Best ESG Funds: High-Rated and Low-Cost Options

With more ESG funds available than ever, ESG investors don't have to choose between ESG principles and cost.
Alana BensonJul 20, 2021

Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.


The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

When you’re adding investments to your portfolio, how well they perform may not be the only question on your mind. Investors are increasingly considering ESG factors — environmental, social and governance principles — when they choose investments, and the number of ESG-focused options is growing.

Now you can seek returns and make an impact in the same portfolio. Research shows ESG funds often perform better than their traditional counterparts.

Ready to pick ESG funds? Jump to the best overall ESG funds or the cheapest ESG funds.

What is an ESG fund?

ESG funds are mutual funds graded using ESG (environmental, social and governance) principles. ESG funds invest in companies that aim to have a sustainable and societal impact in the world, such as those with a small carbon footprint or diverse leadership boards.

ESG funds are not individual stocks. They are a collection of multiple stocks grouped together. Buying a fund rather than an individual stock can decrease risk since a fund holds shares of many companies rather than just one. If one company represented within your fund goes out of business, the fund should weather it better than if you owned stock in a single company that went under.

ESG benefits

“Putting our investment dollars to work in ESG influences the behavior of the largest and most powerful multinational corporations in the world for the greater good of society. To me, this illuminates the breadth of power the everyday investor has and is an excellent way to make a large scale, meaningful difference,” says Kenneth Chavis, a certified financial planner at Mercer Advisors in Scottsdale, Arizona.

But if influencing powerful companies to make meaningful change isn't a good enough reason to invest with ESG principles, there are two more: the potential for increased performance and reduced risk.

Studies from JUST Capital, Arabesque Partners and others have shown that ESG funds can not only match traditional funds in terms of performance, but that they often outperform them. As for risk, a 2019 white paper from the Morgan Stanley Institute for Sustainable Investing details a study comparing sustainable funds and traditional funds from 2004 to 2018. The research showed that overall, sustainable funds have consistently shown a lower downside risk than traditional funds. And while some ESG funds are relatively new (particularly many passive ones), they’ve been able to show solid performance and resiliency in both good markets and bad.

“When we had healthy growth markets, like for the last few years, ESG funds performed quite well. This year, when we had such a significant decline, and even now when the markets are choppy, these funds have outperformed, on the whole. So the shorter track records of younger ESG funds do cover different types of markets,” says Jon Hale, the director of sustainability research at independent investment research firm Morningstar. (Morningstar is a NerdWallet advertising partner.)

» Need more information? Learn how to get started with socially responsible investing

Advertisement
Betterment
Stash
Ellevest
NerdWallet rating 
NerdWallet rating 
NerdWallet rating 
Read review
Fees

0.25%

management fee

Fees

$1 - $9

per month

Fees

$1 - $9

per month

Account Minimum

$0

Account Minimum

$5

Account Minimum

$0

Promotion

Up to 1 year

of free management with a qualifying deposit

Promotion

Up to $510 in credit to invest

with qualifying deposit into taxable account (see terms)

Promotion

2 months free

with promo code "nerdwallet"

Best overall: Highest-rated ESG funds

To determine the best ESG funds, we started with a list of funds from Morningstar that have sustainability and impact considerations as a central component of their investing strategy. We then narrowed down that list to include only funds that earned the firm's top score and Low Carbon Designation.

Based on that analysis, here are the top 10 ESG funds as of October 2020, ranked by their total return percentile rank, which is a metric that allows investors to see how a fund performs relative to other funds in the same category. The top-performing funds receive a rank of 1. Note that past performance is not always a good indication of how a fund will perform long-term.

» Some brokers are better than others. Read our roundup of top-rated brokerages for mutual funds

Fund

Morningstar category

3-year total return percentile rank

Expense ratio

1919 Socially Responsive Balanced A (SSIAX)

US Fund Allocation - 50% to 70% Equity

1

1.26%

Pax Large Cap Fund Institutional (PXLIX)

US Fund Large Blend

1

0.70%

Thornburg Better World International I (TBWIX)

US Fund Foreign Large Blend

1

1.09%

Parnassus Core Equity Investor (PRBLX)

US Fund Large Blend

2

0.86%

iShares MSCI USA ESG Select ETF (SUSA)

US Fund Large Blend

5

0.25%

Natixis Sustainable Future 2025 N (NSFEX)

US Fund Target-Date 2025

5

0.56%

Boston Trust Asset Management (BTBFX)

US Fund Allocation - 70% to 85% Equity

6

0.90%

Change Finance US LgCp FossilFuel Fr ETF (CHGX)

US Fund Large Blend

6

0.49%

AllianzGI Water Class P (AWTPX)

US Fund Natural Resources

7

0.94%

JHancock ESG Large Cap Core R6 (JHJRX)

US Fund Large Blend

7

0.82%

Data provided by Morningstar

Cheapest ESG funds and ESG ETFs

Sustainable funds used to get a bad rap for being expensive, and it's true that the funds above may carry higher expense ratios than their traditional peers. (An expense ratio is the annual fee charged to fund investors. For example, if you invest $10,000 in a fund with a 1% expense ratio, you’ll pay $100 a year.)

» How much does a fund cost? Estimate a fund’s expenses with a mutual fund calculator

Impact investors are often willing to pay a bit more to ensure they're investing in a way that aligns with their values, but if you're also concerned with costs — and all investors should be — the following funds are among the lowest-cost ESG funds available.

Most of the cheapest funds listed here are ESG ETFs, or exchange-traded funds. ESG ETFs can be traded throughout the day like stocks. This is different from index funds which can only be bought and sold only for the price set at the end of the trading day. One reason why ESG ETFs are less expensive: They are usually passively managed and don’t employ a fund manager to make investment decisions. (More about passive vs. active management below.)

This list includes the lowest-cost funds earning either a four or five Morningstar Sustainability Rating, plus the lowest-cost sustainable bond funds. (Bond funds are generally not eligible for a Sustainability Rating.) The funds are listed in order of expense ratio, from low to high.

Fund

Morningstar category

Expense ratio

IQ Candriam ESG US Equity ETF (IQSU)

US Fund Large Blend

0.09%

Fidelity® Sustainability Bond Index (FNDSX)

US Fund Intermediate Core Bond

0.10%

iShares ESG MSCI USA Leaders ETF (EAGG)

US Fund Large Blend

0.10%

iShares ESG U.S. Aggregate Bond ETF

US Fund Intermediate Core Bond

0.10%

iShares® ESG Advanced MSCI USA ETF (USXF)

US Fund Large Blend

0.10%

Xtrackers MSCI USA ESG Leaders Eq ETF (USSG)

US Fund Large Blend

0.10%

Xtrackers S&P 500 ESG ETF (SNPE)

US Fund Large Blend

0.10%

Fidelity® U.S. Sustainability Index (FITLX)

US Fund Large Blend

0.11%

iShares ESG 1-5 Year USD Corp Bd ETF (SUSB)

US Fund Short-Term Bond

0.12%

Vanguard FTSE Social Index I (VFTNX)

US Fund Large Blend

0.12%

Data provided by Morningstar

How to choose the best ESG funds for you

Deciding you want to invest in ESG funds adds some extra considerations you may not have when picking more conventional funds.

1. Understand the difference between active and passive funds

Active and passive funds have different pros and cons. Make sure you know their differences before you dive in.

  • Strategy. Actively managed funds try to beat stock market performance. This strategy may sound good in theory, but overall, actively managed funds often underperform their passive counterparts. According to the S&P Dow Jones Indices year-end scorecard, 70% of domestic equity funds underperformed the S&P Composite 1500® in 2019. Passively managed funds are also known as index funds because they are invested to reflect a specific market index, such as the S&P 500. These funds mirror the performance of the index they track.

  • Cost. Keep in mind, higher fees can also negate higher returns. Many of the funds listed as "best overall" above are actively managed, whereas the funds on the low-cost list are passive. Actively managed ESG funds tend to be more expensive than passively managed funds, so if you’re looking to add sustainable investments to your portfolio with a smaller price tag, passively managed funds or ESG ETFs may be a better option.

  • Availability. There are far more actively managed ESG funds than passively managed ESG funds, but passive funds are becoming more common. According to Morningstar, the number of available sustainable index mutual funds and exchange-traded funds has more than doubled in the last three years — as has the money invested in them. Still, you’ll have more choice if you’re looking at active funds.

When choosing between active and passive funds, Chavis emphasizes that the decision depends on considerations such as your investment goals, your investing experience and your tax situation. He also recommends consulting an investment professional during this process

2. Decide where you want to have an impact

In addition to checking expense ratios, make sure an ESG fund’s mission speaks to you. “An investor should look for an ESG fund that is in alignment with their goals. Let’s say social impact is of the utmost importance to you, specifically regarding diversity, equity and inclusion initiatives. You should seek a fund that rewards, in investment dollars, companies for high diversity, equity and inclusion scores on their boards, executive teams and with their employment practices,” says Chavis.

» Is sustainability just a label? Learn about greenwashing

Think about whether there are particular missions you’d like to support with your investment dollars, such as clean water, renewable energy or women in leadership. If there’s an impact area that’s really important to you, that may outweigh a slightly higher expense ratio.

3. Consider your existing investments

Before adding any new investments to your portfolio, think about how an ESG fund would fit in. Be sure you're not overinvesting in a particular industry or asset class.

If you’d like to invest in ESG funds but don’t want to choose your investments yourself, there are several robo-advisors that offer ESG portfolios for no extra charge.

4. Understand your ESG fund’s impact

Maybe you’ve added a few ESG funds to your portfolio. So how do you know if those investment dollars actually made a difference?

“What I would look for, and what investors should insist upon, is an impact report,” says Hale. “That will give you a way to assess the impact of a fund as an investment. Impact reports talk about things like shareholder engagement, or the portfolio’s carbon footprint or gender diversity on the Boards of the companies held. That’s a good way to gain a sense of what impact you’re having as an investor.”

ESG funds may periodically release an impact report, or you can likely request one from the fund managers.

What's the easiest way to invest responsibly?

Using a robo-advisor that offers a socially responsible portfolio (which are typically built from ESG-graded exchange-traded funds) is the easiest way to get started with sustainable investing. Of the robo-advisors with socially responsible portfolios that NerdWallet reviews, the following currently offer socially responsible portfolios or access to ESG investments and earn a star rating of 4.5 or higher.

Socially responsible portfolio offerings

Learn more

Betterment*

Provides three impact portfolios to choose from: Broad Impact, Climate Impact and Social Impact.

Ellevest*

Ellevest Impact Portfolios are invested in up to 53% ESG and impact funds.

Stash*

Categorizes ETFs that support various social and environmental causes.

Axos Invest

Offers investments in themed areas such as clean energy and companies with a greater representation of women in senior leadership roles.

Ally Invest

Offers a Socially Responsible Managed Portfolio option.

* These robo-advisors are NerdWallet advertising partners.

Disclosure: The author held no positions in the aforementioned securities at the original time of publication.

Get more smart money moves – straight to your inbox
Sign up and we’ll send you Nerdy articles about the money topics that matter most to you along with other ways to help you get more from your money.