Our top rated ESG ETFs

Sustainable fund flows in global decline

Morningstar’s Global Sustainable Fund Flows report found that Q1 2025 experienced record-high outflows amidst new geopolitical challenges and an intensifying environmental, social, and governance backlash.

Investors withdrew an estimated USD 8.6 billion, contrasting with the inflows of USD 18.1 billion in the previous quarter. Notably, Europe suffered its first quarter of net outflows since our tracking began in 2018. The United States demonstrated the largest decline with USD 6.1 billion in outflows with the asset class suffering its 10th consecutive quarter of withdrawal.

Figure 1: Quarterly Global Sustainable Fund Flows (USD Billion).

Why are sustainable funds struggling?

We believe there are several factors we can attribute to this trend.

Firstly, an increasingly complex geopolitical environment (partly shaped by President Trump’s return to the White House), appears to have deprioritised sustainability goals in Europe. Furthermore, Trump’s anti-climate agenda and anti-ESG policy measures such as an executive order targeting diversity, equity, and inclusion, have introduced new legal risks. These developments have prompted asset managers in the U.S. to adopt a more cautious global approach in promoting their ESG credentials and supporting sustainability issues.

This sentiment appears to have rattled the European market with investors unsure about the sense of global alignment on climate and sustainability goals. This is also compounded by persistent performance concerns – particularly in clean energy – continue to weigh on investor appetite for sustainability strategies

Some domestic optimism

On the other hand, Australia and New Zealand saw positive net flows of around USD 305 million into the sustainable fund universe, although this was lower than the previous quarter’s net flows.

However, there has been a pattern of sustainable fund closures globally and Australia is no exception. In the first quarter of the year, there was only one new launched, VanEck Gold Bullion ETF, whilst six closed over the same period, reflecting a 2% decline in the Australasian (Australia and New Zealand) universe.

Figure 2: Australia and New Zealand sustainable fund flows (USD Billion).

Our top ESG ETFs

As shown above, it seems Aussie investors still appear to have an appetite for sustainable funds in their portfolio. I ran an ETF screen using the below criteria to reveal some of our analyst’s top rated ESG funds:

• Sustainable Investment (By Prospectus) 
• Fossil Fuel Covered Portfolio Involved: < 5%  
• Morningstar ESG Risk Rating: 4+ globes  
• Investment Management Fee: < 0.10% 
• Gold, Silver or Bronze Morningstar Medalist Rating  

Unsurprisingly, these rigid criteria excluded most sustainable funds with only the below two ETFs meeting all requirements. Investors are encouraged to adjust their screening criteria based on personal goals and investing strategy.

iShares Core MSCI World Ex Australia ESG ETF (ASX: IWLD)

A sensible, cost-efficient vehicle to attain global equity exposure with a sustainability overlay, IWLD tracks the MSCI World ex Australia ESG Leaders Index.

ESG Methodology

IWLD carves 1,350 companies from the parent index down to around 700 constituents. The index is screened for eligible holdings using proprietary ESG metrics, which exclude companies based on controversial business involvement data and greenhouse gas emissions. The bottom half of each sector (by ESG rating) is excluded, mitigating turnover.

A market-cap-weighted scheme is used to utilise the market’s collective opinion to size positions. The resulting portfolio avoids excessive sector tilts, an issue that ESG strategies often encounter. Some of the notable absentees from the resultant ESG portfolio are Apple, Amazon.com, Meta Platforms, and Broadcom.

Composition

The sustainability screen gives us a smaller opportunity set which leads to elevated stock concentration. IWLD contains around 670 stocks, of which the top 10 account for 34% of the portfolio. In comparison, the parent index contains 1,350 stocks, with the top 10 making up 27%. Focusing on ESG leaders and leaving out some mega and large cap laggards can result in higher stock-level concentration. The portfolio is also overweight in technology (30.42%) relative to the category average (24.58%), while being understandably underweight in energy (0.75% vs 2.86%). Its weighting scheme also tilts the portfolio toward larger companies.

Fees and performance

IWLD was re-positioned and renamed in June 2021 meaning the performance history of the fund in its new form is relatively limited, however the 3-year trailing price return is 14.53%. In its current configuration as an ESG-oriented fund, IWLD has maintained a positive alpha compared with category peers as well as the MSCI World ex Australia Index (category index).

The strategy shows strong potential to keep outperforming the global equities market over the long term, aided by the low annual management fee of 0.09%.

Sustainability

The fund aims to achieve best-in-class ESG metrics for the portfolio while fairly representing the sector composition of the broader market. However, this means the index will include exposures to more controversial sectors, which might not be suitable for investors with stricter ESG screens that require complete exclusion of fossil fuel companies. Earning the second highest Morningstar Sustainability Rating of 4 globes, IWLD has relatively low exposure to ESG risk.

One key strength is its low Morningstar Portfolio Carbon Risk Score of 4.46 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. IWLD has 16.9% involvement in carbon solutions which easily surpasses the 12.9% average of its peers.

By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, and thermal coal. The fund mostly fulfils this goal; however, it does exhibit 0.17% exposure to companies involved in thermal coal, which compares to 0.6% for its average peer in the Global Equity Large Cap category.

Overall, the Bronze-Medalist rated fund is a good proposition within the world large-blend category. The low annual fee of 0.09% is also a plus.

SPDR S&P World ex Australia Carbon Aware ETF (ASX: WXOZ)

Described as a standout low-cost global equity offering with a carbon-focused ESG overlay, WXOZ aims to track the S&P Developed Ex-Australia LargeMidCap Carbon Aware Index via a full replication approach.

ESG Methodology

The methodology uses screening criteria that whittles the 1,600 index constituents down to around 770 companies (May 2025). A best-in-class ESG methodology excludes 25% of the lowest-scoring stocks from each industry and then further identifies and excludes companies involved in unsustainable business practice, or that carry excessive risk from an ESG perspective. The weighting mechanism of the final list of constituents is performed to minimise the portfolio’s weighted average carbon intensity.

Composition

Despite the reduced number of holdings, the strategy remains well-diversified with the top 10 holdings accounting for ~25% of the total assets – similar to the parent index. The sector composition is also close to the parent index with information technology, financial services, and healthcare stocks representing the largest sectors.

The only notable difference between WXOZ and its parent index is the reduced exposure to energy stocks, owing to the tilt toward companies with low carbon footprints. This has resulted in some deviation in performance over the past year, due to the outperformance of the energy sector during a declining market phase. We do not expect long-term performance to differ from the parent index significantly.

US companies constituted around 68% of the underlying index as of May 2025. However, many US-listed companies have a substantial global footprint, leading to more global diversification than the headline numbers suggest.

Fees and performance

Since adopting the current tracking index strategy in February 2022, the 3-year trailing return is 15.58% (30 April 2025), which is above the category average but has underperformed the category benchmark MSCI World ex Australia. A fee cut in July 2024 from 0.18% to 0.07% makes the option even more attractive to investors with it a meaningful cost/value advantage over its peers, particularly over the active strategies.

Overall, considering its low fees, we anticipate that the fund will continue to deliver notable outperformance compared with the category average over the long term.

Sustainability

WXOZ has a number of positive attributes that may appeal to sustainability-focused investors. This fund has relatively low exposure to ESG risk compared with its peers in the Global Equity Large Cap category, earning it the second highest Morningstar Sustainability Rating of 4 globes.

One key area of strength is its low Morningstar Portfolio Carbon Risk Score of 4.22 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Much like iShares Core MSCI World Ex Australia ESG ETF IWLD, WXOZ’s involvement in carbon solutions is close to 16% which surpasses the 12.9% average of its peers.

By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, and thermal coal. The fund fulfills this goal as its investment exposure to each of these activities is negligible.

Gold-Medalist rated SPDR S&P World ex Australia Carbon Control ETF stands out as a meritorious investment, boasting a strong combination of a diversified portfolio with robust ESG principles and a track record of successful implementation by State Street Global Advisors.

Applying our equity research share level valuations to the underlying holdings shows that both WXOZ and IWLD screen approximately 0.92 price/fair value (April 2025).

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Our definition of “sustainable fund” encompasses open-end funds and exchange-traded funds that, through their prospectus or other regulatory filings, claim to focus on sustainability, impact, or environmental, social, and governance factors. It is not based on any regulatory framework, nor does it meet the criteria of any particular regulatory framework.

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ESG terms mentioned in this article:

Fossil Fuel % Covered Portfolio Involved: The percentage of the covered portfolio that is exposed to corporates that make any revenue (<0%) from fossil fuels.

Morningstar ESG Risk Rating: ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit. Morningstar assigns Sustainability Ratings by combining a portfolio’s Corporate Sustainability Rating and Sovereign Sustainability Rating proportional to the relative weight of the (long only) corporate and sovereign positions, rounded to the nearest whole number. Sovereign Historical Sustainability Scores and Corporate Historical Sustainability Scores are ranked and rated separately, to represent the ESG risk of the portfolio relative to its peers for its respective corporate and sovereign positions and then combined by their relative weights for the Portfolio Sustainability Rating.