How to Invest In ESG: Top ETFs to Consider

While investments have long been focused on achieving good financial outcomes, there is a new dimension, looked at particularly by Millennial and Generation X investors, when it comes to making investing decisions. These investors are equally concerned about the impact of their investments on society, environment and the whole ecosystem at large. This is where Environmental, Social and Governance, aka ESG, investing comes into play. These investments look at positive returns along with 'positive results and impact on society and environment.'

Here’s a look at the ESG investing universe

The term ESG was coined in 2005 in a study titled, “Who Cares Wins,” with a tag line, ‘connecting financial markets to a changing world.’ The study was based on the belief that successful investing ultimately depends on a vibrant economy, which in turn depends on a healthy civil society, which is ultimately dependent on a sustainable planet.

In other words, it’s in companies' own interest to better manage environmental and social impacts of outcomes, and not just focus purely on profits.

The report reads, “A better inclusion of environmental, social and corporate governance (ESG) factors in investment decisions will ultimately contribute to more stable and predictable markets, which is in the interest of all market actors.”

MSCI defines ESG investing as the “consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.”

A study titled "Cone Millennial Cause Study" highlighted that 74% are more likely to pay attention to a company’s message when they see that the company has a deep commitment to a cause, and 83% of Americans will trust a company more if it is socially/environmentally responsible. A recent Morgan Stanley survey revealed similar results: 85% of U.S. individual investors now express interest in sustainable investing strategies while the percentage goes up to 95% when only millennial investors are considered.

Here are the top U.S. ESG exchange traded funds that investors can consider (in terms of size of AUM, in no particular order):

The iShares ESG MSCI USA Leaders ETF (SUSL) tracks the MSCI USA Extended ESG Leaders Index and has a portfolio of around 300 U.S. companies from the large- and mid-capitalization space, which have the highest ESG rating within their industry. Launched in May 2019, the fund is a good way to achieve a more sustainable outcome within the U.S. equity exposure. It has $1.72 billion as assets under management, and an expense ratio of 0.10%. The top ten stocks add up to 28.82 %.

Launched in September 2018, the Vanguard ESG U.S. Stock ETF (ESGV) tracks the FTSE U.S. All Cap Choice Index by following a passive, full replication approach. The fund provides access to around 1,500 stocks across varied sectors, which have been screened for certain ESG criteria. The fund has $833 million as assets under management and an expense ratio of 0.12%.

The Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG) was launched in March 2019. The fund provides an opportunity to around 300 plus companies in the U.S., which are part of the MSCI USA ESG Leaders Index. It has almost $1.58 billion as assets under management, an expense ratio of 0.10% and has a concentration of 28.71% in the top ten stocks.

The iShares MSCI USA ESG Select ETF (SUSA) is benchmarked against MSCI USA Extended ESG Select Index, which is made up of securities of large and mid-cap U.S. companies excluding tobacco and civilian firearms involvement. The MSCI USA Extended ESG Select Index constitutes around 118 stocks and is a subset of the MSCI USA Index. The fund was launched in 2005 and has $1.17 billion as assets under management. The top ten stocks add up to almost 30% of the portfolio.

Launched in 2006, the iShares MSCI KLD 400 Social ETF (DSI) tracks the MSCI KLD 400 Social Index. The fund tracks more than 400 companies, which have been screened for positive ESG characteristics. The fund has around $1.79 billion as assets under management and an expense ratio of 0.25%.

Microsoft, Visa, Proctor and Gamble, Alphabet, Visa, Verizon, AT&T, Intel, Mastercard, Disney, Apple, and Facebook are some of the most commonly held stocks in the above ETFs.

In addition, there is the Nuveen ESG Small Cap ETF (NUSC). Its core is built with U.S. small-cap stocks for investors who value ESG principles.

Some of the biggest funds from the ESG space investing outside the U.S. are the Vanguard FTSE Europe ETF (VGK), JP Morgan BetaBuilders Europe ETF (BBEU), iShares Core SMCI Europe ETF (IEUR), iShares MSCI United Kingdom ETF (EWU), and iShares MSCI Australia ETF (EWA), among others.

The market for ESG exchange-traded funds has witnessed a surge in recent years. While this category of funds only held $47.33 billion as assets at the end of September 2019, the percentage is poised to increase going forward given the changing preferences and rising awareness levels among investors. An EY report mentions that Millennials are poised to receive more than $30 trillion of inheritable wealth, and this will be a big factor in the continued demand for sustainable investments. The flows into ESG funds will strengthen further as more as Baby Boomers are replaced by Millennials and Generation-X as primary earners and take charge of powerful and influential positions that involve business decisions and policy making.

Disclaimer: The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. Details based on press releases by companies and company websites. The list has been carefully prepared, and any exclusions from the list are unintentional.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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