Best ESG ETFs to Buy UK

ESG ETFs, also known as “ESG funds” or “ethical funds”, have dramatically increased in popularity over the past few years.

These funds present an opportunity for investors to support socially conscious causes while also targeting investment returns. So, read my guide to find out about some of the best ESG ETFs to buy UK.

Also consider: Guide to ETFs for UK investors

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

About the best ESG ETFs available in the UK

ESG companies are those considered to be run with environmental, social, and governing values.

The ESG label relates to a set of standards that indicate a specific company’s impact on the environment and wider society, as well as the transparency of the business itself.

As the natural state of the planet is widely thought to be in decay, it’s sometimes posited that large, multinational conglomerates do much to accelerate it. Some ESG companies respond to this by trying to avoid any unnecessary business practices that may be harmful to the environment.

It is hoped that investments in companies that are adapting their business model to prepare for future issues, such as climate legislation, will help investors to reduce their exposure to risk from such changes.

In addition to this, ESG funds and investors will typically avoid controversial or potentially harmful sectors such as tobacco, weaponry, and unsustainable energy.

Features of a business model that can be adapted for ESG alignment may include:

• Processes
• Supply chains
• Manufacturing

ESG ETFs, meanwhile, are responsible investment funds that either include a range of ESG-rated companies, or that track the performance of an index containing these types of investments.

Which ESG ETF is the best?

No individual ESG ETF can be considered the best as they all have different qualities and rates of performance. In addition to this, the past performance of an ETF is not a reliable indicator of future results.

How to decide which ESG ETF best suits you

Realistically, finding the right ETF for you will depend on your investment goals and personal circumstances.

It could be useful to research ESG ETFs that you are interested in and create your own metrics to decide which is the best for you.

Factoring in your own risk tolerance is important as it may not be relative to the risk involved with some ESG ETFs. The given level of risk can vary between almost all stocks and ETFs, so you shouldn’t assume all ESG ETFs have the level of risk as each other.

If you are keen to pursue a sustainable investment strategy, perhaps you could prioritise ETFs that include companies with the highest ESG ratings.

Also, taking into account a fund’s assets means you could consider ETFs that have ESG motives which resonate with your personal views if the responsible investing aspect is most important to you.

On top of this, it’s important to consider the price of the units of an ESG ETF and whether it is affordable for you. If the units are expensive, it could be worth seeking out cheaper funds or even fractional units instead.

All stocks and ETFs have a degree of investment risk, so you should make sure you fully understand the fund holdings and closely monitor any positions you take.

What is ESG investing?

ESG investing refers to investments in companies that meet certain environmental, social, and governance criteria – which is where the “ESG” acronym originates from. You may also hear ESG investing referred to as “sustainable investing” or “ethical investing”.

The ESG criteria are quite broad. Find out more about each category below.

Environmental investing

Environmental investing involves companies that seek to have a positive impact on the environment. This might include businesses that actively battle climate change, such as a company that produces solar panels.

Alternatively, it can include any business that looks to reduce its carbon emissions, thereby reducing its environmental impact on the planet.

Social investing

Social investing refers to businesses that engage in socially conscious behaviour, or that are socially active in their communities.

For example, companies that provide clean water in areas of drought could be considered a social investment, as might those that actively work with charities in their local area.

Investing socially might also involve excluding companies that are deemed to be engaging in behaviours that are not socially responsible. For example, this might mean avoiding investments in tobacco or gambling companies.

Governance investing

Governance investing revolves around a company’s behaviour at the corporate level.

Companies with good governance credentials might make a targeted effort to ensure diversity in their boardroom. They might also have strict behaviour policies to prevent bribery and other illegal, unethical practices.

How does a company qualify as an ESG business?

Companies don’t have to be in a specific sector to be considered an ESG business. Instead, they are given an ESG rating by a third-party rating agency or provider.

Ratings agencies will calculate the ratings by looking at a wide range of ESG factors. The agency then applies a strict methodology to assess how well the company meets these factors, both internally and in comparison to other businesses in their industry.

Interestingly, these ratings can sometimes throw out anomalies that you might not expect. For example, an energy storage company might seem like an obvious inclusion in an ESG fund, as its business specifically works towards improving energy efficiency across the global economy.

However, if that company has poor social or governance credentials – the boardroom may lack diversity, for example – then it could have a poor ESG rating.

Meanwhile, you might think that mining companies or those involved in fossil fuels would be automatically excluded from the funds on the basis that their activities are typically carbon-intensive, and therefore bad for the environment.

In reality, if they can prove that they are taking steps to reduce their carbon emissions, this could be sufficient for them to have a strong rating.

It can be worth looking at the individual companies with strong ESG ratings to decide whether you think they meet your own personal ethical criteria.

Which companies are the top ESG rating providers?

There are many companies that work to provide ESG ratings, helping fund managers or those that compile ESG indices to make decisions on what to include.

The top ESG rating providers and agencies include:

• MSCI ESG Research LLC
• Sustainalytics’ ESG Risk Ratings
• Bloomberg ESG Disclosures Scores
• FTSE Russell’s ESG Ratings
• ISS Ratings and Rankings

There are of course many more ratings agencies and data providers that provide this function, too.

What is an ESG ETF?

Now that you know what ESG investing is and how it works, understanding ESG ETFs should be a lot easier. Simply, these are exchange-traded funds that exclusively contain companies which meet the crucial ESG criteria.

Ethical investing funds allow you to more closely align your investments with your personal values.

These funds enable investors to gain exposure to a range of asset classes that fall under the ESG umbrella.

Many ethical funds have investment teams who actively pick and choose which companies to include in their holdings.

Meanwhile, others might track indices of ESG companies. Many of the funds included in my guide do this, such as:

• Amundi Index MSCI Europe SRI PAB UCITS ETF DR
• iShares ESG Aware MSCI USA ETF
• iShares MSCI UK IMI ESG Leaders UCITS ETF

These funds all track specific investment indices, rather than selecting individual companies to invest in.

What’s the difference between ETFs and other funds?

There are two major differences between ETFs and other funds:

1. They are often passive funds, tracking an index to determine their holdings
2. They are exchange-traded.

Being passive funds, ETFs use indices of companies to select the holdings they invest in. That removes the need for the fund provider to have fund managers actively overseeing the investment, reducing costs for individual investors.

Of course, this doesn’t always hold true, as some ESG ETFs are active funds. For example, the ARK Innovation fund does have a fund manager to make an investment decision and ensure that it remains on track to deliver the fund’s investment objective.

But in most cases, there are no fund managers overseeing the investments contained within.

The other major distinction between an ETF and other mutual funds is in the name “exchange-traded fund”. Exchange-traded funds do what they say on the tin – they are traded on an exchange.

Most other funds execute orders at the end of a trading day only. Meanwhile, an exchange-traded fund can be bought and sold throughout the day on the stock exchange. This means you can capitalise on smaller swings in the value of your units throughout the trading day.

If you’re unsure whether ETFs are a suitable investment for you, consider seeking independent advice from a financial adviser.

Best ESG ETFs to Buy UK FAQs

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial situation.