Calculating the ESG ratings and rankings according to certain criteria requires a large data set. When investing into ESG related topics via ETFs, the ETF providers will do the hard work of requiring the data and selecting the right companies within an ETF – either themselves or via an index or data provider.
There are several companies available that provide ESG scoring data and strategies for the above-mentioned categories such as MSCI, Sustainalytics, and Morningstar. In addition, the UN has come up with their 17 Sustainable Development Goals (SDGs) and there are some ETF issuers that provide ETFs on several of those UN SDGs. And while ETF providers are gathering or outsourcing all the ESG data for us, the task for a Sustainable model portfolio provider is to understand the differences and nuances between different index providers (or the investment mandates of active ETFs), to provide model portfolios in line with their investment mandates.
How to Build a Sustainable Model Portfolio Using ETFs
There are several steps involved to building a sustainable model portfolio.
Defining Your ESG Investment Goals
Before selecting ETFs, investors must determine their sustainability priorities. Some may aim to reduce carbon footprints, while others may seek to invest in companies that promote social equality or environmental preservation. Clearly defining these objectives ensures alignment with both financial and ethical goals.
Implementing a Core-Satellite Strategy
A well-structured ESG portfolio often follows a core-satellite approach:
- The core portfolio consists of broad, diversified ESG ETFs, such as Best-in-Class or Climate-Aligned funds, covering equities, fixed income, and alternative assets.
- The satellite portfolio includes thematic and impact-focused ETFs targeting specific sustainability sectors such as renewable energy, electric vehicles or carbon capture technology.
Managing Risk and Diversification
Just like traditional portfolios, ESG model portfolios should maintain diversification across asset classes, industries, and geographic regions to mitigate concentration risk. While ESG investing has long-term growth potential, certain themes, such as clean energy, may exhibit higher volatility. Portfolio managers should carefully balance these risks while maintaining exposure to high-quality ESG investments.
To measure portfolio risk, investors can analyse historical data from traditional benchmarks as a reference. However, ESG ETFs should be evaluated independently, as their risk-return profiles may differ from conventional investments due to their focus on sustainability factors.
Exploring Thematic ESG ETF Opportunities
For the core part of the portfolio, one can use a range of Classic ESG or climate aligned funds. Let’s focus specifically on some of the ESG-related thematic ETFs from what is a much wider selection available in the markets.
L&G Clean Water UCITS ETF (GLGG LN)
This ETF offers investors exposure to the global clean water industry by tracking the Solactive Clean Water Index. The index comprises companies actively engaged in the clean water sector through technological, digital, engineering, utility, and other services such as water treatment, filtration, infrastructure, and technology. The ETF's sector allocation is predominantly in Industrials (57.16%), followed by Utilities (22.19%) and Technology (10.30%).
Top 5 Holdings**
- Core & Main (Industrials, 2.56%) – Specializes in the distribution of waterworks and plumbing products.
- Trimble (Technology, 2.52%) – Uses data analytics for various industries such as construction, agriculture, transportation and geospatial.
- Mueller Water Products (Industrials, 2.50%) – Operates primarily in the water utility sector, providing solutions for the management and distribution of water.
- Kadant (Industrials, 2.43%) – Focuses on sustainable filtration and industrial systems.
- Metso Outotec Oyj (Industrials, 2.36%) – Specializes in sustainable technology and services for the mining, aggregates, and recycling industries.
Investing in the clean water sector aligns with the increasing global emphasis on sustainable and responsible resource management. And with a growing population worldwide comes an increasing need for access to clean water, both for individuals and corporates.
Amundi MSCI Robotics & AI ESG Screened UCITS ETF Acc (GOAI FP)
This ETF provides investors with exposure to companies worldwide that are actively engaged in the development and application of robotics and artificial intelligence (AI) technologies, while adhering to ESG criteria. It tracks the MSCI ACWI IMI Robotics & AI ESG Filtered Index, which includes firms from both developed and emerging markets involved in robotics and AI, filtered according to ESG standards. The index excludes ESG controversial companies like tobacco, oil and gas etc. With the remaining companies it aims to reduce the weighted average greenhouse gas intensity by 50% compared to the broad based Robotics & AI index while also targeting the top 25% of companies of each Global Industry Classification Standard (GICS) sub-sector by ESG score.
The ETF’s sector allocation is predominantly in Technology (63.01%), followed by Industrials (10.91%) and Healthcare (10.87%).
Top 5 Holdings**
- Intuitive Surgical (Healthcare, 4.66%) – Specializes in robotic-assisted surgical technology.
- Apple (Information Technology, 4.65%) – Develops AI-powered consumer technology.
- Alphabet Class C (Communication Services, 4.25%) – Invests in AI research and innovation.
- Stryker Corporation (Healthcare, 4.23%) – Focuses on medical robotics and innovation, including orthopaedic implants, surgical equipment, and medical instruments.
- Cisco Systems (Information Technology, 4.16%) – Develops AI-driven network security solutions.
This ETF offers exposure to the rapidly evolving fields of automation and AI, sectors poised for significant growth as technological advancements continue to accelerate. The integration of ESG screening adds an additional layer of ethical consideration, appealing to socially conscious investors.
The ETF highlights that there is more to an ETF than its name. Once one has decided to invest in AI and automation, the real task begins to decide which ETF to choose. Should it be ESG related or not? What is the exact index methodology of the ETF in question? If we stick to this ETF, then the similar, but non ESG related index, the MSCI ACWI IMI Robotics & AI Index, will have a different breakdown of sectors and countries. Looking at the top 5 holding for the non-ESG index, they comprise of Meta, Broadcom, Amazon, Apple and Netflix. All but Apple have not made the ESG scoring cut for the index with ESG filtering, thus quite a different exposure.
One might ask, do the two concepts of automation & AI and ESG go together? It depends on what one is interested in, but this ETF shows that it can work.
iShares $ Development Bank Bonds UCITS ETF Acc (DDBB LN)
This ETF invests in USD-denominated bonds issued by multilateral development banks (MDBs) that finance economic and social projects worldwide. It seeks to replicate the performance of the FTSE World Broad Investment-Grade USD Multilateral Development Bank Bond Capped Index, which includes bonds from MDBs with all G7 countries as members, ensuring a diversified and high-quality bond portfolio.
This ETF, as with most Fixed Income investments, typically holds several bonds of the same issuer, but with different coupon payments and maturity dates.
Top 5 Issuers**
- Inter-American Development Bank (25.12%)
- International Bank for Reconstruction and Development (24.63%)
- Asian Development Bank (24.58%)
- International Development Association (8.75%)
- African Development Bank (7.69%)
The fund's significant exposure to the United States reflects the domicile of many MDBs' bond issuances, while the remaining allocation spans various countries, contributing to geographical diversification. Investing in development bank bonds provides exposure to high-quality bonds issued by reputable international institutions dedicated to global development. The fund's focus on USD-denominated bonds from MDBs with G7 membership ensures a blend of creditworthiness and developmental impact with a range of maturity dates and an average weighted maturity of 3.9 years.
In some ways this investment could be seen as very similar to global government bonds. But development bank bonds usually have a lower risk, and this specific ETF also has a lower average weighted maturity than a general global government bond (for example the iShares Global Government Bond UCITS ETF, which has an average weighted maturity of 8.9 years).
Conclusion
Sustainable investing through ETFs is becoming an integral part of modern portfolio management, offering investors the opportunity to align their financial goals with broader environmental, social, and governance (ESG) considerations. By carefully selecting high-quality ESG ETFs, applying a core-satellite strategy, and ensuring proper diversification, investors can build resilient portfolios that not only seek competitive returns but also contribute to positive societal and environmental outcomes.
As ESG investing continues to evolve, staying informed about regulatory developments, new ESG product offerings, and advancements in ESG data and scoring methodologies will be crucial. The increasing scrutiny on greenwashing and the push for greater transparency mean that due diligence in fund selection will become even more important. Furthermore, integrating ESG factors into risk management can enhance long-term portfolio stability by mitigating exposure to companies facing sustainability-related challenges.
Ultimately, as sustainability considerations become a permanent fixture in global financial markets, investors who proactively adapt their approach will be well-positioned to build effective, future-proof portfolios that align with both their financial ambitions and broader ethical values.