How to Build a Sustainable ETF Portfolio: Tips and Examples for Beginners

Sustainable investments are gaining popularity, especially among investors who want to align financial returns with their ethical values. A sustainable ETF portfolio allows you to invest both environmentally and profitably.

In this article, you’ll learn how to build a sustainable ETF portfolio, what criteria to consider when selecting sustainable ETFs, and the steps you need to take to achieve long-term success in sustainable investing.

What is a Sustainable ETF Portfolio and How Does it Work?

A sustainable ETF portfolio consists of Exchange Traded Funds (ETFs) that invest in companies committed to sustainable and responsible practices. These ETFs focus on environmental, social, and governance standards, also known as ESG criteria.

Definition and Explanation of ETFs and Sustainable ETFs

ETFs are funds traded on the stock exchange that track the performance of a specific index, such as the MSCI World or the S&P 500. They offer a simple way to invest in multiple companies at once, providing automatic diversification. Sustainable ETFs are specific ETFs that only invest in companies that adhere to sustainability standards. They are often based on ESG indices that rate companies on environmental (Environmental), social (Social), and governance (Governance) criteria.

You can easily find examples of sustainable ETFs using our Impact Check. There, you’ll find a variety of ETFs that we’ve evaluated, and you can filter by the themes that matter most to you. For example, if you value having companies in your ETF with diverse management, a low gender pay gap, or low CO2 emissions, our Impact Check allows you to filter for exactly these types of ETFs.

ESG Criteria and Their Application to ETFs

The ESG criteria are the core of sustainable investments. They evaluate companies in three main categories:

Environmental: How well a company manages environmental protection, resource usage, and emissions reductions.

Social: How a company treats its employees, suppliers, and society. This includes fair working conditions, diversity, and social engagement.

Governance: The quality of corporate governance, including transparency, ethical business practices, and diversity in leadership.

Our Impact Check also uses sustainability criteria that you can read about in our Methodology.

Why Sustainable ETFs Are Particularly Suitable for Beginners

Sustainable ETFs are an excellent option for investors looking for an affordable and diversified way to invest in sustainable assets.

Low Fees and Broad Diversification with Sustainable ETFs

One of the biggest advantages of ETFs, including sustainable ETFs, is low fees. Since ETFs are passively managed, meaning they follow a set index, management fees are much lower than those for actively managed funds. This is especially beneficial for beginners, as low costs lead to higher returns over the long term.

Additionally, ETFs provide broad diversification by investing in many different companies. Sustainable ETFs allow you to invest globally in environmentally friendly and socially responsible companies without analyzing each company individually.

Long-Term Growth Through Investments in Sustainable Sectors

Sustainable ETFs also offer long-term growth potential, as they often invest in forward-looking sectors such as renewable energy, sustainable agriculture, or green technologies. These sectors have strong growth prospects driven by global trends such as the energy transition and the increasing demand for socially responsible products.

Investors with a long-term view and ethical goals can participate in economic growth while supporting sustainable businesses through sustainable ETFs.

How to Choose the Right Sustainable ETFs

Choosing the right sustainable ETFs is crucial for your portfolio’s alignment. To ensure that your ETFs are both financially successful and ethically sound, keep these essential criteria in mind.

Key Criteria for Selection: TER, Fund Size, and ESG Ratings

Several criteria are essential when choosing sustainable ETFs:

TER (Total Expense Ratio): The TER shows the ETF’s annual management fees. Lower TERs ensure that more of your investment works for you. Look for ETFs with competitive TERs compared to similar funds.

Fund Size: Larger funds often have lower trading costs and better liquidity, making trading easier and reducing the risk of fund closures. Choose ETFs that have reached a solid size.

ESG Ratings: Ensure that the sustainable ETF meets your sustainability standards. Use our Impact Check to filter by criteria that matter to you. You can also compare multiple ETFs and add them to your watchlist.

Steps to Building a Sustainable ETF Portfolio

Once you’ve found some ETFs that meet your basic requirements, it’s time to combine them into a cohesive portfolio. Building a sustainable ETF portfolio requires careful planning and diversification. Here are some steps to help you create a balanced portfolio.

How to Diversify Your Portfolio: Regional and Sectoral Spread

Diversification is a fundamental rule of investing. For sustainable ETFs, ensure that your portfolio is well-diversified by investing across different regions and sectors to minimize risk.

Regional Diversification: Invest in ETFs covering companies from various parts of the world.

Sectoral Diversification: Sustainable ETFs can focus on sectors like renewable energy, water supply, healthcare, or green technologies. By spreading investments across sectors, you can benefit from various growth trends while reducing the risk associated with concentrating on a single sector.

How Many ETFs Should Your Portfolio Contain?

The number of ETFs in your portfolio depends on your investment strategy and risk tolerance. Beginners often need only a small selection of broadly diversified sustainable ETFs to build a solid foundation.

The focus should be more on what your ETFs cover rather than quantity. Your portfolio should avoid concentration risks and aim to cover the world economy’s various sectors and regions as much as possible.

For example, ensure that your portfolio isn’t overly focused on the U.S. or that you avoid home bias—holding too many shares from companies in your home country.

It’s essential to review and adjust your portfolio regularly to ensure it aligns with your financial and ethical goals.

Conclusion

Building a sustainable ETF portfolio is a great way to achieve financial returns while promoting ethical values. By selecting ETFs that meet strict ESG criteria, you can ensure that your money goes to environmentally friendly and socially responsible companies. With careful diversification and the right selection of ETFs, you lay the foundation for long-term success and sustainable growth.