Shri Krishnansen is the Chair of Parmenion’s Ethical Oversight Committee and Chief Commercial Officer for WealthOS. In his latest article, Shri explores why ESG portfolios differ from mainstream indices, using baking as a metaphor to show how changing ingredients changes outcomes and impact today!
Why different ingredients mean different outcomes
Over Christmas, I found myself back in the States, knee-deep in flour and holiday tradition. For my in-laws, baking isn’t just a hobby; it’s a love language. We communicate in sugar cookies and chocolate chip batches. But as any baker knows, recipes that look the simplest are often the most temperamental and hardest to get right.
For the uninitiated, these recipes seem simple. But achieving that specific chewiness, and that nostalgic flavour requires precise ratios of ingredients. This year, however, the challenge was levelled up: I decided to adapt the secret family recipes to cater to a growing variety of dietary requirements, so that everyone could partake.
I was swapping out butter for dairy-free alternatives, flour for gluten-free blends and obsessing over ratios. It was somewhere between batches that it struck me: we’re doing the same thing in the investment world, but we’re not being realistic about the expected results.
Assessing the 'right' cookie
Throughout my career in the investment industry, there is a concept that has continuously frustrated me: tracking error. Technically, it’s a metric for the variability of relative returns. Plainly, it’s measuring how much your portfolio behaves differently from a reference benchmark like the S&P 500 or the FTSE 100.
In some corners of finance, tracking error is a vital tool. If you’re trying to mirror a specific market exactly and all that it entails, you want that error to be zero. Yet if you’re an active fund manager, tracking error is often seen as a penalty – a sign that you’ve strayed too far from the herd. But if you are an outcome-based or sustainable investor, tracking error isn’t just expected; it is the entire point.
When I bake a gluten-free, dairy-free cookie, I am intentionally changing the ingredients. We all know that if you change the composition, the outcome will be different – which is the objective. My family can’t enjoy the original cookies, so that’s the outcome I’m trying to change. I create new recipes that meet the requirements of the people consuming them. The result will probably have a different texture and look. But I’ll know I’ve succeeded when it invokes the delicious flavours of the original.
So, why is it that when we move from the kitchen to our investments, we suddenly expect the laws of "ingredients and outcomes" to vanish? Why do we take a "recipe" (a portfolio) that has been altered to reflect specific values (e.g. remove fossil fuels, improve social outcomes, or exclude tobacco), and then we complain when it doesn't look – or perform – exactly like the mainstream index?
Changing the recipe
Many investors compare their ESG portfolios to standard, mainstream market indices, like the S&P 500. When the ESG portfolio underperforms, the panic sets in. "Why is it different?" they ask. [Of course, no one questions when the ESG version outperforms, like in 2020… 2021… 2023… or more recently, the first half of 2025.]
The answer is simple: we changed the recipe.
We removed certain ingredients (like fossil fuels or weapons manufacturers) and reweighted others (towards companies with better social or environmental footprints) to achieve a different outcome. You cannot expect this portfolio to behave exactly like the original market.
We saw this play out starkly over 2022, when fossil fuel prices surged. If you had removed the "oil ingredient" from your portfolio that year, your "cookie" tasted very different – but that wasn't a mistake; it’s literally just how that cookie crumbles. It was the direct result of your investments working in line with your values for people and the planet.
Measuring 'regret risk'
When we obsess over how an ESG portfolio performs relative to a broad market comparator like the S&P 500, we aren’t really measuring skill or sustainability. We are measuring regret risk.
We are looking at the portfolio we chose – one designed to build a greener, more ethical world – and comparing it to the mainstream market we could have chosen instead. Over a full market cycle, that regret can cut both ways: there have been periods when excluding fossil fuels or backing higher‑quality, lower‑carbon businesses has added value, as well as periods, like the recent energy rally, when it has detracted. This leads to "yo-yo" decision-making.
We see the headlines: "FTSE 100 tops 10,000 for first time in new year rally" or "Stocks bull run set to mark historic 2026 streak". Suddenly, the investor who asked for a "greener world" starts to wonder why their "cookie" doesn't taste like the one everyone else is eating. Investors get confused, advisers get defensive, and capital starts flowing back into the very industries the investor wanted to avoid.
The way the cookie crumbles
The truth is this: you cannot change the world by investing in it exactly as it is right now.
Mainstream market-cap indices are mirrors of the status quo. They reflect what the world is currently rewarding economically. If we believe the world needs to transition to a different state – one that prioritises the environment and society – then capital must flow to different places and in different proportions. Importantly, “different” does not automatically mean “worse” financially; over multiple stretches of the last decade, more sustainable investment approaches delivered competitive returns, while still aligning with investors’ values.
When I used AI-suggested substitutions for my holiday baking this year, it didn't produce an exact replica of the original recipe. But it did produce a good cookie. An alternative that met the specific requirements of the people I love – and fostered holiday cheer! My family knew that it was different, and enjoyed it all the same – especially because they hadn’t been able to for years.
If you are targeting a greener world or a more ethical society, you must have the faith to stick to your recipe. Your portfolio will miss certain rallies, but it will also be catapulted by entirely new ones (did I mention 2020, 2021 and 2023?). It will have "different" textures during market cycles. But if the end goal is a sustainable future, then the mainstream index is no longer your benchmark – the outcome is. What really matters is whether its long‑term journey matches both your financial goals and your values.
A New Year's resolution for our portfolios
As we settle into 2026, many of us are embarking on various health kicks, adopting different regimes to achieve different physical outcomes. For example, we know increasing fibre intake improves gut health, so we eat more fruits, vegetables and wholegrains – not more sugar and ultra-processed foods.
We need to bring that same awareness to our investments – ultimately, you can’t change the world without changing the ingredients.
As for me? I’ll always choose the cookie that actually meets my requirements. [FWIW – it’s a soft, chewy sugar cookie, over-easy on the icing, obviously with glitter sprinkles.]
About Parmenion
At Parmenion, we’ve spent over a decade perfecting our own kitchen. Whether you prefer the precision of our Sustainable Growth range, the balance of Ethical Growth, the strict exclusions of Screened Growth, or the cost-efficiency of our Passive ESG "cookies," we treat every portfolio with rigorous care.
Our recipes (strategic asset allocation) are optimised annually to ensure they stay on track, while our ingredients (constituent funds) are hand-picked through "anything-but-passive" due diligence. As a member of the Ethical Oversight Committee (EOC), I can personally attest that we never stop challenging our process to ensure the final result – the portfolio in your hands – is something you can truly believe in.
If you're ready to stop measuring regret and start measuring impact, let's find the cookie that fits your goals.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
