Best ESG ETFs for Socially Conscious Investors
ESG ETFs filter out companies based on environmental, social, and governance criteria. Here is what they actually exclude and whether the returns suffer.
Don't have time? Here's what you need to know:
- 1ESG ETFs screen for environmental, social, and governance factors — excluding tobacco, weapons, and sometimes fossil fuels
- 2ESGV (Vanguard, 0.09%) offers the broadest exclusions at the lowest cost
- 3Return differences between ESG and traditional index funds have been less than 1% annually
- 4Real-world impact of ESG investing is limited — buying shares does not directly fund or defund companies
ESG Investing: What Gets Excluded
ESG ETFs screen companies on environmental practices (carbon emissions, pollution), social factors (labor practices, diversity, community impact), and governance (board independence, executive compensation, accounting practices). Different ETFs apply different screens. Some exclude entire industries (tobacco, weapons, fossil fuels). Others use a scoring system that keeps most stocks but tilts toward higher-rated companies.
The result is a portfolio that looks similar to the broad market but with reduced exposure to certain sectors — typically energy, tobacco, and defense. The overlap between ESGU (iShares ESG Aware) and the S&P 500 is about 90%, meaning you are making a small tilt, not a dramatic change.
Best ESG ETFs Compared
ESGV from Vanguard has the broadest exclusions and lowest cost among major ESG funds. ESGU from iShares is the most popular but uses lighter screens — it still holds many companies that stricter ESG investors would exclude.
| ETF | Approach | Expense Ratio | Holdings | What It Excludes | 5-Year Return |
|---|---|---|---|---|---|
| ESGU | ESG Aware (iShares) | 0.15% | 300+ | Tobacco, controversial weapons, thermal coal | ~13% |
| ESGV | ESG screened (Vanguard) | 0.09% | 1,500+ | Tobacco, weapons, alcohol, fossil fuels, nuclear, gambling | ~12% |
| SUSA | Sustainable (iShares) | 0.25% | 180+ | Low ESG-scored companies | ~12% |
| SUSL | ESG leaders (Xtrackers) | 0.10% | 350+ | Bottom ESG quartile companies | ~12% |
| KRMA | Global Impact (Crane Shares) | 0.42% | 200+ | Low ESG momentum companies | ~8% |
Do ESG ETFs Sacrifice Returns?
Over the past 5 years, major ESG ETFs have returned within 1% of the S&P 500. The performance impact is small because ESG screens remove only a small percentage of holdings and the remaining stocks are still market-cap weighted toward the same mega-caps (Apple, Microsoft, etc.).
The risk is sector-specific: in 2022, energy stocks (excluded by many ESG funds) surged 59% while tech stocks fell. ESG portfolios underperformed because they had less energy and more tech. In other years, the opposite happens. Over full market cycles, the return difference has been minimal.
Tip: If you want ESG exposure at the lowest cost, ESGV (0.09%) is your best option. If you want the lightest possible screen with maximum market exposure, ESGU (0.15%) excludes less.
Frequently Asked Questions
Do ESG ETFs actually make a positive impact?
Debatable. Buying shares of an ESG ETF does not directly fund or defund companies — it just changes who holds the shares. The impact comes from: (1) signaling investor preferences to companies, (2) increasing the cost of capital for excluded companies if enough investors divest, and (3) shareholder voting on ESG resolutions.
Is ESGU or ESGV stricter?
ESGV has broader exclusions (fossil fuels, alcohol, gambling, nuclear power) while ESGU only excludes tobacco, controversial weapons, and thermal coal. If strict screening matters to you, ESGV is the better choice.
Can I build an ESG portfolio with regular index funds?
Yes. Buy VTI and accept the 3-4% energy exposure, or donate a portion of your returns to environmental causes. Some investors find this more effective than paying a premium for ESG screening, which may not directly reduce corporate emissions.
Further Reading
Free Tools
Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.