Should you buy bad companies?

Posted 24 September 2025

One of the key debates in ESG investing is about engagement versus avoidance. Should you only buy good companies, or should you buy bad ones and make them better? It depends on your perspective, and why you incorporate ESG principles in the first place.

ESG investing isn’t really one style; it’s several. An ESG fund manager might try to exclude companies that violate environmental, social or governance principles, or they might try to promote those principles through rewards or engagement. In 2024, the FCA introduced labels under which UK fund managers can market these different styles.

• Sustainability Focus: 70% of assets meet a credible standard of environmental or social sustainability.
• Sustainability Improvers: fund managers try to improve unsustainable assets through shareholder engagement.
• Sustainability Impact: investing in companies or projects aimed at materially improving the world.
• Sustainability Mixed Goals: a combination of the above that meets SDR rules.

The difference between focus and improvers is particularly interesting because it gets at the classic debate between engagement and avoidance. Some think ESG investors should exclude companies with poor ESG metrics on principle, while others think it’s better to buy those companies and try to improve them. Put simply, should you buy bad companies?

It’s about perspective.
We should point out first that there isn’t a clearly more successful strategy – if by ‘successful’ you mean maximising investment returns relative to risk. One might worry that improving ESG metrics through shareholder engagement could undermine the sources of return – like an activist investor ridding an energy company of its profitable oil operations.

Engagement can risk a backlash too. Last year, ExxonMobil tried to sue its own activist shareholders for bringing ESG resolutions. The case was thrown out, but the oil major has now received US regulatory approval for a system which automatically aligns retail shareholder votes with the board – severely handicapping activist investors.

On the other hand, strategies that exclude bad companies can similarly miss out on returns. The question of returns is very context dependent, and hard to evaluate in the abstract.

In terms of improving companies ESG metrics, each strategy has its pros and cons. The Exxon case shows the challenges of shareholder engagement, but at the same time it isn’t as if the many ESG funds avoiding Exxon shares are changing its behaviour either.

Taken to the extreme, both strategies should have the same effect on companies, since if the only way you can access investment capital is through improving ESG metrics, that is more or less the same as being told to do so by shareholders. For a specific company, the most effective strategy will depend on whether it is more responsive to broad market forces or shareholder votes.

Taking a step back and thinking about it from a policymaking perspective, ideally you would want significant investment pursuing both strategies. If the goal is to promote widespread adherence to ESG principles, it makes sense to offer both the carrot (investors giving capital to companies in the hope they will change) and the stick (investors avoiding non ESG compliant firms).

What should I do personally?
For similar reasons, a mixed strategy might also make sense in terms of what investors should personally do. Balancing risks through diversification is always sound investment advice – and this applies to ESG risks as much as capital ones. A complicating factor here, though, is that ESG investing is intimately tied to personal values. So, even if you thought that engagement might positively improve adherence to ESG principles, you might simply be uncomfortable holding certain assets, such as gambling or weapons stocks.

So is avoidance or engagement best? This is an age-old ethical debate, and not one that investment professionals should pretend to have any special answers to. Excluding bad companies could be seen as sticking to your principles, or it could be seen as sticking your head in the sand. Engagement could be seen as trying to make real change, or it could be seen as being complicit in unethical behaviour. Deciding which view to take comes down to whether consequences or principles are more ethically valuable – whether the ends justify the means.

Investment providers should let investors decide.
That is why Tatton doesn’t have set rules on which ESG strategy is best. For our Ethical Portfolios, we have certain negative screens against ‘no go’ industries, because that is what our own survey data suggests our clients care about most. Additionally, some of the funds we invest in will have methods for positive engagement – whether those are of the impact or improvers variety.

We don’t tell fund managers which strategy to pursue. Rather, we look thoroughly at their processes and assess whether they match up with what matters to our clients. As ever, this needs to be done consistently and with full transparency. ESG investing is about investing according to your principles – so it’s important to make sure those principles are indeed yours.