For years, many investors assumed that choosing environmental, social and governance (ESG) investing came with a cost—a performance shortfall. Based on our recent survey, that picture has changed.

In the 1990s and early 2000s, most investors believed that choosing responsible investing required them to pass up some amount of performance. In fact, this concern was so common that the word performance was mentioned in one-third of all responsible investing news articles published from 1982 to 2009. That’s more than the references to any other term.*

In just a few short years, as ESG investing has gained more traction, there’s been a noticeable shift in performance expectations for this approach.

MOST INVESTORS EXPECT SIMILAR—OR BETTER—RETURNS FROM ESG

Today, the notion that investors have to settle for less with ESG returns seems to have all but disappeared. We surveyed more than 60 North American institutional asset allocators, and the responses clearly showed that most investors no longer think they’ll need to trade off competitive performance when choosing ESG investing.

Nearly 70% of institutional investors we surveyed said they expect similar returns from ESG portfolios as from traditional portfolios (Display 1). These were professionals from retirement plans, endowments and foundations and other gatekeepers who collectively handle roughly $500 billion in assets. Even more surprising was that quite a few investors have raised the bar for ESG: among the other 30% of respondents, almost one quarter expected returns to improve.

What’s behind investors’ evolving attitudes toward the performance implications of ESG investing? They seem to go hand-in-hand with a shift in the way ESG factors are implemented in portfolios.

When responsible investing first arrived, it was implemented mainly through negative screening. In this approach, an investment universe is whittled down by removing companies that are misaligned with an investor’s moral and ethical perspective. Because this approach excludes certain types of investments—such as tobacco companies or weapons manufacturers—investors worried about its negative impact on performance.

According to our survey, negative screening is giving way to more holistic approaches such as integration. With an integrated ESG approach, investors explicitly consider ESG factors in research, integrating the expected economic impact into fundamental analysis. This process helps inform investment decisions.