Looking Beyond Performance When Evaluating an Investment

When an investment is performing well, saying no to it can feel counterintuitive. Strong recent returns may attract attention, create excitement, and potentially leave investors wondering whether they are missing an opportunity.

But we believe an investment decision can involve more than asking, “How much has this company made lately?” For investors interested in sustainable investing, another question may be equally important: “Do I actually want to own this?”

That distinction can matter. An investment may have an attractive performance history while potentially conflicting with an investor’s environmental, social, ethical, or personal priorities. Sustainable investing may provide a framework for considering those concerns alongside traditional investment considerations.

Strong Past Performance May Not Tell You What Happens Next

One of the biggest temptations in investing can potentially be chasing what has already performed well. When certain companies, industries, or investment themes receive significant attention, investors may experience fear of missing out.

However, past results should not be treated as a promise about what comes next. The U.S. Securities and Exchange Commission’s Investor.gov states directly that “past performance is no guarantee of future results.”

Source: Investor.gov, How to Read a Mutual Fund Prospectus: Fee Table and Performance

We believe this is particularly important when an investment has already experienced substantial appreciation. Seeing impressive historical returns may make an opportunity look appealing, but those returns may not establish what an investor can earn after buying.

Rather than relying on recent performance when evaluating an investment, investors may wish to consider how the investment fits within their broader financial strategy, risk tolerance, time horizon, and personal priorities.

Sustainable Investing Can Add Another Question to the Process

For someone interested in sustainable investing, financial performance may be only one part of the decision.

Investor.gov explains that ESG stands for environmental, social, and governance and describes ESG investing as investing in companies based on their commitment to one or more ESG factors. It also notes that ESG investing is often referred to as sustainable investing, socially responsible investing, or impact investing.

Source: Investor.gov, Environmental, Social and Governance (ESG) Investing

We believe this framework can give investors another lens through which to evaluate an opportunity. Rather than asking only whether a company has generated attractive returns, an investor may also consider what the company does, how it operates, and whether owning it feels consistent with the investor’s priorities.

For one person, environmental concerns may be particularly important. Another investor may focus more heavily on labor practices, governance, community impact, weapons, fossil fuels, or other issues. There may not be one universal definition of what a values-aligned portfolio should contain.

A High-Performing Company May Still Conflict With Your Values

Consider a hypothetical company benefiting financially from military activity. An investor may believe that owning businesses involved in weapons or military contracting conflicts with their personal values. That investor could decide against the investment even if its recent financial performance appears attractive.

Exclusionary approaches are an established part of sustainable investing. Morningstar describes exclusions as removing certain industries from an investor’s investment universe and calls them “a cornerstone of sustainable investing.” Its discussion also identifies weapons among the categories that some sustainable strategies have excluded.

Source: Morningstar, Are Exclusions on the Way Out for ESG and Sustainable Funds?

The important point, in our view, is not that every investor should exclude the same companies. Instead, sustainable investing may involve deciding which activities matter to you and then determining whether your portfolio reflects those priorities.

Technology Can Present Similar Questions

A similar values discussion may apply to rapidly expanding technologies.

For example, an investor might be excited about businesses benefiting from artificial intelligence while also being concerned about the environmental or community implications associated with data center expansion.

Those concerns do not necessarily mean technology or data center investments should be avoided. They may simply provide additional considerations for an investor who wants sustainability factors to be part of the investment process.

According to the International Energy Agency, data centers consumed an estimated 415 terawatt-hours of electricity globally in 2024, representing about 1.5% of global electricity consumption. The IEA’s Base Case projects global data center electricity consumption could reach approximately 945 TWh in 2030.

Source: International Energy Agency, Energy Demand from AI

For an investor concerned about environmental impacts, information like this may lead to additional questions about a company’s energy sources, efficiency efforts, infrastructure, or sustainability policies. We believe those questions can coexist with an analysis of the company’s financial characteristics.

“Sustainable” Does Not Automatically Mean Aligned With Your Values

Investors may also want to be cautious about assuming that an investment labeled ESG or sustainable automatically matches their personal definition of sustainability.

The SEC’s Investor.gov bulletin states that ESG funds are not all the same. It explains that different funds may weight environmental, social, and governance factors differently and that some ESG funds may hold companies that do not have the environmental or social impact an investor wants to encourage.

Source: Investor.gov, Environmental, Social and Governance Funds: Investor Bulletin

As we understand it, this means the label alone may not tell you enough.

An investor interested in sustainable investing may want to review a fund’s prospectus, methodology, screening criteria, and underlying holdings before deciding whether it reflects their goals. Investor.gov specifically recommends reading available fund information, including the prospectus and most recent shareholder report, and considering whether the investment strategy is consistent with the investor’s goals.

Intentional Investing May Be More Important Than Chasing the Hot Stock

There may always be an investment generating attention because of its recent performance. The temptation to participate can potentially become stronger when headlines focus on dramatic gains or when other investors appear to be benefiting.

We believe sustainable investing offers a different starting point.

Instead of beginning with, “What is performing best right now?” an investor might begin with questions such as: Does this investment choice reflect what matters to me? Which business activities would I prefer not to own? Which environmental, social, or governance considerations matter most to me? How much investment risk am I comfortable taking? Does this investment fit into my broader financial plan?

Saying no to an investment does not necessarily mean predicting that the investment will perform poorly. It may simply mean deciding that potential financial returns are not the only consideration that matters to you.

Incorporating sustainability or values-based criteria can also affect the investment universe available to an investor. Depending on the methodology used, screening or other criteria may reduce diversification, increase exposure to certain industries or factors, or cause a portfolio to perform differently from a broader market benchmark. The significance of these considerations will vary by strategy.

At Holistic Finance, we believe investing can potentially be approached as part of a broader financial life rather than as a race to identify the latest winner. For investors interested in sustainable investing, that may mean intentionally evaluating both financial considerations and personal values before deciding what deserves a place in a portfolio.

Sometimes, an investment can perform well and still not be the right investment for you.

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Disclosures

This material is for informational and educational purposes only and should not be construed as individualized investment, tax, or legal advice. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Sustainable, and ESG and values-based investment strategies may use different methodologies and may perform differently from the broader market or other investment strategies. Such strategies may also limit the securities or industries available for investment. Investors should consider their individual objectives, risk tolerance, financial circumstances, and preferences and consult with their financial professional before making investment decisions. The discussion of sustainable investing in this article is intended to describe considerations that some investors may incorporate into their investment decisions. It does not represent a specific investment strategy or guarantee that any particular investment or portfolio will satisfy an investor’s environmental, social, ethical, or other personal preferences.

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