Sustainable investments with ETFs

Investors in Europe now have a wide choice of the most diverse socially responsible investing (SRI). Much of the growth is driven by the EU's intention to channel more investments into climate-friendly companies. Since March 2021, there have therefore been basic EU standards for sustainable investment products and fund providers. By 2022, the regulation is to be worked out in detail and implemented. According to the EU, large institutional investors such as pension funds and insurers must also make greater efforts in the area of sustainability and climate protection. All of this has led to a wider range of ETFs operating in the space, greater trading volumes and more assets under management. 
 

Wide choice and big differences in sustainable ETFs

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 strategies for your investment goal

 

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. 

Many investors also attach importance to excluding companies that violate international UN standards. These are principles such as the human rights declaration, the ban on child labour or guidelines against corruption. ETFs on indices that take all these aspects into account are suitable for this purpose. The indices usually have the suffix "SRI" in their name, short for "Socially Responsible Investing". ETFs on indices with the addition "ESG Screened" do not work in detail with the evaluation of each company, but only exclude corresponding sectors.
 

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 tracking 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.
 

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 good 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. 
 
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.