ESG ETFs (Environmental, Social, and Governance) allow Australian investors to align their portfolio with ethical or sustainable values by excluding companies involved in fossil fuels, weapons, gambling, tobacco, and other industries. This article explains how ESG ETFs work, compares the main Australian options, and addresses common questions about their effectiveness and trade-offs.
What Is an ESG ETF?
An ESG ETF tracks a share market index that has been filtered or screened according to ESG criteria. The ETF excludes companies that fail to meet minimum ESG standards or are involved in specific industries.
Common ESG screens (exclusions):
- Fossil fuel producers (coal, oil, gas)
- Weapons manufacturers
- Tobacco companies
- Gambling operators
- Adult entertainment
- Companies with poor labour practices or governance records
The remaining companies are weighted by market capitalisation (similar to non-ESG ETFs) or by ESG score.
The Main ESG ETFs on the ASX
| ETF | Provider | Coverage | MER | Screens |
|---|---|---|---|---|
| FAIR | BetaShares | Australian shares | 0.29% | ESG screened ASX |
| ETHI | BetaShares | Global shares | 0.59% | Global ESG screened |
| VESG | Vanguard | Australian shares | 0.16% | ESG exclusions ASX |
| VETH | Vanguard | International shares | 0.20% | Global ESG exclusions |
| ESGI | VanEck | International | 0.55% | Global ESG leaders |
FAIR — BetaShares Australian Sustainability Leaders ETF
FAIR tracks the Nasdaq Future Australian Sustainability Leaders Index — ASX companies that have been screened for ESG criteria and sustainability.
- MER: 0.29%
- Excludes: Fossil fuel companies, gambling, weapons, tobacco, adult entertainment
- Australian shares only
- Comparison benchmark: VAS (0.07%) or A200 (0.04%) are the conventional alternatives for Australian share exposure
ETHI — BetaShares Global Sustainability Leaders ETF
ETHI provides global share exposure screened for ESG criteria — similar in concept to FAIR but for international companies.
- MER: 0.59%
- Excludes: Fossil fuels, weapons, tobacco, gambling, and significant GHG emitters
- Global coverage, heavily weighted to US tech
- Comparison benchmark: VGS (0.18%) is the conventional international shares alternative
Vanguard ESG Options
Vanguard offers VESG (Australian, MER 0.16%) and VETH (international, MER 0.20%) — both with lower MERs than the BetaShares equivalents, but with slightly different ESG screening methodologies.
ESG ETFs vs Conventional ETFs — Cost Comparison
ESG ETFs typically cost more than their conventional equivalents due to licensing fees from ESG index providers:
| ESG ETF | MER | Conventional equivalent | MER | Difference |
|---|---|---|---|---|
| FAIR (Aus shares) | 0.29% | VAS | 0.07% | +0.22% |
| ETHI (global) | 0.59% | VGS | 0.18% | +0.41% |
| VESG (Aus shares) | 0.16% | A200 | 0.04% | +0.12% |
| VETH (international) | 0.20% | BGBL | 0.08% | +0.12% |
Vanguard’s ESG options (VESG, VETH) are significantly cheaper than BetaShares’ offerings while providing ESG screening.
Limitations of ESG ETFs
- “ESG washing” risk — some ESG indices still include companies that ethical investors may find objectionable; always check the index methodology
- Inconsistent screening — different ESG providers use different criteria; ETHI’s exclusions may differ from VESG’s
- Performance uncertainty — excluding sectors (e.g., energy, mining) means ESG ETFs will track differently from the broad market — sometimes better, sometimes worse
- Higher cost — the MER premium accumulates significantly over long periods
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Frequently Asked Questions
Do ESG ETFs perform better or worse than conventional ETFs? Performance varies by period and index methodology. During 2020–2021, many ESG ETFs outperformed due to heavy US technology exposure (tech companies score well on ESG metrics) and underexposure to fossil fuels. During 2022’s energy price surge, ESG ETFs underperformed conventional counterparts as energy stocks surged while ESG ETFs excluded them. Past performance of either approach is not a reliable guide to future returns.
Does the ASX have a net-zero or climate-focused ETF? Yes. Several climate-focused ETFs are available on the ASX, including those focused on renewable energy (CLNE from VanEck) and low-carbon companies. These are even more thematic and concentrated than broad ESG ETFs.
Are ESG ETFs appropriate for a super fund? If investing through a Self-Managed Super Fund (SMSF), ESG ETFs are fully eligible as ASX-listed investments — the same rules that apply to VAS or VGS apply to FAIR or ETHI. Some retail super funds also offer ESG options as investment options within their fund. A licensed financial adviser can help assess whether ESG-screened investments suit your super strategy.
This article provides general financial information only. ETF mentions are for educational context. Past performance is not a reliable indicator of future performance. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.