Why Younger Investors Are Rewriting the Rules on "Values-Based" Investing

A 2025 Morgan Stanley survey reported that 97% of Millennials are interested in sustainable investing, with 65% of them reporting that they have more than 20% of their portfolios currently invested in companies or funds that seek to make a positive social or environmental impact.

Among Baby Boomers, that number is just 25–30%.

That gap matters on its own.

But when you look at it like this, it’s different: 77% of Gen Z investors began investing before age 25. For this cohort, values-based investing isn't a lifestyle add-on. It's the default starting position.

The stakes compound when you layer in the wealth transfer.

Cerulli Associates projects that over $84 trillion will move from Baby Boomers to Millennials and Gen Z over the next two decades, marking the largest intergenerational transfer in history.

The portfolio preferences of that incoming generation will reshape the way capital is distributed amongst the markets.

The ESG landscape of 2026 looks nothing like the checkbox exercise it was a decade ago. There are new rules and regulations.

In California, Bill 54 (SB 54) requires packaging producers to cut plastic waste by 25% and meaningfully increase recycling rates by 2032.

In Europe, the EU’s Corporate Sustainability Reporting Directive (CSRD) now enforces roughly 50,000 companies to publish audited sustainability disclosures. These are legal measures with real financial penalties if not followed.

What does this mean for investors?

It has 2 implications.

1) ESG data is harder to fake when regulators are auditing it.

2) Companies ahead of the curve on sustainability reporting are likely better positioned on future compliance costs, a signal that may eventually show up on earnings multiples.

In 2023, Deutsche Bank's asset management arm DWS agreed to pay $25 million to settle SEC charges that it had overstated the ESG integration of its funds.

In Europe, strict new definitions triggered a wave of fund downgrades, with dozens of products stripped of their premium “Article 9” classification, which means they have sustainable investments as their primary objective.

Greenwashing is real.

Not all ESG funds are built equally.

Here are 3 that incorporate it well.

iShares MSCI USA ESG Optimized ETF $ESGU ( ▼ 0.31% )

Broad U.S. equity exposure with ESG screens applied, excluding controversial weapons, tobacco, and companies with ESG controversies. Expense ratio: 0.15%. The fund has tracked within ~0.5% of the S&P 500's annualized return over five years while maintaining meaningful exclusions.

Vanguard ESG U.S. Stock Fund Admiral ($VFTAX)

Excludes fossil fuels, weapons manufacturers, and adult entertainment with a 0.14% expense ratio.

iShares ESG MSCI USA Leaders ETF $SUSL ( ▼ 0.65% )

Targets the top 25% of ESG performers within each sector rather than excluding entire industries. The result is an ESG tilt without massive sector concentration, which is a smarter structure for investors who want leaders across the full economy.

ESG funds broadly underperformed in 2022, when energy stocks surged and most ESG mandates were significantly underweight. That's a cost to acknowledge.

But over longer horizons, the gap narrows a bit more.

Morningstar's 2024 Sustainable Funds Landscape report found that more than half of ESG funds across major categories outperformed their traditional peers over the trailing decade.

The better argument isn't that ESG directly generates alpha, it's that ESG results in management quality, regulatory preparedness and long-run risk management.

Companies that have scored poorly on governance have historically shown higher rates of fraud, regulatory fines and reputational blowups.

3 questions you should ask to screen your ESG exposure

1) What does the fund actually exclude? Read the index methodology, not the fund factsheet cover. Does it exclude all fossil fuel producers, or only coal? Weapons manufacturers, or only cluster munitions?

2) What is the expense ratio? ESG investing doesn't require paying a premium. ESGU and VFTAX are both below 0.15%. Above 0.50% for a passive ESG fund is difficult to justify.

3) What's the sector tilt? Funds that exclude energy and utilities heavily tend to overweight tech. Know the concentration risk you're accepting before you buy.

ESG is no longer a fringe preference of an investing minority.

It’s the lens through which the majority of tomorrow's investors will evaluate every dollar they deploy into the markets.

The regulatory environment is tightening around it. The data infrastructure is improving. And the performance drag that once defined the category has largely narrowed over longer time horizons.

The question is no longer whether values-based investing is "real" investing.

It's whether you understand what your ESG fund actually owns, and what it doesn't.

Stay dominant!

Alex (The Dividend Dominator)
Founder and CEO of Dividend Domination Inc.
Follow me on Twitter and Instagram