Pinning Down ESG

Pinning Down ESG

With no specific definition, ESG funds run the gamut from broadly diversified to more niche in nature.

Reviewed by: Jessica Ferringer
Edited by: Jessica Ferringer

[This article appears in our November/December 2021 issue of ETF Report.]

Investments that meet certain environmental, social or governance criteria—otherwise known as ESG or socially responsible investments—have gained interest from investors and issuers alike this year.

The pandemic, extreme weather events and the movement for racial justice have drawn attention to the importance of sustainability and social responsibility. According to data from FactSet, there are now 160 socially responsible ETFs, with assets totaling over $89 billion.

Yet a glance at the funds that fall under this umbrella reveals a wide range, from the broad-based to the more thematic. Even those that sound alike can differ based on how the issuer or index defines ESG.

Since ESG preferences are personal to every investor, understanding the differences between these funds is essential to ensure the investors’ values align with the funds they’re selecting. Having a framework to analyze and consider the various types of ESG funds is critical for those who would like to invest within this space.



iShares Leads Pack
Some of the biggest socially responsible ETFs come from iShares and are the issuer’s take on ESG as it pertains to broad domestic equity, international equity and emerging markets. Three ETFs make up 40% of all assets invested in socially responsible ETFs.

The largest is the iShares ESG Aware MSCI USA ETF (ESGU), which, at $22 billion in AUM, is nearly a quarter of all socially responsible ETF assets by itself. The fund has a similar investment universe as that of the SPDR S&P 500 ETF Trust (SPY). According to the prospectus, the index selects and weights companies for positive ESG characteristics.

The iShares ESG Aware MSCI EAFE ETF (ESGD) and the iShares ESG Aware MSCI EM ETF (ESGE) have similar philosophies applied to international developed and emerging markets, respectively.

ESG For Everybody
These three ETFs fall under MSCI’s “ESG Aware” series. Other flavors of ESG offered by the issuer include “ESG Screened” and “ESG Advanced.” The ESG Aware series falls in the middle of the spectrum, seeking exposure to similar risks and returns as broad non-ESG ETFs, while targeting slightly more sustainable companies.

The process uses negative screening, excluding companies such as those that are classified as producers of civilian firearms and tobacco, or others that derive more than 5% of their revenue from oil sands extraction or the mining of thermal coal.

The benefit of using these basic, negative screens is that most who are interested in ESG investing are likely to agree that companies involved in these activities should be excluded for social or sustainability reasons.

Another benefit of these ETFs is that they’re fairly cheap, ranging from 0.15% to 0.25%. While more expensive than some traditional ETFs offered by iShares, this means that investors can get access to a portfolio that excludes the worst offenders in terms of ESG at a reasonable price.

Environmentally Friendly ETFs
However, these ETFs are unlikely to satisfy more discerning ESG investors who want a specific set of values to be reflected throughout their portfolio. For that, investors should turn to the wide array of thematic ESG ETFs that are available.

While these ETFs haven’t drawn the same assets as more broad-based diversified ESG funds, they do have more targeted investment mandates that help align the portfolio with specific sustainable or socially responsible criteria.

Many of these ETFs target environmental concerns. Nearly a quarter of the 160 socially responsible ETFs use the words “clean,” “low carbon,” “fossil fuels,” “green” or “climate” in the fund name.

The largest of these ETFs is, once again, an iShares fund. The iShares Global Clean Energy ETF (ICLN) invests in global clean energy companies, defined as those involved in the biofuels, ethanol, geothermal, hydroelectric, solar and wind industries.



State Street is another large issuer with its own take on environmentally friendly ETFs. The SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX), for example, tracks an S&P 500-based index, excluding companies with known fossil fuel reserves.

These two portfolios look significantly different from one another, even though they’re both different versions of an environmentally friendly ETF. And earlier this year, BlackRock rolled out two actively managed ETFs covering companies that are likely to benefit from the transition to a low-carbon economy. The BlackRock World ex U.S. Carbon Transition Readiness ETF (LCTD) and the BlackRock U.S. Carbon Transition Readiness ETF (LCTU) launched in April, with LCTU ending its first day of trading with $1.25 billion—the fastest ETF to reach the $1 billion threshold ever—and  LCTD racking up $586 million. While investors can get more targeted exposure through ETFs like these, there’s still due diligence required to ensure the theme is being expressed in the way the investor prefers.

Social Issues In Focus
Environmental issues are not the only ones ETFs seek to address. Those who care about social issues such as gender diversity and racial equity can also find ways to implement those values within a portfolio through the ETF wrapper.

Here, State Street has an option as well. The SPDR SSGA Gender Diversity Index ETF (SHE) is one of the largest socially focused ETFs, with nearly $300 million in AUM.

This ETF invests in companies that employ women in high-level leadership roles, defined as being on the board of directors or in executive positions at the senior VP level or higher. While this fund has a targeted focus, performance is highly correlated with that of SPY, at an expense ratio of 0.20%.

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Governance: Nebulous Concept
While the “E” and “S” are well-represented in the ETF space, there are very few ETFs that strictly consider corporate governance. Corporate governance metrics are a factor in many ESG funds, and some ETFs like SHE straddle the line between being a social or corporate governance fund. But very few governance-focused ETFs exist.

The WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE) is an example of an ETF that might be as close to a governance pure-play as possible. This ETF tracks an index of emerging market companies, excluding state-owned enterprises. Another option might be the Global X Founder-Run Companies ETF (BOSS).

However, just because a fund has strong corporate governance does not mean it scores well on environmental or social measures. As the concept of what makes good governance is so nebulous, it’s often a secondary factor in ESG ETFs.

Faith-Based Funds
Those who want to align their portfolio with specific religious principles are in luck too. Inspire is one of the most prolific issuers in this space, offering eight faith-based ETFs aimed at conservative Christians.

Inspire’s largest ETF is the Inspire 100 ETF (BIBL), which has $266 million in AUM and holds U.S. large cap stocks that align with the index provider’s definition of biblical values and positive impact on the world. The methodology excludes companies with any degree of participation in activities such as abortion, gambling, alcohol, tobacco, pornography, support of the LGBT community or rights violations.

Other religious beliefs have options as well. The Global X S&P 500 Catholic Values ETF (CATH) and the Wahed FTSE USA Shariah ETF (HLAL) track cap-weighted indices of U.S. equities selected based on Catholic and Muslim beliefs, respectively, but there is only about 35% overlap between the two portfolios.

Fixed income ETFs can also be in the ESG bucket. While fixed income ETF options are less numerous than their equity counterparts, options here range from the iShares ESG Aware U.S. Aggregate Bond ETF (EAGG) to ETFs that specifically invest in “green bonds” that fund climate-related or environmental projects.

ESG Evolving
While these ETFs encompass some of the major themes seen in the ESG ETF market, this space is continually evolving. Of the 160 current U.S.-listed ETFs, 31 have launched this year alone.

And while ESG’s fuzzy definition lends itself to hurdles such as “greenwashing,” the increased scrutiny brought on by the growth of investor interest and asset flow could bring greater regulation to the space. Such efforts are already happening in Europe with the EU’s Sustainable Finance Disclosure Regulation.

For now, ESG investors should decide whether broadly diversified ESG funds meet their needs or if a more thematic approach is necessary. Some might even choose to incorporate both into their portfolio.

Due to a lack of specificity regarding the meaning of ESG, selecting ETFs means investors shouldn’t just opt for a fund with the acronym in the name. Further research is required. 

What is greenwashing, and what are some examples of it in the ETF space?
With investor and issuer interest in ESG growing, there has also been increased skepticism of just how ESG-aware these ETFs truly are. Some ETFs are even accused of using “greenwashing” practices.

In other words, these funds are being deceptively marketed as more sustainable or ESG-friendly than they actually are. ESG’s fuzzy definition only further complicates the matter.

While many ESG funds are focused on environmental sustainability goals, over 80% of equity ESG ETFs have some exposure to fossil fuel users and producers. This includes those ETFs that have carbon-emissions-related screens in place.

The iShares ESG Aware MSCI USA ETF (ESGU), the largest socially responsible ETF by assets, has nearly as much exposure to the energy sector as the SPDR S&P 500 ETF Trust (SPY). However, as it looks to closely mirror the broad market it represents, that’s not surprising.

Another large ESG fund, the Vanguard ESG U.S. Stock ETF (ESGV), holds several companies in its top holdings that could be deemed problematic from an ESG lens. Many of the top holdings are in line with that of SPY, including Amazon and Facebook.

The National Council on Occupational Safety and Health releases a “Dirty Dozen” list of companies on an annual basis, highlighting companies that put workers and communities at risk. Amazon is a repeat offender, appearing as a finalist on 2019’s list as well as being included as a dishonorable mention in 2020.

For those who prioritize workers’ rights and humane working conditions, Amazon would likely not be a suitable company for their ESG portfolio. Yet it’s included in many broad-based ESG funds since it doesn’t violate the basic exclusionary screens used by such funds.

Facebook has recently come under fire for prioritizing profits over the safety of its users. The company has also been fined in the past by the Federal Trade Commission for its use of deceptive practices regarding its users’ privacy preferences.

While ESG ETFs like these do have some ESG criteria used within their index construction process, they are proof that having “ESG” within the name of the fund doesn’t necessarily mean the companies included within the portfolio have low ESG risk. Investors should be sure to look beyond the name when analyzing just how ESG-aware a fund truly is.


Jessica Ferringer, CFA, is a writer and analyst for She has 10 years of experience in investment research and due diligence, including helping to manage ETF portfolios. Jessica has a bachelor’s degree in economics from Lafayette College and an MBA from the University of Pittsburgh.