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Look Beyond ESG ETFs' Labels

A deep dive across the most popular broad-market, passive ESG options.

A version of this article previously appeared in the June 2022 issue of Morningstar ETFInvestor. Click here to download a complimentary copy.

Shopping for environmental, social, and governance focused funds might feel a bit like walking down the supplements aisle at the grocery store. There is a vast array of products from multiple brands, each with a different tagline. It’s often difficult to gauge which is right for you, especially when the language around these products doesn’t lend itself to easy comparisons.

In this article, I will parse the similarities and differences among several popular broad-market ESG index funds to make the choices clearer. As the supply of ESG index funds has expanded, many investors have been left wondering how to navigate the now-vast menu. Many may be befuddled by the jargon and feel-good marketing that seem to have become the hallmark of the space. So let’s cut through the clutter to see what’s really going on with these indexes and the funds that track them.

What’s on the Menu?

Exhibit 1 presents a summary of the methodologies of four indexes that underpin popular ESG index funds: the MSCI USA Extended ESG Focus, FTSE4Good U.S. Select, S&P 500 ESG, and Calvert U.S. Large Cap Core Responsible indexes.

Methodologies of the MSCI USA Extended ESG Focus, FTSE4Good U.S. Select, S&P 500 ESG, and Calvert U.S. Large Cap Core Responsible indexes.

The indexes exclude stocks with undesirable ESG characteristics and weight holdings by market cap, with the exception of the MSCI USA Extended ESG Focus Index. The MSCI index uses an optimizer to assign constituents’ weights, and its strict tracking error and position-weight thresholds tether its portfolio to that of the MSCI USA Index, the broad, market-cap-weighted index that represents its selection universe.

The indexes’ selection universes are slightly different, but all four target U.S. large-cap stocks. Since its starting universe is the largest, the Calvert U.S. Large Cap Core Responsible Index has the most expansive lineup of the four, more than 700 holdings, compared with 300-400 for the remaining three. The position-level differences among these benchmarks are generally found among their smaller holdings, as most of their top holdings overlap to some degree.

The key differences across these indexes stem from their ESG exclusion criteria and scoring methods. While they all employ exclusionary criteria, as laid out in Exhibit 2, the stocks they leave out aren’t quite the same. For instance, the MSCI USA Extended ESG Focus Index and the S&P 500 ESG Index place no restrictions on alcohol or gambling stocks.

Exclusion criteria for the four indexes

Even for businesses that most index providers agree are “ESG bad,” such as tobacco and weapons, specific thresholds can still vary across providers. For example, all four benchmarks exclude tobacco producers, but FTSE and S&P have a 5% revenue threshold on tobacco retailers and tobacco-related business, while MSCI’s threshold is 15%. Also, definitions of these businesses differ. While all four indexes exclude controversial or military weapons, the MSCI index still holds two companies involved in military contracting—Raytheon Technologies RTX and Leidos LDOS—both of which are excluded from the other indexes.

What’s Under the Hood?

Exhibit 3 shows the Russell 1000 Index’s top 10 holdings and the relative under/overweight positions of each of the four ESG indexes. I sourced the position level from funds tracking the indexes: iShares ESG Aware MSCI USA ETF ESGU, Vanguard FTSE Social Index VFTNX, Xtrackers S&P 500 ESG ETF SNPE, and Calvert U.S. Large Cap Core Responsible Index CISIX. The data is as of the latest common portfolio date for all four funds, which was March 31, 2022. This was prior to S&P’s decision to remove Tesla TSLA from the S&P 500 ESG Index in May 2022. S&P cited Tesla’s lack of a low-carbon strategy and codes of business conduct as being the key drivers of its decision. ESG-driven exclusions of large companies like Tesla can potentially result in material performance deviations against an ESG-agnostic broad-market index portfolio.

Over-and underweightings of the four indexes relative to the Russell 1000 Index

The MSCI index removes only Berkshire Hathaway BRK.B from the 10 largest U.S. stocks and maintains very minor over/underweight positions among its top holdings, owing to its strict constraints. The Calvert index deviates the most from the Russell 1000 Index, excluding half of the Russell 1000 Index’s top 10 constituents. While the FTSE and S&P indexes have slightly larger overweightings, most notably in Apple AAPL and Microsoft MSFT, they don’t exclude many holdings. Overall, the indexes’ light-touch exclusions don’t tend to move their portfolios too far from the broad market.

Tallying It Up

Exhibit 4 plots the four indexes’ excess returns against the Russell 1000 Index over rolling 12-month periods with a three-month shift.

The four Indexes' excess returns against the Russell 1000 Index over rolling 12 month periods

With the exception of the S&P 500 ESG Index, the indexes’ returns are fairly similar over the period in question. As the market was booming from late 2020 to 2021, we witnessed the meteoric rise of a handful of industry leaders. Their exclusion (or lack thereof) explained much of the performance gap between the MSCI, FTSE, and Calvert indexes. However, these deviations were mostly temporary.

ESG-driven stock bets were also responsible for the S&P 500 ESG Index’s wider deviations from the Russell 1000 Index. Tesla was one of the major detractors, as the index did not add the stock until May 2021. It also missed out on the explosive recovery of several popular names during the latter half of 2020, such as Disney DIS or PayPal PYPL. However, the same PayPal exclusion contributed to its outperformance during late 2021 and early 2022, along with its overweight positions in Apple and Microsoft.

Ultimately, much of these funds’ performance has been attributable to their top holdings. The fewer mega-cap stocks they either exclude or over/underweight, the more predictable their market-relative performance has been. The MSCI index deviates the least from the broad market, proxied by the Russell 1000 Index, as it has a strict tracking-error target and constraints on both its sector and individual position weights. The drawback, however, is that it is less likely to omit stocks that might not fit investors’ ESG preferences.


There’s no clear consensus on what actually constitutes ESG, and incorporating ESG criteria into an index methodology can yield unpredictable behavior. Investors in ESG index funds are thus forced to make trade-offs between ESG integration and broad diversification. These broad-market ESG index funds aim to deliver the best of both worlds and help investors sleep at night. Whether they’re “green” enough is for investors to decide.

Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Morningstar, Inc. does not market, sell, or make any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.

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