Best Alternative Environmental ETFs

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by KnowESG,

MSCI Inc.

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Best Alternative Environmental ETFs

Meta Description: With the emergence of ESG, there are many environmental ETFs getting traction. What are the best environmental ETFs?

Ever since concern was raised with the prospect of working with tobacco producers, arms manufacturers, or companies involved in South African apartheid, ESG - or environmental, social, and governance - investing has been presented as an ethical option for a profit. Since those times, the movement has evolved, but the core concept has remained the same: it’s an investing philosophy that supports the betterment of humanity.

It’s a cause that has gained a lot of traction lately, with last year’s global ESG asset evaluation predicted to surpass $50 trillion by 2025—a third of the projected total assets under global management. And part of those that make up that wealth are, of course, environmental exchange-traded funds, or ETFs.

Sustainable Investing Via An Environmental ETF

To be clear, it’s easy to confuse ESG with something that focuses solely on environmental stewardship. After all, those just learning about ESG will likely have heard it brought up around topics like environmental impact, oil and coal companies, air quality and carbon emissions. But ESG is more than just trees, biodiversity, or the direct environmental benefits of modified business practices, there are several other pressing issues beyond combatting climate change or other environmental issues. Example ESG criteria are diversity, equity, inclusion and social justice issues, gender equality and creating positive impact for a given community. However, for the purposes here, we will list the ESG options that focus on the 'E'.

There are several environmental ETFs to choose from, each with its own unique standards and rules. Because of this, you’ll find no shortage of environmental ETFs that focus on companies that you care about or support specific strategies. 

Below are particular funds that are worth investing in if your primary focus is on environmental concerns.

iShares ESG Aware MSCI USA ETF

This particular ETF tracks the S&P 500 index and does it well. It holds an MSCI ESG quality score of 8.91 and a AAA rating. It holds a fraction of what the S&P 500 index holds, with only 320 holdings, but the performance closely mirrors it.

The only distinct difference is that this fund excludes specific factors, notably stocks that cover weapons (nuclear, controversial, and general firearms), tobacco, and a few environmental concerns like oil sands, thermal coal, and UN Global Compact violators.

It’s fair to say this fund leans heavily on the environmental side of ESG, though it still makes some odd decisions, as the fund has its largest positions in companies like Apple, Microsoft, Tesla, and Amazon. Tesla is particularly interesting since the S&P 500’s ESG index recently removed Tesla over racial discrimination and car crashes from its autopilot features.

All in all, this fund is a decent first step in the right direction. It’s great for those looking to dip their toe into ESG, build interest and feel the differences since, as long as this ETF performs as projected, it should be no different than investing in the S&P 500.

Featured Article: Top ESG Investment Strategies For Your Portfolio

iShares MSCI ACWI Low Carbon Target ETF

As the name of this fund implies, this one tracks low-carbon companies and places more emphasis on the environmental aspects than what ESG Aware provides. Specifically, this tracks companies that are committed to lowering emissions and have been actively reducing their carbon footprint.

While you’d think this encompasses a lot of companies, given that many are pledging to reduce emissions or be net-zero carbon, this fund isn’t as ambitious as those companies. In fact, the ETF has roughly 1,200 holdings. Looking it over, the trend you’ll see with this fund is companies that are either less dependent on fossil fuels or ones that are but are below the average in their consumption.

It’s important to note that this fund tracks only the environmental impacts of these companies. In other words, if these companies have low social or governance scores, this fund doesn’t care about those issues. A such, it risks missing certain components, such as social impact, which could ultimately generate positive impact on financial return. 

iShares Global Green Bond ETF

This fund is unique in that it only includes bonds that meet MSCI’s Green Bond Principles. What this means is that the bonds you’re investing in will be used to fund projects that support various climate change solutions, such as: 

  • Energy efficiency, 

  • Climate adaption, 

  • Water sustainability, 

  • Pollution control, 

  • Green buildings.

Beyond that, it’s important to note that there are independent procedures that the bond issuer is responsible for. Notably, evaluating and selecting environmental projects and reporting the impact these projects have had.

Featured Article: What Is The Best Environmental ETF? (May 2023)

iShares MSCI KLD 400 Social ETF

This environmental ETF was created in 2006 and has since grown in popularity, with around $2.19 billion in assets under management. This one is an environmental ETF, but it also accounts for social and governance characteristics as well. As the name of the ETF implies, this fund holds 400 positions.

But even with a small number, the fund carefully screens each company and makes a point of covering companies from a wide diversity of industries. This level of scrutiny will ensure the companies picked for this fund aren’t participating in greenwashing. There are familiar ones like Microsoft, Facebook, Verizon, and Visa, but the fund makes a point of spreading across healthcare, energy and utilities, and other tech companies. 

Picking Out The Best ESG Funds

Even though the ESG movement has been around for a while, it is still going through new iterations. With much larger changes to the movement being made in regulations and broader acceptance, it's likely that these funds will change as well. ESG investing strategies among institutional investors, asset managers, and day traders will also see immense evolution as sustainability mainstreams, and organizations become fully invested in allocating resources and services to emerging, sustainable goals. 

But regardless of those changes, these ESG funds are decent options for those looking to put more emphasis on the environmental impacts of companies. The tide is already turning, with greater investment already around renewables versus fossil funds. And, as investors see less risk in stocks or asset classes based on pro-environment technologies, the more bankable financial returns will with ESG strategies will outweigh the sentiment that possible loss could come with 'traditional' portfolio choices. 

Takeaway - ESG Investing

Perhaps the smallest change is that, in the near- to mid-term, we will have no need to use the terms 'sustainability' or 'ESG', and what will matter is that the markets provide access to ETFs that are implicitly built around an investment strategy that addresses the climate crisis. 

As 'all jobs are sustainability jobs', all stocks and mutual funds will, one day, be 'sustainable' investments. 

Keep track of company ESG performance via our ESG Ratings listing, and bookmark our ESG Investing news for regular insight into funds and opportunities.

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