Investing in ESG ETFs

In the past decade, ESG (environmental, social, governance) became a buzzword in investment circles for good reason, with many investors flocking to ESG ETFs. Proponents have argued that ESG investing isn't just about caring for people and the planet; it was also good business, as some research suggests that companies with high ESG values have shown.

But ESG investing seems to have fallen out of favor with many investors. A JPMorgan Chase noted in October 2024 that inflows to ESG ETFs is decelerating, particularly in the U.S. Morningstar reports that just 10 sustainable funds were launched in 2024, compared to 116, when interest in ESG ETFs peaked. The report also notes that 71 sustainable funds were merged or liquidated in 2024, while another 24 dropped their ESG mandate.

Declining enthusiasm about ESG ETFs has been attributed to a number of factors, including political backlash, high interest rates, poor performance, and concerns about greenwashing. Still, if you're a long-term investor who cares about mitigating risk and choosing investments that align with your values, ESG ETFs could be worth considering.

Understanding ESG ETFs

Exchange-traded funds, or ETFs, are collections of stocks or bonds. Some ETFs invest in securities that focus on certain themes. ESG ETFs are ETFs that invest in stocks or bonds based on environmental, social, and governance criteria. Sometimes, they're referred to as sustainable funds.

There are a few approaches to constructing an ESG ETF, including:

• Negative screening: Many ESG ETFs use a benchmark index that tracks a specific segment of the stock market, like the S&P 500 index, but exclude companies that have controversial practices or products, i.e., tobacco or fossil fuel companies.
• Positive or best-in-class screening: An ESG ETF may invest specifically in companies that receive above-average ESG scores compared to their peers.
• Thematic investing: Some ESG ETFs invest in specific themes, like clean energy, gender equality, or sustainable water.
• ESG integration: Some ETFs consider ESG factors in constructing a portfolio alongside other traditional financial criteria, like performance and risk, without specifically including or excluding companies based specifically on ESG benchmarks.

Before investing in any ETF, whether an ESG ETF or another type of fund, investors should consider factors like its historical performance, ETF expense ratio, dividend payments, and holdings before buying shares.

6 Top ESG ETFs in 2025

6 Top ESG ETFs in 2025

1. iShares ESG Aware MSCI USA ETF

The iShares ESG Aware MSCI USA ETF tracks the MSCI USA Extended ESG Focus Index. The index is derived from the MSCI USA Index, which tracks the broad performance of U.S. large- and mid-cap stocks.

Fund areas of exclusion include:

• Nuclear weapons
• Controversial weapons
• Tobacco
• Civilian firearms
• Oil sands
• Thermal coal
• UN Global Compact violators

The ETF has 284 holdings, and its largest positions are in Apple (AAPL -0.81%), NVIDIA (NVDA -0.21%), Microsoft (MSFT -0.1%), Amazon (AMZN -0.89%), and Google parent company Alphabet (GOOG -0.17%) (GOOGL -0.25%).

Launched in 2016, the fund has slightly underperformed the S&P 500 on both a one-year and five-year basis as of February 2025.

2. Vanguard ESG U.S. Stock ETF

The Vanguard ESG ETF holds more than 1,300 U.S. stocks. It's a passive ETF that uses exclusionary principles. Companies left out include those that derive revenue from production, supplying, or retailing in the following areas:

• Controversial weapons
• Civilian firearms
• Nuclear power
• Fossil fuels
• Tobacco
• Cannabis
• Conventional military weapons
• Alcohol
• Gambling
• Adult entertainment

Companies are also screened for various diversity criteria. Any violations of labor rights, human rights, anti-corruption, or environmental standards can disqualify companies. Its largest holdings include Apple, Nvidia, Microsoft, Alphabet, Amazon, and Meta Platforms (META -0.36%).

Since its inception in 2018, the fund's returns have been very similar to returns of the top S&P 500 ETFs.

3. iShares Global Clean Energy ETF

iShare Global Clean Energy ETF tracks the S&P Global Clean Energy Index. It specifically focuses on clean energy production, equipment, and technologies and has holdings in 99 companies. There are also significant positions in wind and solar energy.

The ETF’s largest holdings are First Solar Inc. (FSLR -1.49%), Iberdrola SA Inc. (IBDRY 0.22%), SSE PLC (OTC:SSEZY), Vestas Wind Systems (VWDRY -3.96%), and Enphase Energy.

The fund had an abysmal 2024, with shares down more than 25%, reflecting the challenging environment for clean energy stocks due to energy price fluctuations, economic concerns, and regulatory and policy uncertainty. The ETF has been a lackluster performer in the long term, as well. However, if you believe that clean energy will be a profitable investment in the long run, this clean energy ETF may be worth considering.

4. iShares ESG Aware MSCI EAFE ETF

iShares ESG Aware MSCI EAFE ETF's benchmark index tracks the performance of large- and mid-cap stocks with positive ESG characteristics in developed markets outside the U.S. and Canada.

Fund areas of exclusion are:

• Nuclear weapons
• Controversial weapons
• Tobacco
• Civilian firearms
• Oil sands
• Thermal coal
• UN Global Compact violators

The fund has 385 holdings, the largest of which are SAP SE (SAP -1.22%), ASML Holding (ASML -0.14%), Novo Nordisk (NOVO-B.CO), AstraZeneca (AZN 0.48%), and Novartis AG (NVS 1.23%).

Since its launch in 2016, the fund has performed relatively poorly, with one-year returns of less than 4% and five-year returns below 5%. Still, if you're interested in long-term exposure to companies with strong ESG ratings in Europe, Asia, and Australia, the fund may deserve a look.

5. Vanguard ESG International Stock ETF

The VSGX ETF holds about 6,500 stocks. Its regional allocation includes 37% in European companies, 27% in emerging markets, and 27% in the Pacific.

The fund's benchmark index uses ESG exclusionary principles, avoiding companies that derive revenue from the production, supplying, or retailing of:

• Controversial weapons
• Civilian firearms
• Nuclear power
• Fossil fuels
• Tobacco
• Cannabis
• Conventional military weapons
• Alcohol
• Gambling
• Adult entertainment

Companies are also filtered for workplace and board diversity, labor and human rights principles, and environmental standards. To be included, companies must also meet the U.N. Global Compact principles.

The largest holdings are in Taiwan Semiconductor Manufacturing (TSM 0.31%), SAP SE, ASML Holding NV (ASML -0.14%), Alibaba Group Holding (BABA -1.1%), and Novo Nordisk.

The fund delivered so-so one-year returns of about 11% as of February 2025. Its long-term performance has been relatively poor, with five-year returns of about 5%. However, if you want significant exposure to companies with strong ESG standards in emerging markets, you might want to check out the VSGX ETF.

Related investing topics

6. Nuveen ESG Mid-Cap Growth ETF

The NUMG ETF focuses on mid-cap growth U.S. companies. With 41 total positions, the portfolio is heavily invested in information technology (42%), industrials (16%), and healthcare (13%). Its benchmark index is the MSCI USA Mid-Cap Growth Index, but the ETF increases exposure to companies with high ESG ratings, as well as those with a lower carbon footprint.

Top portfolio positions include Royal Caribbean Cruises Ltd. (RCL 0.16%), Quanta Services Inc. (PWR -0.36%), Fair Isaac Corp. (FICO -0.8%), WW Grainger Inc. (GWW -0.72%), and Axon Enterprises Inc. (AXON -2.54%).

The fund's returns haven't exactly been impressive, with one-year returns of about 11% and five-year returns below 10%. But if you're interested in getting exposure to growing companies in the U.S. that adhere to ESG standards, take a look at the NUMG ETF.

Conclusion

The bottom line on ESG ETFs

ESG ETFs provide diversified exposure to stocks with a decent record of sustainable practices. Though ESG ETFs have underperformed recently, with many investors souring on ESG investing, there's some evidence that companies that adhere to ESG principles are less risky and perform better during downturns. For investors concerned about the climate, social equity, and good governance, ESG ETFs are a simple way to invest in alignment with their values.