During January 2026, we published the returns of our portfolios in 2025, which were especially positive overall. In this context, we also noted that ISR portfolios had clearly underperformed standard portfolios, an issue also discussed when analyzing ISR pension plan results.
This fact has generated a legitimate question among many investors:
Why are ISR portfolios delivering lower returns than standard portfolios?
From a management perspective, the answer is clear: it is not a mistake, nor a recent change, nor a one-off anomaly. It is the natural result of applying different investment criteria within the same risk framework.
In this article, we explain what the data shows, why it happens, and how an investor should interpret it in the long term.
Above all, it encourages investors to reflect on whether their sustainable investment values are strong enough to stay committed through different market cycles.
ISR portfolios underperformed in 2025
In the chart above, we compare the standard and ISR versions of the average investor profile (7/10) at inbestMe. Let us take this analysis as an indicator of what happened (it varies by profile).
Cumulative results since inception are as follows:
- Standard portfolio: +79.1% cumulative (6.6% annualized)
- ISR portfolio: +69.9% cumulative (6.0% annualized)
The cumulative difference is approximately 9 percentage points.
It is important to put this into context:
- Volatility and maximum drawdown are very similar in both portfolios.
- The 9-point difference comes from “only” 0.6% annualized.
- In other words, the difference does not come from taking more risk, but from the performance of the underlying assets.
Looking at the chart in more detail:
- In 2020 and 2021, ISR portfolios actually outperformed.
- In 2024 and especially 2025, ISR clearly lagged behind.
In 2025 alone, the difference in profile 7 was –3.1 percentage points (8.1% vs 5%).
From this, we can draw two clear conclusions:
- There are market cycles favorable and unfavorable to ISR investing.
- The difference is not in risk, but in the assets invested.
Source of the difference: exclusions and sector biases
Beyond cyclical factors, it is important to understand what an ISR-indexed portfolio is.
ISR portfolios, even when indexed, apply environmental, social, and governance (ESG) filters. In practice, this means:
- Excluding certain controversial sectors
- Excluding the worst companies in each sector that do not meet minimum ESG standards
- Increasing exposure to companies with better sustainable practices within major indices
This approach introduces structural sector biases.
In recent years, several sectors traditionally excluded or underweighted in ISR portfolios have been major winners, including:
- Traditional energy
- Commodities
- Certain industrial and financial areas
- Selected large tech companies
- Even precious metals
When these sectors lead the market, ISR portfolios tend to lag, not due to poor management, but due to adherence to their investment mandate.ras ISR tienden a quedarse por detrás, no por mala gestión, sino por coherencia con su mandato de inversión.
Importance of the economic cycle
The relative performance between ISR and standard portfolios is not constant over time.
There have been periods when:
- Differences were minimal
- ISR portfolios performed very similarly
- ISR even temporarily outperformed standard portfolios
As with any investment bias (value, growth, quality, ESG), the economic and market cycle is decisive.
Evaluating a structural strategy solely based on a specific period can lead to wrong conclusions.
Switching from an ISR to a standard portfolio after several unfavorable years usually makes little sense, especially considering the mean reversion phenomenon, which could reverse the trend in upcoming years.
Are my sustainability values strong enough?
From an honest and realistic perspective, an ISR investor should be clear on two fundamental points:
- Accept the commitment: investing with ISR criteria is both a financial and values-based decision. Both dimensions matter, and it is reasonable to accept lower returns in certain cycles.
- Be consistent with your values: if the sole goal is maximizing expected returns, the standard portfolio is the natural reference. If how and where you invest also matters, ISR portfolios remain a valid option.
Investors should consider the worst reasonable scenario:
- Would you accept being several years with lower returns — for example, about 9 cumulative points (0.6% annualized) — without feeling like you are “losing” returns?
If the answer is no, then your sustainability values are probably not strong enough to justify an ISR portfolio.
Choosing an ISR portfolio should be guided primarily by values, not by the expectation of higher returns, as occurred until 2023 in a particularly favorable context.
Recent underperformance does not imply worse long-term results
ISR portfolios have lagged in recent years, but this does not have to continue in the long term.
What long-term historical evidence tells us
Investors with ISR convictions, even deep ones, must be prepared to live with these differences.
If we take as a mere indicator of what has occurred over a period longer than that observed in our ISR portfolios (see infographic above) the MSCI ACWI ISR (MSCI All Country World Index with Socially Responsible Investing filter), we observe that since May 2011 it has achieved a slightly higher return (10.44% versus 10.19%), with slightly higher volatility (14.83 versus 14.47), but with a Sharpe ratio one-tenth higher (0.66 vs 0.65).
Therefore, taking this long-term indicator (the data covers 14 years), the message that ISR investing, at least in global equities, can offer a similar or even higher return remains valid, even if only by a few tenths. However, there are no guarantees that this will continue in the future, and in any case, we have already seen that it is not a valid message for short periods and that it is also not so clear when combined with other asset classes, such as fixed income, as occurs in our portfolios.
Investors with ISR convictions, even deep ones, must be prepared to live with these differences.
