Are ASX sustainability shares delivering for ESG investors?

Are ESG-focused ETFs and managed funds delivering better returns than plain old index funds?

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An increasing number of ASX shares investors want to align their investment decisions with their environmental values.

This has led to the development of many exchange-traded funds (ETFs) and managed funds with environmental, social, and corporate governance (ESG) mandates.

These funds typically comprise ASX and international shares representing companies with strong ESG credentials.

The specifics of these credentials are determined by the providers who design the funds.

For example, a fund provider may only include international and ASX shares that represent businesses with defined net zero targets in their fund.

Regardless of the specific criteria, ESG-focused ASX shares investors enjoy feeling like they're doing their bit for sustainability and climate action.

And that's all well and good.

But how are these ESG-focused funds performing as investments?

A review of returns for ASX shares investors

In this article, we review new data published by the ASX that quantifies the returns of ETFs and managed funds with ESG credentials over the past three years.

Many of these funds are so new that three years of data is not available, so they have been excluded.

That leaves us with eight ETFs and managed funds with three years of data available.

Remember, these ASX-listed funds may invest in either ASX shares or international shares — or both.

Let's take a look.

Best-performing ASX sustainability shares

Over the past three years:

The BetaShares Global Sustainability Leaders ETF (ASX: ETHI) returned an average of 12.97% per annum. This includes reinvested dividends which have historically averaged a yield of 4.75%.

The Vanguard Ethically Conscious International Shares Index ETF (ASX: VESG) returned an average of 12.26% per annum. This includes reinvested dividends which have averaged a yield of 1.86%.

The Russell Investments Australian Responsible Investment ETF (ASX: RARI) returned an average of 11.02% per annum. This includes reinvested dividends which have averaged a yield of 3.94%.

The Intelligent Investor Ethical Share Fund (Managed Fund) (ASX: INES) returned an average of 10.57% per annum. This includes reinvested dividends which have averaged a yield of 0.91%.

The VanEck MSCI Australian Sustainable Equity ETF (ASX: GRNV) returned an average of 9.91% per annum. This includes reinvested dividends which have averaged a yield of 3.34%.

The iShares S&P/ASX Dividend Opportunities ESG Screened ETF (ASX: IHD) returned an average of 9.89% per annum. This includes reinvested dividends which have averaged a yield of 5.14%.

The BetaShares Global Sustainability Leaders ETF — Currency Hedged (ASX: HETH) returned an average of 8.77% per annum. This includes reinvested dividends which have averaged a yield of 3.84%.

The BetaShares Australian Sustainability Leaders ETF (ASX: FAIR) returned an average of 5.53% per annum. This includes reinvested dividends which have averaged a yield of 2.12%.

A word on ASX ETHI shares

To give you an idea of how these ESG-focused funds work, let's do a quick profile on the top performing ASX share in this regard.

The BetaShares Global Sustainability Leaders ETF aims to track the performance of the Nasdaq Future Global Sustainability Leaders Index (INDEXNASDAQ: NQFGSL) (before fees and expenses).

The index includes a range of large companies identified as climate action leaders.

They operate in a range of industries and locations across the world.

Part of the criteria for inclusion in the index is that none of them have direct or significant exposure to fossil fuels.

Also, none are engaged in activities deemed inconsistent with responsible investment considerations.

About 32% of shares held within the ETHI ETF are global tech stocks.

The top holdings are NVIDIA Corp at 6%, Apple Inc at 4%, and Visa Inc at 4%.

How do the returns compare to index funds?

Let's use three Vanguard index fund products to compare the performance of the ASX sustainability shares listed above.

Are they delivering better returns for investors than plain old index funds?

Over the past three years:

The Vanguard US Total Market Shares Index ETF (ASX: VTS) returned an average of 15.37% per annum. This includes reinvested dividends which have historically averaged a yield of 1.28%.

The Vanguard MSCI Index International Shares ETF (ASX: VGS) returned an average of 13.62% per annum. This includes reinvested dividends which have averaged a yield of 1.87%.

The Vanguard Australian Shares Index ETF (ASX: VAS), which tracks the performance of the largest 300 ASX shares, returned an average of 12.32% per annum. This includes reinvested dividends which have averaged a yield of 4.07%.

As you can see, the ASX sustainability shares profiled above have typically delivered lower returns to ESG-focused investors than index funds.

Motley Fool contributor Bronwyn Allen has positions in BetaShares Global Sustainability Leaders ETF, Vanguard Australian Shares Index ETF, and Vanguard Us Total Market Shares Index ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Nvidia, Vanguard MSCI Index International Shares ETF, and Visa. The Motley Fool Australia has recommended Apple, Nvidia, and Vanguard MSCI Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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