Top 8 Best ESG Funds for Responsible Investors in 2023

Published on:
by KnowESG
Image of jar full of saved coins, with green plant behind indicating ESG growth

Believe it or not, investing for the betterment of society can be wildly rewarding as well. This is what we have observed in recent years with the uptick in ESG investments, during just 2020 alone an impressive $51 billion went towards such funds while 71 new ones were created. 

Sustainable index funds, as an arm of socially responsible investing, have surged in popularity due to their impressive performance during market downturns. In 2018 and 2020, companies with higher ESG ratings had a greater degree of resilience than those without such commitment.

This can be observed by comparing the S&P 500 ESG Index against its standard counterpart – over the past one-year, three-year, five-year, and 10-year reporting periods its ESG stocks have consistently beaten out the traditional index (S&P INDEX: ^GSPC).

What are ESG funds?

Investing in ESG funds, environmentally friendly mutual funds, etc., is an effective way to support companies that are dedicated to creating a positive environmental, social, and governance impact. Companies with these initiatives typically strive for some or all of the following objectives:

  • Enhance energy efficiency

  • Decrease emissions

  • Foster social progress in communities and the workforce

  • Avert human rights violations in supply chains

  • Ensure ethical business conduct

  • Establish board autonomy and reporting openness.

In short, businesses that prioritise ESG are acting responsibly by contributing to positive reformations of their environment while reducing negative effects.

ESG funds, often paralleled with sustainable of ethical investment funds, can take the form of mutual funds or exchange-traded funds (ETFs). By investing in an ESG fund, you acquire an ownership stake that gives you access to the fund’s holdings and also lets you share in its performance. Furthermore, these investments provide more than just financial returns; they are ideal for those who want to support companies with exemplary corporate citizenship.

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How do ESG funds work?

Investing in ESG funds allows investors to tie their portfolios with the three key principles of environmental, social, and corporate governance values. If you are interested in this type of investing, you must find investments that would support one or more core ESG beliefs.

Environmental

ESG investing can be a great way to promote environmental stewardship. As an investment that helps conserve and protect the environment, it may help a given business or operating system reduce greenhouse gas emissions (GHGs), enhance energy efficiency, use natural resources more effectively via the preservation of land, improve waste management systems, or securely dispose of hazardous materials. 

Social

This aspect concerns the relationship between a business and its primary stakeholders: employees, suppliers, and consumers. These investments seek to advance social measures, such as in developing and implementing fair and equitable labour laws, engaging with and supporting local communities affected by company activities, and making firm guarantees that legally protected workplace conditions are in place for employees, such as healthcare benefits, educational opportunities, environmental hygiene and career development options.

Governance

Enhancing the standards of leadership, shareholder rights, or risk management are known as governance factors. Reinforcing the corporate governance of a company often involves developing a culture of overall informational transparency, so ESG fund financing can be used to motivate fair business operations, secure voting rights for stakeholders, promote hiring diversity, and guarantee equitable pay scales throughout the entire corporate structure, while improving accountancy & taxation transparency.

Therefore, if one of the three ESG principles is the primary driving force behind a given investment opportunity, then you are likely partaking in an ESG fund.

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What are ESG ETFs?

ETFs are baskets of stocks and bonds in which shares are purchased to reach specific objectives. ETFs are reminiscent of mutual funds in the fact that they both invest in groups of stocks and bonds; however, there are two major ways ETFs differ from mutual funds:

  1. ETFs are unique since they may be bought or sold at any time during the day’s trading, as is the case with shares of stock. In contrast, mutual fund transactions may only occur once per day, at their net asset value. 

  2. ETF pricing may vary depending on fluctuating market conditions during the trading period, while mutual funds are still fixed to their single static per day rate. 

ETFs therefore provide investors with a certain degree of versatility. Yes, some are ‘passive’, meaning they are pegged to the performance of a specific index, such as the S&P 500. However, ‘active’ ETFs may be managed dynamically in response to market fluctuations, potentially outperforming pegged indices and with greater returns.

Finally, of note is that with each purchase of an ETF there is an associated cost, that being an expense ratio listed as an annual percentage. In premise, the lower this number is, the more funds will be available for either reinvestment or dividends.

You should also have the option of controlling whether any funds are automatically reinvested, or paid out directly. Alternatively, fund managers can advise you on the specifics of how to build investment portfolios.

Here's a list of ESG funds for your consideration:

Image of black iPhone held showing uptick of Amazon stocks

8 ESG Funds for 2023

To assist you in making an informed decision, here's a look at eight top-rated ESG funds that are worth adding to your portfolio:

iShares ESG Aware MSCI USA ETF

Mirroring the performance of the greater market, this ETF follows the MSCI USA Extended ESG Focus Index, which avoids businesses that produce civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands - thus strengthening its sustainability values.

This ETF, with its top holdings such as Apple, Microsoft, and Amazon, makes an ideal anchor position for those who intend to invest in sustainability without disproportionately increasing their risk level. As long as the fund meets its goal, you can expect similar returns to that of an S&P 500 Index Fund.

SPDR S&P 500 ESG ETF

The SPDR ETF is a newly created fund, though it follows the S&P 500 ESG Index, which for 10 years now has consistently surpassed the S&P 500, its ‘conventional’ counterpart, the S&P 500. 

Companies in the S&P 500 can be removed from the ESG index if they are involved with cluster weapons, land mines, chemical weapons, nuclear weapons, tobacco production or thermal coal extraction, as will any business that ranks within the lowest 5% of UN Global Compact (UNGC) scores, which are based on a company's compliance with 10 principles laid out by UNGC that cover human rights protection, employee welfare policies and environmental standards, all of which must meet the stated anti-corruption standards.

While Apple, Microsoft, and Amazon make up the top three holdings in both this fund and the iShares ESG Aware MSCI USA ETF, they are weighted slightly higher in this particular fund.

Fidelity U.S. Sustainability Index Fund

Fidelity's index fund follows the MSCI USA ESG Leaders Index, composed of companies with exemplary ESG ratings. It also excludes any company incorporating alcohol/tobacco production or gambling activities, as well as nuclear power plants and firearms. Technology stocks take up 27% of the total value, followed by consumer discretionary (10.7%), healthcare (11.2%), communication services (13%) and financials (13%). Sector exposure is similar to the above two funds.

Nuveen ESG Mid-Cap Growth ETF

This fund deals with mid-sized, US-based companies that have experienced significant growth in earnings and sales per. While it does not include Apple or Amazon, there are plenty of familiar names, such as Burlington Stores, Pinterest, Etsy and GoDaddy. The focus on smaller yet rapidly growing firms offers investors promising opportunities.

This fund aligns with the TIAA ESG USA Mid-Cap Growth Index, which only includes organisations with excellent ESG credentials, minimal carbon footprints, and are verified to not partake in prohibited activities.

Calvert International Responsible Index Fund

With over 800 stocks from multiple countries, this fund ensures a diversified portfolio. Japan has the highest concentration of 18.5%, followed by the U.K, France and Switzerland with 12%, 8.3% & 8.3%, respectively. 

The Calvert Principles, which is a specific ESG methodology that limits exposure to companies that partake in gambling, weapons production for civilian use, alcohol and tobacco manufacturing, as well as animal testing. As a result of this framework, the fund invests in corporations such as Taiwan Semiconductor Manufacturing, Nestlé and Roche.

Image of neon lettered sign showing ''Code of Ethical Behavior"

Pax Ellevate Global Women's Leadership Fund

This fund invests in companies that actively foster women's progress in the workplace, by promoting gender diversity at all levels of management and staff, striving for equal pay among genders, and hiring and training more female employees for greater retention.

Boasting a portfolio of over 400 large-cap stocks, with the majority (68%) being US-based organisations, this fund's top holdings include Microsoft Corporation, Amazon Inc., and Estee Lauder Companies Inc

iShares ESG Aware MSCI EM ETF

Invest in this iShares ETF and gain access to ESG-screened exposure to emerging markets! With its objective of providing returns within 100 basis points of unscreened indexes, while favouring companies with higher environment, social and governance scores; you can enjoy a portfolio including over 350 large-cap and mid-cap stocks from countries such as China, Taiwan, and South Korea, India, South Africa Brazil & Russia.

The fund is heavily weighted towards financial companies, making up approximately 23% of its value. Technology stocks follow in second at 21%, with the rest of the top-five sectors comprising consumer discretionary, communications, and materials.

iShares ESG Aware 1-5 Year USD Corporate Bond ETF

This fund holds US dollar-denominated investment-grade corporate bonds ranging from 1 to 5 years of maturity, and follows the Bloomberg MSCI US Corporate 1-5 Year ESG Index, which includes issuers with top-ranked MSCI ESG scores within their market sectors. As customary with other iShares funds, companies actively involved in civilian firearms or controversial weapons production, tobacco products or thermal coal mining and processing, as well as oil sands extraction, are excluded.

Takeaway

While ESG-focussed companies have seen remarkable growth in return over the long-term, have also proven more resilient during market contractions than other stocks on the S&P 500 index. 

For beginner ESG investors, index exclusion funds that track the S&P 500 have been proven to deliver strong returns that closely match those of its benchmark. With more concern about climate change, social justice issues and governance practices, this sector will continue to grow as these issues become the ‘normalised’ concerns of the global business environment. 

Consider ESG ETFs as an effective method to align investment goals with the transition to sustainability, social equity advancement, and improved corporate governance.

Find out more about ESG Ratings here, and follow individual performers via our Company ESG Profiles.

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