In this article, we discuss the 10 best ESG ETFs to buy. If you want to skip our discussion on ESG-related investment trends, you can go directly to the 5 Best ESG ETFs.
There has been a surge in environmental, social, and corporate governance (ESG) related assets under management (AUM) in the last two decades as the ESG theme has become an important factor in making investment decisions. Asset managers have shifted their focus towards achieving competitive financial returns in the long term while also positively contributing to the environment and society. Some key environmental factors being considered include a corporation's carbon footprint, pollution, natural resource usage, and sustainability initiatives. Some of the common ESG investing approaches include negative screening, integration, thematic investing, impact investing, and shareholder advocacy. According to a report released by PricewaterhouseCoopers (PwC) in October 2022, ESG-related AUM is expected to grow at an average annual rate of 12.9% from $18.4 trillion in 2021 to $33.9 trillion by 2026. This forecast implies that within only five years, ESG assets will constitute approximately 21.5% of the total global AUM, surpassing the overall growth rate of the Asset and Wealth Management (AWM) industry.
In 2021, ESG investments accounted for 14.4% of the overall AWM industry. In the US, ESG-related investments are expected to double from $4.5 trillion in 2021 to $10.5 trillion by 2026. The Inflation Reduction Act (IRA) is expected to play an important role in boosting the outlook of ESG-related investments as the US government has committed to investing $390 billion towards climate change and clean energy. According to Bloomberg Intelligence, the outlook for ESG investing is even more optimistic, with assets managed according to ESG principles expected to increase from $35 trillion globally in 2020 to $50 trillion by 2025.
Reshaping Corporate Priorities
Fossil fuel giant Exxon Mobil Corporation (NYSE:XOM) was a target of ESG-related impact investment in May 2021 when a small activist hedge fund called Engine No. 1 decided to force one of the biggest conventional energy companies in the world to increase its focus on clean energy. The hedge fund was able to secure three seats on the Board of the Houston, Texas-based oil major with an insignificant stake of $40 million, equivalent to 0.02% of the overall company. Engine No. 1 Founder and Chief Investment Officer (CIO) Christopher James expressed confidence that the hedge fund members’ presence on the Board would exert pressure on Exxon Mobil Corporation (NYSE:XOM) to reduce investments in fossil fuel expansion and allocate more resources towards clean and renewable energy sources. A similar event took place in 2017 when an activist hedge fund secured a board seat with a relatively small investment of $100 million in The Procter & Gamble Company (NYSE:PG), a consumer goods giant based in Cincinnati, Ohio. These instances highlight the growing influence of ESG-focused investors in shaping the direction of large companies like NVIDIA Corporation (NASDAQ:NVDA), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOGL). You can also check out the 12 Best ESG Stocks To Buy Now here.
Higher Returns from ESG-Themed Investments
According to the PwC report, eight out of 10 investors are interested in increasing their allocations to ESG offerings in the next two years. However, there is a gap in the market as the strong demand for ESG investment offerings is not being fulfilled by suitable ESG investment products. Around 30% of investors have reported difficulty in finding ESG investment products that are suitable and attractive for their portfolios. The report highlights that 60% of investors believe that ESG-themed investments generate a higher return compared to non-ESG-themed investments. This claim can be backed by the fact that all the 10 best ESG ETFs highlighted in our list have generated higher five-year returns compared to the five-year return of 53.6% for the S&P 500 Index. Additionally, eight of the 10 best ESG index funds included in this list have even outperformed the 61.6% increase in gold prices during the same period. The iShares ESG Aware MSCI USA ETF (NASDAQ:ESGU) is one of the largest ESG ETFs with an AUM of $12.82 billion as of September 13, 2023. The ETF observed an increase of 53.4% in the last five years. Another notable ESG ETF is the Vanguard ESG U.S. Stock ETF (ESGV), which will complete its five years since inception on September 18. The ETF charges an expense fee of 0.09% with an AUM of $6.90 billion. Over the last 5 years, the Vanguard ESG fund has generated a return of 55.71%.
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Our Methodology
We have shortlisted the 10 best ESG funds based on the five-year ESG funds’ performance as of September 13. For funds with a shorter track record, we have assessed their performance since inception. These ETFs provide exposure to large, mid, and small-cap companies with strong ESG ratings. The funds have been ranked in ascending order of their historical performances.
Best ESG ETFs
10. iShares MSCI USA ESG Select ETF (NYSEARCA:SUSA)
5-Year Price Performance: 57.2%
Total Net Assets as of September 13, 2023: $4.04 billion
Expense Ratio: 0.25%
Number of Holdings: 183
iShares MSCI USA ESG Select ETF (NYSEARCA:SUSA) is the oldest ETF on our list of the best ESG ETFs. It was created over 18 years ago. The ETF selects companies with high ESG ratings relative to sector peers and excludes controversial business activities like alcohol, tobacco, gambling, civilian firearms, nuclear weapons, and thermal coal. The fund incorporates key issues like climate change, natural capital, pollution and waste, human capital, product liability, corporate governance, and stakeholder opposition in its investment decisions. The ETF is reconstituted and rebalanced semi-annually in May and November.
9. iShares MSCI KLD 400 Social ETF (NYSEARCA:DSI)
5-Year Price Performance: 59.8%
Total Net Assets as of September 13, 2023: $3.81 billion
Expense Ratio: 0.25%
Number of Holdings: 401
iShares MSCI KLD 400 Social ETF (NYSEARCA:DSI) has a rich history of nearly 17 years. The fund tracks the MSCI KLD 400 Social Index, which screens the broad market Russell 1000 index based on ESG criteria. It tilts toward companies with positive ESG characteristics related to the environment, human rights, labor standards, diversity, and community relations. The ETF’s top 10 holdings represent 35.4% of its portfolio. iShares MSCI KLD 400 Social ETF’s (NYSEARCA:DSI) expense ratio of 0.25% is on the low end for socially responsible investment (SRI) funds.
8. Xtrackers S&P 500 ESG ETF (NYSEARCA:SNPE)
Price Performance since Inception: 62.5%
Total Net Assets as of September 13, 2023: $885.15 million
Expense Ratio: 0.10%
Number of Holdings: 322
Xtrackers S&P 500 ESG ETF (NYSEARCA:SNPE) has a short history of just over four years, as it came into being in June 2019. The ETF tracks the performance of the S&P 500 ESG Index, which screens companies in the S&P 500 for positive ESG characteristics while keeping similar overall industry group weights as the S&P 500. The ETF’s top sector allocations as of September 2023 are information technology, with a weight of 33.6%, followed by healthcare and consumer discretionary, with a contribution of 13.2% and 12.7%, respectively.
7. iShares ESG MSCI USA Leaders ETF (NASDAQ:SUSL)
Price Performance since Inception: 63.4%
Total Net Assets as of September 13, 2023: $1.14 billion
Expense Ratio: 0.10%
Number of Holdings: 292
iShares ESG MSCI USA Leaders ETF (NASDAQ:SUSL) was launched by BlackRock in 2019. It tracks the MSCI USA Extended ESG Leaders Index. The index comprises large and mid-cap US stocks with high ESG performance relative to sector peers.
As of September 2023, the ETF has 292 holdings. The top three sector allocations are information technology (28.5%), healthcare (12.9%), and financials (11.9%). iShares ESG MSCI USA Leaders ETF's (NASDAQ:SUSL) top holdings include Microsoft Corporation (NASDAQ:MSFT), NVIDIA Corporation (NASDAQ:NVDA), Alphabet Inc. (NASDAQ:GOOGL), and Tesla, Inc. (NASDAQ:TSLA).
Here’s what Baron Funds said about Tesla, Inc. (NASDAQ:TSLA) in its Q2 2023 investor letter:
Many factors contributed to the strong performance of our largest Disruptive Growth position, Tesla, Inc. (NASDAQ:TSLA), in the period. Investors’ concerns regarding Tesla in 2022 continue to dissipate, and the company’s business has continued to grow materially, although at below peak margins. Tesla’s deliveries in China are recovering. The company’s newest factory in Texas has ramped production and should contribute to improved domestic sales and margins. U.S. government policies have lowered the cost to own Tesla vehicles, while also reducing the company’s battery production expenses.
6. Xtrackers MSCI USA ESG Leaders Equity ETF (NYSEARCA:USSG)
Price Performance since Inception: 68.1%
Total Net Assets as of September 13, 2023: $1.28 billion
Expense Ratio: 0.10%
Number of Holdings: 293
Xtrackers MSCI USA ESG Leaders Equity ETF (NYSEARCA:USSG) is an ESG-focused ETF launched in March 2019. The ETF is managed by DWS Group and tracks the MSCI USA ESG Leaders Index. The fund tracks its index using full replication, meaning it aims to hold all the securities in the index at their respective weightings. The ETF has a low expense ratio of 0.10%.
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