Sustainable ETFs: How to Invest in Responsible Funds in 2025?

Sustainable investing has seen remarkable growth in recent years, with a 15.2% increase in 2024. Sustainable ETFs today represent one of the most accessible solutions for combining financial goals with environmental impact.

But how can you distinguish a sustainable ETF from a greenwashing operation? What are the essential criteria for making the right choice? What are the alternatives?

This practical guide will help you understand ETFs and provide you with the keys to building a responsible investment portfolio tailored to your objectives.

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“Sustainable ETFs”: What Are We Talking About?

What is a Sustainable ETF?

An ETF (or "tracker") is a financial product traded on the stock exchange that allows you to invest in a basket composed of several listed companies, rather than in a single company. This Exchange Traded Fund is an index fund that tracks the evolution of a stock market index, both up and down.

With an ETF, an investor can (indirectly) invest in different companies that share a sector of activity, a geographical area, or even ESG criteria.

A sustainable ETF integrates environmental, social, and governance (ESG) criteria into its selection. Although there is no official "sustainable ETF" category, this generic term encompasses a set of thematic funds: renewable energies, water, electric mobility, and also climate change.

Sustainable ETFs implement more or less significant sectoral exclusion policies. Depending on the indices, coal, unconventional oil and gas exploration, GMOs, and nuclear power are excluded. These funds often go beyond environmental issues and exclude other sectors: alcohol, weapons, tobacco, pornography…

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Main Types of Sustainable ETFs

While there are no strictly "sustainable ETFs," several ETFs can fall under this designation, such as climate ETFs, renewable energy ETFs, and water ETFs.

Climate ETFs

There are over 100 "climate" indices to invest in via ETFs. JustETF lists 163 ETFs on the subject. These funds are based on indices that comply with the Paris Climate Agreement.

Examples of Climate ETFs include:

• Amundi MSCI USA ESG Broad Transition UCITS ETF Dist
• Amundi S&P Eurozone Climate Paris Aligned UCITS ETF Acc
• Amundi S&P 500 Climate Paris Aligned UCITS ETF Dist
• iShares MSCI EMU Paris-Aligned Climate UCITS ETF EUR (Acc)
• L&G Europe ESG Exclusions Paris Aligned UCITS ETF EUR Accumulating

Renewable Energy ETFs

Renewable energy ETFs allow you to invest in companies involved in the deployment of green energies as well as in R&D. Numbering 15, they directly finance the energy transition.

This type of ETF also offers interesting long-term profitability prospects due to the structural increase in energy prices expected in the coming decades.

The 3 most important renewable energy ETFs are:

• iShares Global Clean Energy Transition UCITS ETF USD (Dist)
• Amundi MSCI New Energy UCITS ETF Dist
• L&G Clean Energy UCITS ETF

Water ETFs

Water is an essential element when we talk about the environment. Sanitation, irrigation, water management: the water sector is at the heart of economic activities.

Investing in water combines financial profitability with ecological impact. The 3 most important ETFs for this are:

• iShares Global Water UCITS ETF
• Amundi MSCI Water UCITS ETF Dist
• L&G Clean Water UCITS ETF

What Are the Best-Performing Sustainable ETFs in 2025?

Criteria for Choosing Your Sustainable ETF Wisely

Several criteria can help you choose the right sustainable ETF to invest in, depending on your objectives:

• Performance: Analyze historical data specific to each fund from reliable sources such as JustETF or Morningstar before investing.
• Management Fees (TER): Annual fees vary from 0.07% to 0.7% depending on the ETF. Climate ETFs show lower fees (0.07% to 0.2%) than thematic renewable energy ETFs (0.5% to 0.7%). The lower the TER, the less impact it has on long-term performance.
• Fund Size: Favor ETFs with significant assets under management to ensure liquidity.
• PEA Eligibility: ETFs domiciled in France or Luxembourg are generally eligible for the PEA (Plan d'Épargne en Actions – French Equity Savings Plan). Those domiciled in Ireland are generally not eligible, with some exceptions.
• Replication Type: Prefer physical replication (direct holding of shares) for its transparency. Synthetic replication uses more complex derivatives (swaps).
• ESG Methodology: Verify the exclusion criteria applied.
• Income Use: Choose between distribution (dividend payment) or capitalization (automatic reinvestment) depending on your tax and investment goals.

10 ESG ETFs to Watch in 2025

To choose which sustainable ETF to invest in for 2025, it's important to look at the current market situation.

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To limit risk, every investor should also consider how fund valuations have evolved over time.

Here are the 5 ETFs with the best performance over the past 5 years:

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Diversifying Your Sustainable Investment: Beyond ETFs

Limitations of Sustainable ETFs

Despite their accessibility and transparency, sustainable ETFs have several limitations that should be known before investing.

- The risk of greenwashing is one of the main concerns. Some "ESG" labeled ETFs include companies whose environmental impact is questionable. Selection and exclusion criteria vary considerably depending on the indices, which requires the utmost vigilance.

- ESG standards are not homogeneous. The same company can receive contradictory evaluations depending on the standard selected.

- ESG indices tend to overweight technology sectors, deemed less polluting, while underweighting energy and heavy industry sectors. This approach can expose investors to sectoral risks, limiting diversification.

- Due to their passive nature, investing in ETFs has no direct influence on companies. Unlike active funds, ETFs merely replicate an index without influencing the practices of the companies held.

Other Sustainable Investment Solutions

ETFs are not the only option for diversifying your investments responsibly.

ISR-labeled funds (Investissement Socialement Responsable - Socially Responsible Investment) offer active management with direct shareholder engagement. This approach allows for finer selection and potentially greater impact, albeit with higher management fees. Some ISR funds are eligible for the PEA.

An investor can also directly finance sustainable projects via green bonds: wind farms, energy renovation, low-carbon transport… With the development of crowdfunding, more and more investors can support initiatives at accessible amounts. This type of investment offers total control over selection but requires more in-depth expertise of sectoral issues.

Carbon allowances (EU ETS) are an innovative and effective mechanism for sustainable investing. Unlike ETFs, carbon allowances directly act on emissions reduction. Each allowance purchased removes one ton of CO2 from the carbon market. This approach combines financial performance with climate impact. Homaio now allows individual investors to invest directly in this market.

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Complementarity remains essential for building a high-performing sustainable investment portfolio.

Conclusion

Key Takeaways

While they are on the rise, ETFs are not the ultimate solution for responsible investing:

• ETFs allow for indirect investment in a basket of companies.
• Sustainable ETFs are not an official category but group ESG funds with variable criteria and non-standardized exclusion criteria.
• While ETFs are advantageous in terms of management fees, their PEA eligibility varies.
• Due to their indirect nature, ETFs do not allow direct influence on corporate policy and emissions, unlike ISR active funds or carbon allowance markets offered by Homaio.

Frequently Asked Questions

What is ESG? ESG (Environmental, Social, and Governance) criteria assess a company's environmental impact, social practices, and the quality of its corporate governance.

What is an ESG ETF? It's an ETF that applies ESG criteria in its selection of companies. It may exclude certain sectors (coal, GMOs, tobacco, weapons, etc.) or favor companies best rated by ESG standards.

What are the risks with sustainable ETFs? ETFs are financial products without capital guarantee, where losses are possible. Specific risks of sustainable ETFs include greenwashing and the potential discrepancy between the expected impact and the actual portfolio.

How to invest in sustainable ETFs with a PEA? Prioritize ETFs domiciled in France or Luxembourg that comply with the 75% European equity quota. Check PEA eligibility in the fund's descriptive sheet before investing.

Do ETFs help combat climate change? The climate impact of ETFs is limited because they do not directly influence corporate practices. Other types of investments, such as carbon allowances, effectively remove CO2 from the market.

Sources

Table data sourced from justetf.com, between June 3 and June 5, 2025.

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