It is important to fully understand the growing importance of ESG (environmental, social, and governance) investing and the best performing ESG ETFs to consider investing in and this article does just that.

ESG investing means that investments are made only in the businesses and their financial securities which are compliant with environmental, social, and governance norms for doing their business and conducting operations. ESG scores are composed of three types of criteria: environmental, social, and governance.

Below are 7 reasons for the growing importance of ESG investing, namely:

1. Countries are beginning to embrace sustainable strategies and the overall demand for sustainable funds is expected to continue on this upward trend.
2. Governments of 60 countries are working towards a net-zero emissions future, in which greenhouse gas emissions are reduced or offset.
3. Industries reliant on energy needs from fossil fuels are beginning to shift to renewable energy in an attempt to achieve the goal of net-zero emissions by 2050.
4. Companies are becoming much more conscious of ESG criteria far beyond the environment.
5. Consumers want to know to what extent companies are taking ESG considerations into account in their operations and the extent to which they are doing so to ensure their purchases will be sustainable.
6. Investors are seeing a unique opportunity to tap into the ESG market given the billions of dollars flowing into the energy transition.
7. The investment landscape is changing with the demand for sustainable fixed-income strategies also growing rapidly in addition to equities.

ESG investing requires positive answers to the following questions regarding:

1. Environment:
   • What is the company’s attitude toward climate change?
   • To what extent is the company attempting to minimize its carbon footprint?
   • How does the company manage its environmental impact?
   • How does the company handle air or water pollution arising from its operations?
   • How much progress has the company made in utilizing renewable energy sources?
   • How sustainable are the company’s efforts in its supply chain?
2. Social:
   • How does the company improve its social impact?
   • Does the company offer fair levels of compensation for employees?
   • What are the companies' policies regarding LGBTQ+ equality, racial diversity, and inclusive hiring practices?
   • How does the company advocate for social good in the wider world, beyond its limited sphere of business?
3. Governance:
   • How do management and the board of directors address the interests of the company’s employees, shareholders, and customers?
   • Is executive compensation balanced compared to pay for other employees?
   • How do the company’s board and management drive positive change?
   • Does the board foster diversity in leadership?
   • Are its interactions with shareholders positive?

ESG investing is not just about aligning your financial goals with your values. Studies show that ESG investing can reduce volatility and improve returns and munKNEE's  Highest ESG Score ETFs Index did just that in 2022.

50 of the 126 ETFs in the Environmental, Social, and Governance (ESG) category are rated as to their ESG Risk by Morningstar of which 29 have ESG scores of 7.2 (AA or AAA) or more and 10 of those consistently outperform their peers and make up the constituents in munKNEE's  Highest ESG Score ETFs Index.

Below are how the constituents in the index performed in 2022, in descending order, along with their ESG scores and other pertinent information:

1. Vanguard Value ETF (VTV): DOWN 4.3% in 2022
   • The investment seeks to track the performance of the CRSP US Large Cap Value Index which measures the investment return of large-capitalization value stocks. 
   • ESG Score: 7.2
   • # Holdings: 347
   • Highest Concentration of Holdings: Health (21.9%), Financials (19.6%), Industrials (12.3%), Consumer Defensive (11.3%), Other (34.9%)
   • Dividend % Yield (2.47%) less Management Expense Ratio (.04%): Net 2.43%
   • Assets Under Management (AUM): $143.4B
2. Vanguard Health Care ETF (VHT): DOWN 6.7% in 2022
   • The investment seeks to track the performance of the MSCI US Investable Market Index/Health Care 25/50 made up of stocks of large, mid-size, and small U.S. companies within the healthcare sector.
   • ESG Score: 7.5
   • # Holdings: 410
   • Highest Concentration of Holdings: Health (99.4%)
   • Dividend % Yield (1.36%) less Management Expense Ratio (.10%): Net 1.26%
   • Assets Under Management (AUM): $18.6B
3. SPDR S&P 500 Value ETF (SPYV): DOWN 7.1% in 2022
   • The investment seeks to provide investment results that correspond generally to the total return performance of the S&P 500 Value Index.
   • ESG Score: 7.5
   • # Holdings: 450
   • Highest Concentration of Holdings: Health (17.0%), Financials (16.9%), Industrials (12.8%), Consumer Defensive (11.9%), Other (41.4%)
   • Dividend % Yield (2.15%) less Management Expense Ratio (.10%): Net 2.05%
   • Assets Under Management (AUM): $3.0B
4. Vanguard S&P 500 Value ETF (VOOV): DOWN 7.4% in 2022
   • The investment seeks to track the performance of the S&P 500® Value Index which measures the investment return of large-capitalization value stocks in the United States.
   • ESG Score: 7.4
   • # Holdings: 748
   • Highest Concentration of Holdings: Financial (17.0%), Health (16.2%), Industrials (13.1%), Consumer Defensive (11.7%), Other (42.0%)
   • Dividend % Yield (2.16%) less Management Expense Ratio (.04%): Net 2.12%
   • Assets Under Management (AUM): $11.7B
5. iShares Core U.S. Value ETF (IUSV): DOWN 7.8% in 2022
   • The investment seeks to track the investment results of the S&P 900 Value Index composed of large- and mid-capitalization U.S. equities with at least 80% of its assets in the component securities of its index.
   • ESG Score: 7.7
   • # Holdings: 448
   • Highest Concentration of Holdings: Financials (16.9%), Health (16.8%), Industrials (12.8%), Consumer Defensive (12.0%), Other (41.5%)
   • Dividend % Yield (2.23%) less Management Expense Ratio (.04%): Net 2.19%
   • Assets Under Management (AUM): $12.8B
6. Vanguard Russell 1000 Value ETF (VONV): DOWN 9.3% in 2022
   • The investment seeks to track the performance of the Russell 1000® Value Index which measures the investment return of large-capitalization value stocks in the United States.
   • ESG Score: 7.4
   • # Holdings: 861
   • Highest Concentration of Holdings: Financials (19.8%), Health (16.8%), Industrials (10.1&), Other (53.3%)
   • Dividend % Yield (2.09%) less Management Expense Ratio (.08%): Net 2.01%
   • Assets Under Management (AUM): $7.6B
7. S&P Health Care ETF (RYH): DOWN 9.8% in 2022
   • The investment seeks to track the investment results of the S&P 500® Equal Weight Health Care Index with at least 90% of its total assets in securities that comprise the underlying index.
   • ESG Score: 7.2
   • # Holdings: 247
   • Highest Concentration of Holdings: Financials (47.2%), Consumer Cyclical (13.9%), Industrials (11.9%), Other (27.0%)
   • Dividend % Yield (2.49%) less Management Expense Ratio (.20%): Net 2.29%
   • Assets Under Management (AUM): $122.7M
8. JPMorgan Diversified Return ETF (JPUS): DOWN 10.8% in 2022
   • The investment seeks investment results that closely correspond, before fees and expenses, to the performance of the JP Morgan Diversified Factor US Equity Index.
   • ESG Score: 7.9
   • # Holdings: 369
   • Highest Concentration of Holdings: Consumer Defensive (13.4%), Health (13.1%), Utilities (11.4%), Technology (11.1%), Other (51.0%)
   • Dividend % Yield (2.09%) less Management Expense Ratio (.18%): Net 1.91%
   • Assets Under Management (AUM): $514.4M
9. Invesco Russell Top 200 ETF (EQWL): DOWN 13.3% in 2022
   • The investment seeks to track the investment results of the S&P 100® Equal Weight Index with at least 90% of its total assets in securities that comprise the underlying index.
   • ESG Score: 7.5
   • # Holdings: 102
   • Highest Concentration of Holdings: Financials (18.4%), Health (14.6%), Technology (12.7%), Industrials (12.1%), Consumer Defensive (11.2%), Consumer Cyclical (10.7%), Other (20.3%)
   • Dividend % Yield (2.17%) less Management Expense Ratio (.25%): Net 1.92%
   • Assets Under Management (AUM): $128.0M
10. JPMorgan U.S. Value Factor ETF (JVAL): DOWN 13.8% in 2022
    • The investment seeks investment results that closely correspond, before fees and expenses, to the performance of the JP Morgan US Value Factor Index.
    • ESG Score: 8.4
    • # Holdings: 65
    • Highest Concentration of Holdings: Health (100.0%)
    • Dividend % Yield (.68%) less Management Expense Ratio (.40%): Net .28%
    • Assets Under Management (AUM): $891.7M

The above 10 ESG ETFs have an average ESG score of 7.45 and were DOWN 8.5%, on average, in 2022, compared to the S&P 500 which was DOWN twice that at -17.9%).

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