Updated in April 2026
An ETF, short for “Exchange-traded fund”, contains a large number of shares in listed companies that can be bought “off the shelf”. When you ask your bank for a sustainable investment, Sustainable ETFs are likely what they will try to sell you. In this article, we will dive into their Pros and Cons and find out if they are right for you.
Disclaimer:
Please note that my evaluation of the options below are all based on my own personal experience and subjective assessment. I am not a finance professional, so none of it constitutes investment advice. Remember: It’s your money and you’re ultimately responsible for what you do with it. However, this list will definitely help you in getting a broader overview of what you CAN do to invest with a positive impact.
What are Sustainable ETFs?
We can distinguish between actively or passively managed ETFs:
- Passive funds don’t involve any active stock picking. Instead, the fund aims to replicate the performance of a predefined index. An index is a rules-based list of securities (such as shares or bonds) designed to represent a market, sector, or theme. By tracking this list automatically, a passive ETF provides broad, transparent exposure at low cost.
- Active funds are managed by a fund manager who bundles together shares based on certain criteria and then sells the fund to investors for a fee. A common misconception is that all ETFs are passive. “Exchange-traded” only means the fund can be bought on a stock exchange (not all funds can be), not how it is managed.
In the past, active funds could be considered more sustainable because fund managers have direct influence on the fund’s composition. Nowadays, however, some passive ETFs can track indices, that are already quite focused on a particular sustainability theme. The main difference is fees: Active funds cost you more. In turn, they hope to achieve better returns, which is often an illusion. But they can still help you invest in an area of particular interest, such as the Circular Economy.
In my opinion, there is little difference today between a typical active or passive ETF from a sustainability point of view. So I cover both together in this article, but look at Impact Funds separately. These are based on the same principles but actively engage with the companies they invest in, creating potential for actual change in the world. If you’re confused by the difference between “Sustainable Investment” and “Impact Investment”, check out my blog post here: Impact Investing on the Stock Market? Think again.
Sustainability Impact Potential
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As I describe in more detail in a separate post, the stock market is not the best place to go looking for impact. As when buying individual shares in a company, the companies you invest in through sustainable ETFs don’t see a single cent. The main difference is that with a typical, non-impact-oriented fund, someone chooses the companies for you using certain Environmental, Social and Governance (ESG) criteria.
This approach faces some difficulties. First, the selection criteria for these funds are usually quite generous. The fund manager could employ the best-in-class approach. Such a fund includes, say, the five companies in every sector with the best performance based on a sustainability rating. While this approach is quite good in excluding the worst offenders, you’ll still find oil and gas companies in your portfolio. In the worst case, the “sustainability” label in the fund’s description borders on greenwashing. This is the case for funds that only apply exclusion criteria for number of controversial industries. These are usually armaments, pornography, tobacco, alcohol, gambling and sometimes nuclear energy or, increasingly, fossil fuels.
A better approach from a sustainability point of view is positive selection. This means the fund manager actively selects companies for the fund with strong sustainability performance. This usually means that fewer companies will make it in, which negatively affects diversification. For this and other reasons, such hand-picking is very common. But the solutions that do exist make it a point to tailor a client’s portfolio to his or her values and priorities. Gender equality is all you care about? Here’s a portfolio of companies that excells at having female board members, even if they are not perfect when it comes to CO2 emissions!
Why would a sustainable investor buy Sustainable ETFs?
As with individual shares, the main sustainability-related reasons for buying Sustainable ETFs are:
- Focus on long-term sustainability opportunities or risk avoidance: If you believe in the sustainable transition, you believe that sustainable companies will enjoy better long-term success. This can mean they are better placed to sell their already sustainable products or services, or that their strategy already considers sustainability risks and opportunities well. For instance, a sustainable company will be more resilient in the face of carbon taxes or supply chain disruptions due to extreme weather.
- Moral alignment: You may sleep better knowing that your investments return do not harm people or the planet.
Both are very valid reasons to invest, but your investment decision doesn’t change anything anywhere.
And what about Active ownership, the idea of influencing companies by exercising your voting rights as a shareholder? While this is sometimes possible when you hold individual shares, ETF investors generally don’t enjoy that privilege. After all, an ETF can contain hundreds of companies – you wouldn’t want to attend all of their shareholder gatherings. Using your shareholder rights through a fund is only possible if the fund manager exercises them. If he or she does so with sustainability in mind, then I call that an Impact Fund.
Sustainable ETFs are suitable for you if:
> You have a long investment horizon (5+ years). Like individual shares, funds can fluctuate over the short term.
> You don’t know enough about individual companies or want to invest in many companies at once to achieve better diversification.
> Impact is less important for you than just having a buy-and-forget solution. Sustainable ETFs still let you sleep with a clear conscience.
> You have a bank you trust to sell you a product with robust sustainability credentials.
Pros and cons of sustainable ETFs
Advantages
- Easy to buy. You buy an ETF the same way you would a share in a single company. All you need is an account with a stock broker, such as your bank or a neo broker, e.g. Swissquote. Then you search for the fund by using its ISIN number and click “buy”.
- Easy to sell. If you find yourself in a financial pinch and need to sell your investments, ETFs can be sold almost instantly.
- Instant diversification. It’s similar to buying shares but you are automatically invested in various companies and industries, often also across different countries. Passive funds tracking very broad indices, such as the MSCI World include over 1’000 companies.
- Large variety. There are many products available on the market for you to choose from. Some funds cater to very narrow topics, such as sustainable water use.
- Passive ETFs are cheap. Funds that just reproduce an index require hardly any management effort and thus are very cheap (0.2-0.4% of the invested capital). Each percentage point you save equals higher returns, which cumulates exponentially over the years. The performance is usually also comparable to actively managed funds. Few fund managers can beat the market by picking the right stocks to buy/sell at the right time, at least not in the long run, and all charge hefty fees for it.
Disadvantages
- Green with a tint of brown. You might end up having companies in your sustainability fund that are not sustainable in the conventional sense, e.g. oil companies or car manufacturers. They may be better than their competition, but not actually green. Some passive funds tracking very broad indices could even be considered brown with a tint of green. You will have lots of companies in the index that are not really sustainable or even “bad guys”.
- Active ETFs can be rather expensive. Fees can reach 1.5% per year or more. Active management mean more costs for the fund manager, which they charge you in the form of higher fees. Plus, sustainability performance is another thing the manager has to consider when deciding what companies to buy or sell.
- Virtually zero impact. Stocks are a very low-impact form of investment to begin with. As mentioned above, no matter the fund you buy, you don’t actually fund any sustainable activities. ETFs don’t even have the redeeming possibility of active ownership as some actively managed Impact Funds do.
- Fluctuates in value. Although ETFs are often more diversified than more selective Impact Funds, their value still follows the ups and downs of the stock market. An important consideration when you need to sell your investment to cover a big expense
Examples
There are plenty of ESG-/sustainability-oriented ETFs on the market, so here are only an illustrative few. The number in brackets is the ISIN: it allows you to find the exact fund more easily.
- Amundi MSCI World ESG Selection UCITS ETF (ISIN: IE00016PSX47). Companies with some sustainability credentials from all over the world (but mostly the US).
- UBS MSCI USA Socially Responsible UCITS ETF (ISIN: IE00BJXT3C94). US companies with a strong sustainability filter.
- Vontobel Fund – Transition Resources B CHF Cap (ISIN: LU1407930277). Global companies involved in providing the resources needed for decarbonisation. Some of its invested companies are rather controversial, however.
Conclusion: Ideal for hands-off diversification
Sustainable ETFs are the easiest way to achieve a diversified portfolio while benefitting from exposure to sustainability, especially when compared with holding just a few individual shares. You can broadly benefit from how markets are developing – which over the long term is usually (but not always!) up. You’re not as exposed to the ups and downs of a single share, which makes an ETF much more suitable to serve as a core piece of your portfolio. If you hope to benefit from one sector or trend in particular, you’re almost certain to find an ETF that covers your fancy. But as with shares in general, most regular ETFs are inherently low-impact. If you want your money to do some good in the world, you need to look for more impact-oriented investments, such as Impact Funds, or, even better: Crowdfunded Loans and Bonds or Crowdfunded Private Equity.
Not sure if buying an ETF is a good idea for you? Then take a step back and get started with my Beginner’s Guide to help determine what investment suits your needs.