Clean up your portfolio and rest easy.
Environmental, social and governance, or ESG, investing is having a moment. Sustainable mutual and exchange-traded funds, which screen for ESG metrics, brought in $69.2 billion in net inflows in 2021, a 35% increase over 2020’s record-setting year, according to Morningstar. The number of funds also rose to 534, a 36% increase. With this explosion in ESG investing — and more on its way — organizations and governments have taken steps to provide more transparency for investors to separate the wheat from the chaff. It’s important to understand what ESG is and what it’s not. ESG is a measurement of a company or fund’s exposure to these three risk metrics: Environmental, the “E” in ESG, can be measured by carbon intensity. Social can be measured by customer relationships or controversies. Governance often measures board leadership, diversity and internal controls. This is different from impact investing, which is a strategy to proactively tackle prevailing problems of the day. ESG ratings can help your portfolio divest from controversial companies or harmful practices while maintaining a solid return. More and more ratings agencies are improving their analyses on ESG metrics, and one of the most mentioned is MSCI Inc. (ticker: MSCI). An MSCI rating ranges from CCC, which is a laggard in addressing these risks, to AAA, which would be a leader. Here are six ESG exchange-traded funds with ratings of AA or better and a trailing-12-month return of more than 8%.
iShares ESG MSCI USA Leaders ETF (SUSL)
iShares is known for the variety and strength of its ESG funds, and this offering tracks the large- and mid-cap MSCI USA Extended ESG Leaders Index, which removes major businesses involved in tobacco, alcohol, gambling and nuclear power, as well as producers and major retailers of firearms. Approximately 48% of its holdings receive a rating of AAA or AA, and 0% receive a rating of B or lower. Its top three holdings are Microsoft Corp. (MSFT), Class A shares of Alphabet Inc. (GOOGL) and Tesla Inc. (TSLA). The fund does well on its weighted average carbon intensity, which is measured by tons of carbon dioxide per million in sales, of 59.9 tons, and is supported by the fact that 9.9% of its revenues come from green sources and only 0.5% from fossil fuel. The boards of directors for its holdings, ranked on a weighted average, score 82.7% on independence and 32.5% on diversity, which is average for the funds listed here.
American Century Sustainable Equity ETF (ESGA)
At least 80% of this actively managed fund’s assets are invested in sustainable equity securities, with a focus on large-cap companies for long-term capital growth. This ETF has a secret: It uses a proprietary model that incorporates value, future growth and ESG metrics and doesn’t disclose certain information in order to prevent other traders from copying its strategy. Its top three holdings are Microsoft, Google Class A shares and Apple Inc. (AAPL), and it generally avoids controversies, though it is exposed to controversial weapons with its 0.81% weighting of Lockheed Martin Corp. (LMT). Approximately 44% of its holdings receive an MSCI ESG rating of AA and above, and 1% are rated B or below. ESGA’s combined holdings have a moderate average carbon intensity of 113.3 tons of CO2 per million in sales, with 7.2% of revenues coming from green sources and 2.3% from fossil fuels. The weighted average board of directors for its holdings is ranked 83.1% on independence and 33.2% on diversity.
iShares MSCI KLD 400 Social ETF (DSI)
Another iShares offering, this ETF tracks the MSCI KLD 400 Social Index and weeds out companies with involvement in adult entertainment, alcohol, civilian and military weapons, fossil fuels, gambling, nuclear, thermal coal and tobacco. It’s specifically notable for also screening out companies involved in genetically modified organisms. Its top three holdings are your usual large-caps — Microsoft, Google and Tesla — and it isn’t exposed to controversial companies, according to MSCI. It ranks in the 92nd percentile in its U.S. peer group — high for this list — and 47% of its holdings are rated AA or above, with 0% rated B or below. The fund ranks low on emissions, coming in at 68.7 tons per million in sales, and derives a sizable 10.1% of its revenues from green sources, as opposed to 0.4% from fossil fuels. Similar to aforementioned funds, it has 82.3% board independence and 32.3% board diversity, according to MSCI.
SPDR S&P 500 ESG ETF (EFIV)
The SPDR S&P 500 ESG ETF does what it says on the box: It tracks a market-weighted index of S&P 500 stocks screened for ESG criteria while maintaining a similar industry weighting as the tracked index. It screens using ratings from Sustainalytics, Arabesque and SAM, and its top three holdings are Apple, Microsoft and Alphabet. Nearly one-third of its holdings rank AA or better, and 2% are rated B or lower. It has one holding, weighted at 0.1%, that violates United Nations Global Compact principles and one, weighted at 0.1%, that MSCI marks as exposed to “very severe” controversies, potentially from its 0.1% allocation in Hershey Co. (HSY). Its carbon intensity is moderate, at 98.4 tons per million in sales, and it generates 7.6% of revenue from green sources and 2.6% from fossil fuels. The fund’s board independence and diversity scores are similar to aforementioned funds.
Nuveen ESG Large-Cap Value ETF (NULV)
As the first AAA-rated fund on this list, the Nuveen ESG Large-Cap Value ETF can be used along with the AA-rated Nuveen ESG Large-Cap Growth ETF (NULG) and the AAA-rated Nuveen ESG Large-Cap ETF (NULC) to play trends without adding exposure to alcohol, weapons, nuclear power or gambling. The ETF also has a low-carbon screening criteria, which gives it its low carbon intensity of 69.2 tons per million in sales, though investors might be disappointed that only 2.9% of its revenue comes from green sources. Its top three holdings are JPMorgan Chase & Co. (JPM), Procter & Gamble Co. (PG) and Home Depot Inc. (HD). NULV ranks in the 94th percentile for MSCI ratings among its U.S. peer group, and among its holdings, 52% are rated AA or above and 1% are B or below. The fund has no strikes against it for holding controversial companies, according to MSCI. Its board independence and diversity are around the average for this list.
iShares MSCI USA ESG Select ETF (SUSA)
Another AAA-rated fund, the iShares MSCI USA ESG Select ETF knocks it out of the park, ranking in the 98th percentile among its U.S. peer group with 71% of the fund’s holdings rated AA or better and 1% rated B or lower. It screens out more controversial businesses than the average, including thermal coal power, conventional weapons and civilian firearms. Though its top holdings are the usual tech suspects — Apple, Microsoft and Google — its 1.37% weighting in AAA-rated industrial safety manufacturer 3M Co. (MMM) boosts its ESG rating. SUSA’s carbon intensity is low, at 45.4 tons per million in sales, and it generates 7.2% of its revenue from green sources. Its board independence and diversity are around the standard for this list.
6 top ESG ETFs with high MSCI ratings:
iShares ESG MSCI USA Leaders ETF (SUSL) American Century Sustainable Equity ETF (ESGA) iShares MSCI KLD 400 Social ETF (DSI) SPDR S&P 500 ESG ETF (EFIV) Nuveen ESG Large-Cap Value ETF (NULV) iShares MSCI USA ESG Select ETF (SUSA)
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6 Top-Performing ESG ETFs With High MSCI Ratings originally appeared on usnews.com
