Are Climate ETFs Based On Empty Promises?

New analysis show gap between actions and words, leaving some climate ETFs overexposed.

Reviewed by: Jessica Ferringer
Edited by: Jessica Ferringer

Climate and carbon emissions are popular themes when it comes to socially responsible ETFs, with a multitude of funds claiming to invest in companies that minimize their carbon footprint or that are actively engaged in the process of transitioning toward net zero goals within the next few decades.

However, a recent analysis by nonprofit organizations NewClimate Institute and Carbon Market Watch highlighted an important distinction: There is a difference between what companies say they will do, and what they actually do.

The organizations evaluated 25 major multinational companies, giving each a transparency rating as well as an integrity rating ranging from high to very low. Of the companies evaluated, 21 of them ranked as either having low or very low integrity. And while some climate-focused ETFs have very little exposure to these companies, others have even more than the broad benchmark.

Domestic ETFs Vary

Of the four domestic large cap ETFs analyzed, two had significantly less exposure to the companies ranked as having low or very low integrity, while two had more exposure to these companies than were found within the SPDR S&P 500 ETF Trust (SPY).


TickerFundLow IntegrityVery Low IntegrityTotal
SPYS&P 500 ETF Trust7.96%0.95%8.91%
ETHOEtho Climate Leadership U.S. ETF0.38%0.00%0.38%
VEGNU.S. Vegan Climate ETF0.00%1.50%1.50%
FEUSFlexShares ESG & Climate U.S. Large Cap Core Index Fund8.83%0.47%9.30%
JCTRJPMorgan Carbon Transition U.S. Equity ETF7.89%1.44%9.33%


The Etho Climate Leadership U.S. ETF (ETHO) had the least exposure to these companies, with Amazon making up the entirety of the 0.38% allocation. The U.S. Vegan Climate ETF (VEGN) also held only one company—Accenture—that was identified as having either low or very low integrity.


(Use our stock finder tool to find an ETF’s allocation to a certain stock.)


Both ETFs track different indexes and have different methods of constructing the portfolio, with different exclusionary screens in place. Other differences include ETHO’s equal weighting methodology, while VEGN uses market cap weightings.

However, two ETFs—the FlexShares ESG & Climate U.S. Large Cap Core Index Fund (FEUS) and the JPMorgan Carbon Transition U.S. Equity ETF (JCTR)—had slightly larger allocations to these companies relative to SPY.

Both ETFs rely on some negative screening in addition to ranking companies based on specific factors. FEUS tracks a principles-based index of companies based on ESG and carbon-related metrics, while JCTR uses a carbon transition score.

Global ETFs Guilty Too

As some of the multinational companies analyzed are domiciled internationally, global ETFs are prone to the same issues when considering this analysis. The identified companies make up 7.3% of the iShares MSCI ACWI ETF (ACWI), and the three ETFs analyzed all held allocations close to that of the benchmark.


TickerFundLow IntegrityVery Low IntegrityTotal
ACWIiShares MSCI ACWI ETF5.46%1.85%7.31%
NTZOImpact Shares MSCI Global Climate Select ETF3.45%1.96%5.41%
CRBNiShares MSCI ACWI Low Carbon Target ETF5.44%1.74%7.18%
LOWCSPDR MSCI ACWI Low Carbon Target ETF5.51%1.85%7.36%


The Impact Shares MSCI Global Climate Select ETF (NTZO) had the lowest allocation, though notably it had a higher allocation to companies ranked as having very low integrity in terms of their climate pledges.

The iShares MSCI ACWI Low Carbon Target ETF (CRBN) and the SPDR MSCI ACWI Low Carbon Target ETF (LOWC) were not meaningfully different from ACWI, which aligns with their philosophy of tilting the portfolio toward lower carbon emissions stocks while maintaining marketlike exposure.

But as discussed in a prior blog post, funds like these are designed to have lower tracking error to the broad benchmark, and often only exclude the worst ESG offenders.

Actions Over Words

One thing all these funds have in common is that they are passive, rules-based strategies. ETFs that track an index are more limited in their ability to adjust to new information based on their methodology and frequency of reconstitution.

Unless the index has some way of measuring company action versus what they have pledged to do, it is unlikely that this gap between actions and words will be reflected within the ETF.

Here, active management might make more sense, as the manager can be nimble enough to adjust to new information about a company’s efforts toward net zero … as long as the manager’s process is set up to do so.

According to CNBC, some companies listed in the report have disagreed with the methodology and findings. But the underlying message—that action and transparency are more important than lofty climate pledges that may or may not be met—is an important one to consider when evaluating climate-focused ETFs.


Contact Jessica Ferringer at [email protected] or follow her on Twitter

Jessica Ferringer, CFA, is a writer and analyst for She has 10 years of experience in investment research and due diligence, including helping to manage ETF portfolios. Jessica has a bachelor’s degree in economics from Lafayette College and an MBA from the University of Pittsburgh.