Sustainable investments with ETFs

How to choose the right socially responsible investing (SRI) ETFs

One sign that the world is not going to hell in a handcart is that demand for socially responsible investing (SRI) ETFs has grown considerably since 2018. Much of the growth is driven by the commitment of large investors to sustainability targets, which has led to a wider range of ETFs operating in the space, greater trading volumes and more assets under management. 
 
But not every SRI ETF is suitable for everyday retail investors, and some products may not fit in with your particular values. To help you navigate the moral maze of SRI investing we’ve put together this quick guide to rating the products on offer:

 

Sustainable strategy styles

Sustainable strategy styles
Source: justETF Research, as of 31/08/2020

 

Implementing your values

Many people want to avoid companies that operate in industries they deem to be unethical. Industries that are commonly excluded from SRI products include:
 
  • armaments
  • tobacco
  • alcohol
  • gambling
  • adult entertainment
  • nuclear energy
  • coal mining
  • human genetics
Some indices simply exclude companies that produce, supply or distribute products associated with these areas. Or companies may be excluded if they earn over a certain revenue threshold from these industries. Excluding such companies is known as negative screening. Positive screening, by contrast, enables you to invest in companies with strong environmental, social, and/or governance (ESG) credentials.
 
How do you know which companies have a negative impact and which are positive? The impact of a company's policies can be rated by the index provider, and/or independent bodies or they may be excluded because they’re classified as part of a particular industry. 
 
Each SRI / ESG index uses a different blend of positive and negative screening – although some may only use negative screening. The criteria should be readily available and explain how companies are excluded and/or weighted for ESG factors. 
 
Choose your index carefully so that it best expresses your values. Some indices exclude oil and coal equities but some do not. Some indices enable you to exclude companies that violate international UN standards such as the Declaration of Human Rights, the prohibition of child labour, or anti-corruption guidelines. 
 
Find out more in our investment guide to the best socially responsible investing (SRI) ETFs - it includes exclusions, factsheets and methodologies for the main SRI and ESG indices. 
 
An introduction to socially responsible investing with ETFs
An introduction to socially responsible investing with ETFs
Find out how different SRI indices enable you to invest according to your values.
More about socially responsible investing
 

Investing in sustainable companies using ETFs

It can be worthwhile and exciting to invest in companies that specialise in technologies, services and infrastructure for future-facing sustainable industries. Investors who want to try to earn an above-market return by gaining exposure to these industries can use ETFs that track thematic indices. 
 
Themes include investing in clean water, renewable energy, electric transport and future driving technology. However, be aware that themed indices usually select companies by the proportion of their business associated with a theme and not by ESG rating. See our guide on megatrends for more.
 
justETF tip: Find the best ETFs for investing in renewable energy, water, climate change and electric mobility.
 

The impact of large institutions on sustainable investing

Large institutional investors manage billions of pounds on behalf of pensions, insurance firms, and regular citizens. Their responsibility to invest that capital sustainably inevitably includes a moral dimension that actually gave rise to socially responsible investing in the first place. 
 
The scale of institutional capital means that many SRI / ESG indices and ETFs are designed primarily with large investors in mind.
 
Institutional investors use sustainability audits to try to avoid extreme risks such as fraud scandals (Wirecard and Volkswagen are recent examples) or industrial disasters (such as the Vale dam breach in Brazil or the BP oil spill). 
 
Similarly, they often exclude some controversial companies such as those that manufacture cluster bombs. 
 
Large investors engage with ethical issues through the lens of different institutional missions, practices and criteria. Anticipating regulation also plays its part (such as indices that support compliance with the Paris Climate Agreement), hence the available indices and ETFs vary widely and provide you with the opportunity to pick the approach that best fits your own principles.
 
justETF tip: You can find an overview of sustainable index families in our investment guide The best socially responsible investing (SRI) ETFs or by searching our database using the terms sustainable equity ETFs and sustainable bond ETFs.
 
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