Famous economist Milton Friedman once argued that a company’s sole responsibility was towards its shareholders, with no obligation to the public or society at large. However, modern investors have diverse perspectives, and many seek to incorporate environmental, social, and governance (ESG) considerations into their investment strategies. For these investors, ESG funds become an attractive option for their core portfolio holdings.
ESG funds offer a unique opportunity to align investments with personal beliefs, emphasizing social responsibility, good governance, and sustainability. Alex Budak, a lecturer at the University of California-Berkeley’s Haas School of Business, encourages investors to put their money where their values lie.
These funds not only offer the potential for positive long-term investment returns but also allow investors to actively support causes they care about. Whether it’s combating climate change, advocating for worker rights, or promoting better corporate governance, ESG funds serve as a viable investment vehicle for making a positive impact on the world.
To help investors navigate the vast array of ESG funds available in the market, our team conducted an assessment based on various criteria. This evaluation included factors such as assets under management, expense ratios, management style, and diversification levels. By considering these aspects, investors can make informed decisions that align with their financial goals and ethical values.
Compare the best ESG ETFs
| FUND (TICKER) | INDEX | EXPENSE RATIO | AUM | FUND THREE-YEAR RETURN AS OF JUNE 30 |
|---|---|---|---|---|
| iShares ESG Aware MSCI USA ETF (ESGU) | MSCI USA Extended ESG Focus Index | 0.15% | $14.6 billion | 13.27% |
| iShares ESG Aware MSCI EAFE ETF (ESGD) | MSCI EAFE Extended ESG Focus Index | 0.20% | $7.5 billion | 9.26% |
| iShares ESG Aware MSCI EM ETF (ESGE) | MSCI Emerging Markets Extended ESG Focus Index | 0.25% | $4.4 billion | 1.77% |
| Vanguard ESG U.S. Stock ETF (ESGV) | FTSE US All Cap Choice Index | 0.09% | $6.7 billion | 12.94% |
| Vanguard ESG International Stock ETF (VSGX) | FTSE Global All Cap ex US Choice Index | 0.12% | $3.4 billion | 6.00% |
| iShares ESG Aware U.S. Aggregate Bond ETF (EAGG) | Bloomberg Barclays MSCI US Aggregate ESG Focus Index | 0.10% | $2.9 billion | -4.20% |
Why other funds didn’t make the cut
We initiated our rankings by focusing on ESG funds in the exchange-traded funds category. Unlike mutual funds, ETFs are preferred due to their lower fees and better tax efficiency, making them attractive to self-directed investors.
To ensure transparency, we opted for passively managed ESG funds that track external benchmark indexes rather than actively managed ones. This way, prospective ESG investors can easily understand the fund’s selection process, factors assessed, and weightage of those factors by referring to the published methodologies of the underlying indexes.
Expense ratios played a crucial role in our filtering process. Funds with higher fees were excluded since they can negatively impact long-term total returns. We set an upper limit of 0.25% for expense ratios to be included in our list.
Additionally, we considered the assets under management (AUM) of the ESG funds. To make it to our list, funds had to meet a minimum AUM requirement of $1 billion. This ensured that the selected funds came from reputable providers with a strong track record in the fund industry, namely Vanguard and BlackRock.
Our ranking criteria also emphasized broad diversification. ESG funds that were focused on specific stocks or bonds, such as small-cap stocks, corporate bonds, or technology sector stocks, were excluded. The selected funds offered diversification across various market-cap sizes, sectors, bond issuers, maturities, and credit ratings, making them suitable as core holdings for diverse ESG-conscious investors.
Methodology
Our ranking of the top ESG funds is based on several key metrics that act as our criteria for selection. These funds all use the ETF structure, providing a diversified approach to ESG investing. Additionally, they each have a substantial Asset Under Management (AUM) of at least $1 billion, ensuring they have the resources to effectively manage their portfolios.
Expense ratios play a crucial role in the performance of any fund, and for the ESG funds on our list, we’ve ensured that all of them have an expense ratio of 0.25% or lower. This helps investors keep more of their returns while contributing to socially responsible investments.
When it comes to management strategy, we focus on passively managed ESG funds that track benchmark indices. By doing so, they align their investments with specific ESG criteria, providing investors with a consistent approach.
We also pay attention to diversification. For equity ESG funds, we only consider those that hold stocks from multiple market capitalization sizes and cover most of the 11 stock market sectors. Similarly, for bond ESG funds, we include only those that offer exposure to multiple issuers, maturities, and credit ratings.
While our experienced fund analyst has selected these top ESG funds, it’s essential to remember that every investor’s needs and risk tolerance are unique. Conduct thorough research and ensure that any fund you choose aligns with your financial goals and values before making any investment decisions.
What are ESG funds?
ESG funds are investment vehicles that differ from traditional funds by considering not only financial metrics but also environmental, social, and governance factors in their portfolio selection. These funds prioritize responsible investing, going beyond basic financial analysis.
The environmental aspect of ESG focuses on how a company’s operations impact the planet. Factors like carbon footprint, energy usage, climate change impact, and pollution are among the key considerations in this evaluation.
The social dimension of ESG involves assessing how a company interacts with its stakeholders, such as employees, customers, and communities. Evaluations cover labor practices, diversity, inclusion, and human rights record.
As for governance, ESG funds screen for ethical leadership and management practices. This includes executive compensation, risk management, internal controls, privacy, transparency, and shareholder rights.
ESG funds aim to identify companies with superior environmental, social, and governance metrics compared to their peers. They achieve this through various methods, including proprietary rules-based methodologies or externally provided indices. By doing so, these funds encourage more sustainable and socially responsible practices in the corporate world.
