. While results can vary by market and sector, strong ESG management tends to support long-term stability and resilience.
Ethical investing can involve a smaller pool of options because it excludes certain sectors. This doesn’t automatically make it riskier, but it does mean diversification needs careful planning to maintain balance across a portfolio.
Check a fund’s documentation for clear criteria on how it screens or selects investments. Look for transparency on ESG scoring, sustainability goals or exclusion policies. Your financial adviser can help verify that a fund’s approach aligns with your intentions.
Research shows that ESG and sustainable funds often perform in line with, or even ahead of, traditional investments. While results can vary by market and sector, strong ESG management tends to support long-term stability and resilience.
Important information
The information on this page is for general guidance only and does not constitute personal financial advice. We recommend seeking advice tailored to your individual circumstances before making financial decisions.
