Head of Commercial ESG and Education
Summary: ESG index ETFs, also known as broad ESG ETFs or core ESG ETFs, are passive funds that track major market indices with sustainability filters applied. They offer diversified exposure at low-cost, but the exclusion of certain sectors or companies has implications that investors should understand to use them effectively.
ESG index ETFs are products that passively track ESG-screened versions of broad market indices. They start with a standard index (e.g. MSCI World or S&P 500), apply an ESG screen or tilt, and then replicate the adjusted index. They typically exclude companies involved in controversial industries such as tobacco, fossil fuels, or weapons, while favoring companies with stronger ESG scores or practices.
Over the past decades, ESG investing has moved into the mainstream, as more investors want to align returns with environmental, social, and governance considerations. At the same time, exchange-traded funds (ETFs) have become a popular way to access broad markets and the intersection of these two trends has driven the growth of ESG index ETFs.ESG index ETFs offer:
Beyond their structure, ESG index ETFs offer broad diversification across sectors and regions, allowing investors to gain exposure to a wide market while incorporating ESG considerations. Because they trade intraday on exchanges, they offer high liquidity and flexibility, enabling investors to buy and sell throughout the trading day. They also typically have lower fees than actively managed funds.
These products are also highly transparent, with regular disclosure of holdings. This enables investors to see exactly which companies they hold, which is particularly important for ESG-focused investors who want to avoid certain sectors or issuers. In addition, ESG index ETFs incorporate a risk management element by screening out companies with high ESG risks or controversial activities.
Finally, they respond to growing client demand for investments that combine ESG alignment with broad market exposure. Many investors want to stay close to traditional benchmarks, while still integrating ESG principles into their portfolios.A key question for investors is how ESG index ETFs perform relative to traditional benchmarks. Across large core ESG ETFs over 1, 3 and 5 years, the evidence points to a slight tendency to underperform their non-ESG benchmarks, although the gap is typically modest and inconsistent across time periods. This is consistent with findings from MSCI and Morningstar, which show that ESG indices and funds tend to deliver performance broadly in line with their conventional counterparts.
Differences in returns predominantly reflect:
Although ESG index ETFs offer many advantages, they are not without criticism. Because they follow broad market indices, they may still include companies that some investors consider controversial, even after ESG screening. Their need to remain close to the benchmark limits how far they can deviate, which can reduce their ability to drive meaningful real-world impact. As a result, their influence on corporate behaviour may be weaker than that of more active ESG strategies.
These products can also carry a risk of greenwashing, as the ESG label does not always reflect a meaningful difference from the underlying traditional index. ESG index-tracking ETFs are ETFs, which means they must operate within a reasonable tracking error relative to standard benchmarks. While exclusions and tilts are applied, they cannot be too extreme, which may dilute the ESG effect.
In addition, these funds often exhibit sector biases. They tend to be underweighted in sectors such as energy and overweight in sectors like technology. This can lead to periods of underperformance when excluded sectors outperform, as seen during energy market disruptions in recent years.
Finally, political and regulatory developments can affect ESG investing. Increased scrutiny and shifting policy priorities in some markets, and particularly the USA, have created headwinds for ESG strategies, contributing to uncertainty and potential changes in investor sentiment.Explore Saxo’s Index ETFs Theme, a curated selection of ETFs that track broad global indices.
Before making any investments, be sure to review the available information about the product on the platform and consider your investment objectives, risk tolerance and time horizon.
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