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As it turns out, investing for the greater good can be profitable, too. That's the story behind the rise in environmental, social, and corporate governance (ESG) investing over the past several years. Investors are flocking to ESG investing by way of ESG-focused funds. Annually, net inflows to sustainability-focused funds from investors around the world have reached billions of dollars.
Why have ESG funds become so popular? During market contractions in 2018 and 2020, companies with solid ESG track records showed more resilience than their non-ESG peers. As a broader point of comparison, the S&P 500 ESG Index has either aligned with or outperformed the standard S&P 500 (SNPINDEX:^GSPC) over the past three-, five-, and 10-year reporting periods.
ESG funds invest in companies that actively manage their environmental, social, and governance risks. These companies commonly pursue a range of sustainability goals, such as:
In short, companies that prioritize ESG are good corporate citizens. They dedicate significant resources to improving their impacts on people, communities, and the environment.
In other respects, ESG funds function like any other investment fund. When you buy shares in an ESG fund, you own a slice of the fund's holdings and participate in the fund's performance. They can be mutual funds or exchange-traded funds (ETFs).
ESG funds can vary widely in the assets they hold. Some may suit your values and investment needs better than others. Be sure to review each prospective fund's investing approach carefully, starting with the nine top ESG funds highlighted below.
This ETF tracks the MSCI USA Extended ESG Focus Index. The index mimics the performance of the broader market while excluding companies involved in civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands. Top holdings by value include Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT).
This ETF is appropriate as an anchor position for new ESG investors who want to invest in sustainability without materially altering their risk profiles. As long as the fund meets its goal, its performance should be near that of an S&P 500 fund.
This iShares ETF provides ESG-screened exposure to emerging markets. The fund aims to produce returns similar to unscreened emerging market indexes while prioritizing companies with higher ESG scores. The portfolio includes more than 300 large-cap and mid-cap stocks, primarily from China, Taiwan, India, South Korea, Brazil, South Africa, and Saudi Arabia.
Financial companies comprise roughly one-quarter of the fund's value, and information technology stocks are a close second. The other top three sectors are consumer discretionary, communications, and materials.
The iShares aggregate ESG bond fund invests in investment-grade, dollar-denominated bonds with diversified maturities. Treasury securities comprise most of the portfolio, followed by mortgage-backed securities and corporate bonds issued by industrials, financial institutions, and utilities. The fund seeks to match the risk profile of the Bloomberg US Aggregate Bond Index while favoring issuers with higher sustainability ratings.
This SPDR ETF tracks the S&P 500 ESG Index, which often outperforms the traditional S&P 500. The index excludes S&P 500 companies involved in cluster weapons, landmines, chemical weapons, nuclear weapons, tobacco, or thermal coal extraction.
Also excluded are companies that Sustainalytics has classified as noncompliant with United Nations Global Compact principles. The principles are U.N.-defined business standards covering human rights, employee rights, the environment, and anti-corruption.
This fund's top three holdings by value are Apple, Nvidia, and Microsoft. The SPDR fund weights these positions slightly higher than the iShares ESG Aware MSCI USA ETF.
Nuveen's small-cap ESG fund invests in smaller domestic companies with good ESG track records. The stocks are selected from the MSCI USA Small Cap Index, screened with exclusionary rules, and then ranked by their comparative ESG performances. The highest-ranked companies in each sector are eligible for the portfolio.
The fund holds almost 500 positions, none of which comprise more than 1% of the portfolio's total value. The top market sectors represented are industrials, financials, consumer discretionary, and information technology.
This ESG ETF holds investment-grade, U.S. dollar-denominated corporate bonds with maturities ranging from one to five years. The fund tracks the Bloomberg MSCI US Corporate 1-5 Year ESG Index, which includes issuers with the highest MSCI ESG scores in their sectors.
As with other iShares funds, companies substantively involved in civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands are ineligible for inclusion in this ETF.
This ETF holds about 50 mid-sized, U.S.-based companies that are rapidly growing, as measured by projected earnings per share (EPS), historic EPS, and the historic growth of sales per share.
Since the fund features smaller companies, you won't find Apple and Amazon (NASDAQ:AMZN) in this ETF. Even so, you may recognize a few of the fund's holdings, such as Burlington Stores (NYSE:BURL) and GoDaddy (NYSE:GDDY).
The fund tracks the TIAA ESG USA Mid-Cap Growth Index, which includes companies with high ESG scores and low carbon scores and that are not involved in controversial business activities.
This equity fund is the ESG version of the popular Invesco QQQ ETF (NASDAQ:QQQ). The fund identifies suitable stocks from the Nasdaq-100 by screening out those participating in unsavory activities, such as tobacco and gambling. It also excludes companies that don't comply with the United Nations Global Compact principles.
The portfolio contains roughly 90 large-cap, Nasdaq-listed stocks, with Nvidia, Microsoft, and Apple at the top of the list.
The iShares ESG Aware Moderate Allocation ETF is a one-stop shop for sustainability-focused investors. The portfolio maintains a composition of about 42% stocks and 58% bonds by way of other iShares ESG funds. The advantages of this structure are that the fund does not need to be rebalanced and is highly diversified.
This ETF is a good choice for the ESG investor who wants a lower-volatility, easy-to-manage ESG portfolio.
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