Ethical ETFs

Increasingly investors want their investments to do more than simply make a profit. They want reassurance that their investments will be put to good use – to support companies that are making the world a better place, rather than propping up difficult industries, such as tobacco or fossil fuels.

Defining ‘ethical’ is no small task and ethical funds come in plenty of shapes and sizes: there are SRI (“socially responsible”) funds, sustainable funds, climate change funds and ESG ETFs (environment, social and governance). Confusingly, all of them do things slightly differently.

What are ethical ETFs?

Ethical ETFs aim to invest with a conscience. This may be by excluding all ‘sin’ areas, such as weapons, pornography, gambling or tobacco or by giving higher weighting to the top performing companies on various ethical criteria, such as carbon emissions, gender diversity or social impact. Others will specifically focus on a single ‘ethical’ area, such as climate change or clean energy.

Types of ethical ETFs

As we mentioned, there’s many ethical ETFs areas you might want to invest in. Here are some of the main types of ethical ETFs:

• ESG ETFs
• Socially responsible ETFs
• Clean energy ETFs
• Climate change ETFs

Best ethical ETFs

Whether you’re looking for top ESG or SRI ETFs – we’ve got you covered. Learn more about the best ethical ETFs on the market divided into categories below.

Best ESG ETFs

Here are the top performing ESG ETFs by five year performance based on JustETF to 3 July 2024:

Logo	Fund name (Ticker)	5 year performance	YTD performance (to 3 July 2024)	Link to invest
	Amundi MSCI Semiconductors ESG Screened UCITS ETF Acc (SEMG)	262.13%	58.05%	Invest with InvestEngine Capital at risk
	Xtrackers MSCI Japan ESG Screened UCITS ETF 4C USD Hedged (XDNU)	118.98%	26.16%	Invest with InvestEngine Capital at risk
	UBS ETF (IE) Factor MSCI USA Quality ESG UCITS ETF (USD) A-dis (UC99)	113.38%	17.84%	Invest with HLCapital at risk

Best socially responsible ETFs

Here is the list of top performing socially responsible (SRI) ETFs by five year performance (based on JustETF.com) to 3 July 2024:

Logo	Fund name (Ticker)	5 year performance	YTD performance (to 2 July 2024)	Link to invest
	Xtrackers MSCI USA ESG UCITS ETF 1C (XESU)	111.45%	6.47%	Invest with HLCapital at risk
	iShares MSCI USA SRI UCITS ETF USD (Acc) (SUUS)	92.68%	6.47%	Invest with CMC Invest Capital at risk
	UBS ETF (LU) MSCI USA Socially Responsible UCITS ETF (USD) A-dis (UC46)	88.31%	10.28%	Capital at risk

Best clean energy ETFs

Here are the top performing clean energy ETFs by five year performance based on JustETF to 2 July 2024:

Logo	Fund name (Ticker)	5 year performance	YTD performance (to 2 July 2024)	Link to invest
	Amundi Global BioEnergy ESG Screened UCITS ETF USD Acc (CWEG)	28.54%	-6.57%	Capital at risk
	iShares Global Clean Energy UCITS ETF USD (Dist) (INRG)	27.87%	-14.31%	Invest with XTBCapital at risk
	Amundi MSCI New Energy ESG Screened UCITS ETF Dist (NRJL)	1.25%	-9.12%	Invest with ii Capital at risk

Best climate change ETFs

Here are the top performing climate change ETFs by five year performance based on JustETF to 2 July 2024:

Logo	Fund name (Ticker)	5 year performance	YTD performance (to 2 July 2024)	Link to invest
	Ossiam US ESG Low Carbon Equity Factors UCITS ETF 1A (USD) (LOUF)	64.77%	6.93%	Capital at risk
	Ossiam ESG Low Carbon Shiller Barclays CAPE® US Sector UCITS ETF 1A (USD) (5HEP)	53.51%	-1.93%	Invest with InvestEngine Capital at risk
	Lyxor MSCI EMU ESG Broad CTB (DR) UCITS ETF Dist (MFDD)	41.21%	6.68%	Invest with ii Capital at risk

How to invest in ethical ETFs

Ethical ETFs trade on exchanges like a normal share. As such, investors can buy them through a platform or broker.

Buying ethical ETFs is more nuanced than buying a standard ETF. Investors have to decide on their ethical parameters as well as which option is likely to give the best financial performance. That means looking at how the index is constructed and whether it meets your ethical goals. For example, do you want specific sectors to be excluded? Or do you want to target certain sectors? Are environmental or governance considerations more important to you?

When you have your pick, head to our guide on how to invest in ETFs.

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How do ethical ETFs work?

Ethical ETFs will aim to match one of the key ethical indices, such as MSCI ESG Leaders or S&P ESG or Dow Jones Sustainability range. The indices will be compiled using a range of ethical, social, environmental or governance criteria. Often they will take the ‘normal’ MSCI World or S&P 500 index and reweight it. Rather than it being the largest companies that take the biggest positions in the portfolio, it is the most socially responsible.

There are also indices that specifically exclude certain sectors, such as the MSCI ex controversial weapons or Dow Jones Sustainability ex alcohol, tobacco, gambling and others. It is important to note that ‘unethical’ companies may still appear in some ethical ETFs, but just at a far lower weight than they are represented in normal indices.

The ETF may use different methods for replicating the index performance. Some will use full physical replication, buying into each stock in the index at the same percentage as it is represented in the index. Others will use sampling, buying representative companies with the aim of delivering the index performance. Finally, there is ‘synthetic replication’ where the ETF provider uses derivatives In general, physical replication is more transparent, but more expensive. Synthetic replication has greater counterparty risk and may be less accurate but is often cheaper.

Bottom line

Ethical ETFs offer a route to do good with your money, supporting companies that are behaving responsibly on the environment, treating their staff well and are managed with professionalism and integrity. This is becoming a popular way to invest, widely used among institutional investors such as pension funds. If you’re unsure which provider best suits your investment goals, you can compare the features from a range of platforms that let you buy ETFs in the UK.

Frequently asked questions

• Can an ethical ETF really make a difference?

  Governments can make commitments on carbon emissions or biodiversity, but there can be little progress without the corporate sector. Companies need incentives to act responsibly. By pushing capital to the most responsible companies and moving it away from companies that are acting poorly, investors really can make a difference. Companies are already making significant steps on climate change targets as shareholders exert greater pressure.

• Why does my ethical ETF still hold tobacco?

  ‘Sin’ sectors will sometimes still appear in ethical ETFs. Many ETFs simply reweight an index based on environmental, social or governance scores, giving the highest weight to the top-performing companies. So ‘unethical’ companies will still appear, but at a lower weight. Equally, some tobacco companies score highly on governance, which will bump up their overall scores. If tobacco (or any other sector) is a deal-breaker for you, there will be other options that specifically exclude it.

• What type of sectors tend to appear most in an ethical ETF?

  It depends on the approach. Areas such as technology tend to do well on carbon emissions, but score poorly on social considerations. Energy is weak on the environment and tends to have a lower weighting in ethical funds. Financials will often be well-represented. In general, however, investors aren't taking a significant sector bet by investing in an ethical ETF. Most have a good spread of sectors.

• What is the best ESG energy ETF?

  Based on 5 year performance, Amundi MSCI Semiconductors ESG Screened UCITS ETF Acc is the best clean energy ETF.

• What is the best socially responsible ETF?

  Based on 5 year performance, iShares MSCI USA SRI UCITS ETF USD (Acc) is the best socially responsible ETF.

• What is the best clean energy ETF?

  Based on 5 year performance, iShares Global Clean Energy UCITS ETF USD (Dist) is the best clean energy ETF.

• What is the best climate change ETF?

  Based on 5 year performance, Lyxor MSCI USA ESG Broad CTB (DR) UCITS ETF (Dist) is the best climate change ETF.

Written by

Cherry Reynard

Writer

Cherry Reynard is a financial journalist. She's written for a range of publications including the Financial Times, The Telegraph, The Independent and Forbes. Cherry co-authored a book on investing in emerging markets and is a six-time winner of the Investment Management Association’s freelance journalist of the year award. See full bio