Investing can help you achieve goals that go beyond monetary returns. While your focus as an investor should always be on getting the best possible performance, more and more people also want their money to reward companies that have a positive impact on the environment and society.
ESG investing is a strategy that channels dollars to companies that meet stringent environmental, social and governance standards. Investing in the best ESG mutual funds, index funds and exchange-traded funds (ETFs) can help you support responsible corporate behavior without sacrificing performance or incurring excessive fees.
While ESG investing alone cannot solve the problems of climate change, social injustice and income inequality, backing companies that actively work to address these challenges is a great place to start.
There are dozens of ESG funds to choose from. Forbes Advisor has combed through nearly 100 options to identify seven of the best ESG funds that we believe are worthy of your consideration.
We began by looking at approximately 80 ETFs and mutual funds focused on ESG investing. While some investors are willing to sacrifice returns in exchange for ESG focused investments, we were not. We excluded funds that did not have at least three years of performance data. We also excluded funds whose performance fell significantly below the benchmark S&P 500 index or other ESG funds.
Beyond performance, we considered the costs associated with each fund. The index funds on our list are the least expensive we found, and tend to perform best over longer periods of time. We did include more expensive actively managed funds, based on their after-fee performance. It’s worth noting one word of caution.
Several ESG funds in our list had outsized performance on a one- or three-year basis. This performance in part reflects the remarkable price appreciation for growth stocks generally. How these funds will perform over much longer periods of time, which is far more important than short-term performance, is unknowable. It is certainly reasonable to believe that rising rates and a shift to value stocks could see many ESG funds underperform over the next five to 10 years.
Finally, we considered how each fund selects ESG companies and debt. Our goal wasn’t to impose our own value judgments on this selection. Rather, we were looking for a wide variety of methodologies and ESG concentrations (e.g., sustainable energy vs corporate governance).
To learn more about our rating and review methodology and editorial process, check out our guide on How Forbes Advisor Rates Investing Products.
What Is ESG Investing?
ESG investing is a strategy where people put their money to work in companies that have a positive net impact on the environment and society, led by a management team that achieves these goals via better corporate governance. The acronym ESG stands for environmental, social and governance, for the three core pillars of this investing philosophy:
- Environment. How does a company manage its environmental impact? How much progress has it made in utilizing renewable energy sources? Is it attempting to minimize its carbon footprint? How does it handle air or water pollution arising from its operations? What is its attitude toward climate change? What about sustainability efforts in its supply chain?
- Social. How does the company improve its social impact? Does it offer fair levels of compensation for employees? What are its policies regarding LGBTQ+ equality, racial diversity and inclusive hiring practices? How does a company advocate for social good in the wider world, beyond its limited sphere of business?
- Governance. How does management and the board of directors address the interests of the company’s employees, shareholders, and customers? Is executive compensation balanced compared to pay for other employees? How does the company’s board and management drive positive change? Does the board foster diversity in leadership? Are its interactions with shareholders positive?
This is only a sample of the kinds of questions ESG investors ask themselves when they evaluate companies. ESG relies on independent research organizations to score public companies for their performance in addressing these issues. ESG scores aim to provide objective, credible ratings of how well a company manages their environmental, social and governance policies.
How Do ESG Funds Work?
Like any other type of fund, ESG funds adopt one of two possible approaches to portfolio construction. They passively track an index or actively pick investments based on their own research. We’ve included both active and passive ESG funds in our listing.
Active ESG mutual funds and ETFs conduct their own research to identify funds that meet their criteria. Passive ESG funds rely on third-party indexes to screen companies for their compliance with different environmental, social and governance criteria. These indexes choose companies whose ESG scores are above set thresholds, and ESG fund managers build a portfolio of investments that track the index’s performance.
Our profiles of the best ESG funds include a summary of how each fund constructs its portfolio, and whether it tracks an index or uses an active strategy for its portfolio choices. Understanding the ESG methodologies used by each fund is key for investors who want to align their choices with their own views on environmental, social and governance issues.
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