The Truth About ESG Investing for Buy-and-Hold Investors

ESG investing—short for Environmental, Social, and Governance investing—has gained significant momentum in recent years. As more investors seek to align their values with their investments, ESG funds and scoring systems have become a common part of financial discussions. But for the long-term, value-focused, buy-and-hold investor, one critical question remains: Does ESG investing actually improve your portfolio—or does it distract from the fundamentals?

In this article, we’ll explore what ESG investing really means, break down both the positive and negative arguments, and most importantly, evaluate whether it aligns with a long-term investing strategy like that championed by Warren Buffett. You’ll learn how to identify ESG factors yourself (without relying on overhyped ESG-labeled funds), how ESG considerations may impact performance, and whether this investing style has a place in a portfolio built on quality and patience.

What is ESG Investing?

ESG investing refers to evaluating potential investments based on three key non-financial factors:

• Environmental: Climate impact, resource usage, pollution, renewable energy initiatives

• Social: Employee treatment, community engagement, diversity and inclusion, customer satisfaction

• Governance: Board structure, executive compensation, shareholder rights, transparency

These factors are designed to help investors evaluate the broader impact of a business beyond its financial statements. ESG investing aims to combine profit with principles, but this doesn’t mean abandoning returns. Ideally, ESG-conscious companies manage risks better, avoid scandals, and foster long-term stability—qualities long-term investors appreciate.

The Rise of ESG Investing in Modern Portfolios

ESG investing has surged in recent years. According to Morningstar (nofollow), global ESG fund assets surpassed $2.5 trillion by the end of 2023. Major firms like BlackRock, Vanguard, and State Street offer ESG-themed ETFs, and regulatory frameworks like the European Union’s Sustainable Finance Disclosure Regulation (SFDR) are pushing for more transparency.

At the same time, many retail investors—especially younger generations—are showing greater interest in aligning their money with their personal values. But popularity doesn’t always mean effectiveness, and not all ESG strategies are created equal.

🔗According to Morningstar, global ESG fund assets surpassed $2.5 trillion by the end of 2023.

Can ESG Investing and Value Investing Work Together?

As a value investor, you care about buying quality businesses at fair prices and holding them for the long term. So where does ESG fit in?

✅ Areas of Alignment

Some ESG factors—especially governance—are deeply aligned with Buffett-style investing. Strong boards, honest executives, and ethical business practices reduce risk and support long-term compound growth.

In fact, we’ve previously highlighted how evaluating management teams and leadership quality are key to long-term investment success. These are core components of the “G” in ESG.

In some cases, strong ESG practices can even reinforce a company’s economic moat—its durable competitive advantage. A company that leads in sustainability may reduce future regulatory risk or improve brand loyalty, supporting its long-term pricing power. If you’re interested in learning more about moats, check out our article on understanding the economic moat.

🚫 Potential Conflicts

However, ESG scores don’t always align with business fundamentals. Some ESG-labeled funds avoid entire industries (like energy or defense), even when those companies have strong cash flows, good management, and a wide moat.

Buffett himself owns stakes in companies like Chevron (CVX) and Occidental Petroleum (OXY), which score poorly on environmental metrics but provide strong returns, dividends, and business fundamentals.

ESG Investing: The Positives

Let’s look at the arguments in favor of ESG investing from a long-term investor’s perspective.

1. Risk Management

Companies that address environmental and social risks may avoid costly lawsuits, regulatory fines, or reputational damage. This can lead to more stable earnings—something long-term investors appreciate.

For example, Microsoft (MSFT) is often praised for its governance and environmental practices. It has committed to becoming carbon negative by 2030 and consistently ranks as one of the most ethical tech companies. Meanwhile, it continues to post strong revenue growth and wide margins.

2. Long-Term Alignment

ESG can help investors focus on sustainable business models. Companies prioritizing long-term health over short-term profits may be more resilient and more likely to compound over decades.

3. Consumer Preference Trends

As consumers shift toward supporting responsible companies, ESG leaders may capture market share. This aligns with the “wide moat” philosophy—companies that consumers trust and prefer are often harder to compete with.

ESG Investing: The Drawbacks

Despite the positives, ESG investing isn’t without criticism—especially for disciplined investors focused on fundamentals.

1. Inconsistent ESG Ratings

Different rating agencies often assign wildly different ESG scores to the same company. MSCI might give a company a high score, while another firm rates it poorly. This lack of standardization makes it difficult to trust scores blindly.

🔗 Learn more about MSCI ESG Ratings and Methodology.

2. Greenwashing

Some companies and funds slap an ESG label on their product without meaningful changes to operations or strategy. This “greenwashing” can mislead investors and may lead to underperformance.

🔗 A recent Harvard Business Review article explored how ESG branding is being used for marketing rather than substance—something long-term investors should be skeptical of.

3. Missed Opportunities

Strict ESG screens can eliminate entire sectors—like oil, tobacco, or defense—that have historically offered strong dividends and returns. Avoiding these industries could lead to under-diversification or missed compounding.

Real-World ESG Investment Examples

How to Evaluate ESG Factors as a Value Investor

You don’t need to invest in ESG funds to apply ESG principles. In fact, you can integrate ESG into your stock analysis process without compromising on business fundamentals.

Here’s how:

• Read the 10-K and proxy statement for clues on governance and ethical conduct.

• Review third-party ESG data (use it as a reference, not a decision-maker).

• Monitor how the company treats employees, suppliers, and customers—this often appears in news stories and sustainability reports.

• Prioritize companies with strong free cash flow and healthy financials.

• Look for businesses that reinvest wisely—like through Dividend Reinvestment Plans (DRIPs) or dividend growth.

• Assess cash flow health over profit margins for long-term viability.

Actionable Takeaways for Investors

✅ Understand ESG factors, but don’t rely solely on ESG scores or labels.

✅ Incorporate governance into your company evaluation—this aligns with value investing principles.

✅ Use ESG as a risk filter, not as a replacement for traditional financial analysis.

✅ Avoid blindly excluding sectors unless it fits your personal investing rules and philosophy.

✅ Review fundamentals first, then apply ESG filters as an additional layer of analysis.

✅ Track intrinsic value with or without ESG. Read our full guide on determining intrinsic value.

Conclusion: Should ESG Investing Be Part of a Long-Term Portfolio?

ESG investing offers a framework to evaluate risks that traditional financial metrics might overlook, particularly in governance and environmental impact. For long-term investors focused on quality businesses, certain ESG principles—especially strong corporate governance—can be valuable.

That said, ESG should not replace sound financial analysis. It’s a supplement, not a strategy on its own. ESG scores are inconsistent, and over-relying on ESG-labeled products may lead you away from high-quality, undervalued opportunities.

If you follow a Buffett-style, buy-and-hold approach, the best path forward may be to apply ESG principles yourself—especially governance—while focusing on companies with strong cash flows, economic moats, and ethical leadership.

Happy Investing!