How to Compare ESG Funds Side by Side
How Do You Compare Two ESG Funds Against Each Other?
Comparing ESG funds is harder than comparing conventional funds because there is no single ESG performance metric equivalent to investment return. Two ESG funds can have similar financial performance but dramatically different ESG quality; two funds with similar ESG quality can have different investment risk profiles. Effective ESG fund comparison requires a multi-dimensional framework that covers both ESG quality dimensions and investment characteristics — and recognizes that funds with different strategy types (exclusionary versus best-in-class, passive versus active) are not directly comparable on all dimensions.
ESG fund comparison involves systematic assessment across ESG quality, investment characteristics, cost, stewardship, and disclosure dimensions — adapted for the specific strategy types being compared, and using portfolio-level data rather than marketing descriptions.
Key Takeaways
- Strategy type matters before comparison: comparing an exclusionary ETF with a best-in-class ETF requires understanding that their ESG quality improvement mechanisms are fundamentally different, not just numerically different.
- Carbon intensity (WACI) and fossil fuel exposure are the most objective portfolio-level ESG quality metrics for comparison.
- SFDR categories (Article 8 vs. 9) provide a starting point but insufficient differentiation within the Article 8 category — further analysis is always required.
- Morningstar Sustainability Rating, MSCI Fund ESG Rating, and similar aggregate tools are useful starting points but cannot replace document-level due diligence.
- Voting and engagement quality comparison requires stewardship report analysis — quantitative ESG scores do not capture stewardship behavior.
Before Comparing: Classify Strategy Type
ESG fund comparison only yields useful results when comparing like with like. Before comparing, classify each fund:
| Dimension | Fund A Characteristics | Fund B Characteristics |
|---|---|---|
| Strategy type | Exclusionary | Best-in-class |
| Passive/Active | Passive | Active |
| Asset class | Global equity | US equity |
| SFDR category | Article 8 | Article 9 |
| Thematic focus | None | Clean energy |
Comparing an active Article 9 clean energy fund with a passive Article 8 global ESG ETF on a single ESG quality dimension would be misleading — they are designed for different objectives and should be evaluated against different benchmarks.
When funds are comparable: Funds in the same asset class, with the same broad strategy type, and targeting similar investment objectives can be compared on ESG quality, cost, performance, and stewardship dimensions.
Dimension 1: ESG Quality Comparison
Carbon Intensity (WACI)
Weighted average carbon intensity (tCO₂e per $M revenue) is the most standardized and directly comparable ESG quality metric across funds. Sources:
- Fund manager disclosures (for SFDR-compliant funds, required)
- Morningstar Portfolio Carbon Metrics tool
- MSCI Fund Climate Exposure data
How to compare: Compare WACI for Fund A and Fund B against the same benchmark (e.g., MSCI World WACI). Fund A with 40% lower WACI versus benchmark has stronger climate quality than Fund B with 20% lower WACI.
Fossil Fuel Revenue Exposure
The percentage of portfolio revenue attributable to fossil fuel extraction, processing, and services. This is a more direct measure than WACI for exclusion-based climate comparison.
Sources: Fund manager portfolio disclosures, Fossil Free Funds database (US-focused), Morningstar.
ESG Score Distribution
The portfolio's weighted average ESG score (using a consistent provider) and the score distribution (% of holdings in top ESG tier, % in bottom tier). This measures overall ESG quality beyond climate.
Caveat: ESG score comparisons are only valid within the same scoring system. Comparing MSCI-rated portfolio scores against Sustainalytics-scored portfolios conflates two different assessment methodologies.
Controversial Activities Exposure
Percentage of portfolio in companies with UNGC violations, ongoing major ESG controversies, or controversial weapons manufacture. Some data providers (RepRisk, Sustainalytics) provide controversy overlay that can be applied portfolio-wide.
Dimension 2: Investment Characteristics Comparison
| Metric | Description | Source |
|---|---|---|
| 3-year and 5-year return vs. benchmark | Performance vs. stated benchmark | Morningstar, fund prospectus |
| Tracking error | Annualized deviation from benchmark | Fund reports |
| Expense ratio | Annual explicit fee | Fund KIID/prospectus |
| Active share | % of portfolio differing from benchmark | Fund manager / Bloomberg |
| Portfolio concentration | Top 10 holdings % | Fund transparency report |
| Sector weights vs. benchmark | Sector deviation | Fund transparency report |
For passive ESG funds, tracking difference versus the conventional market index (not the ESG index) is the appropriate return cost measure for ESG constraint.
Dimension 3: Cost Comparison
Cost comparison requires totaling explicit and implicit costs:
Explicit: Expense ratio (TER).
Implicit: Bid-ask spread (typically available from ETF data providers as 30-day average), estimated transaction cost from portfolio turnover.
ESG constraint cost: Estimate based on performance vs. conventional equivalent over multiple market cycles — the historical cost of ESG exclusions and tilts.
For active ESG funds, the additional annual cost versus passive ESG equivalent should be compared against documented value-add (ESG quality improvement, engagement outcomes, alpha generation).
Dimension 4: Stewardship Comparison
Stewardship comparison requires reviewing each fund's:
Proxy voting record:
- What percentage of climate-related shareholder resolutions did the fund support?
- Did the fund vote against management on compensation resolutions linked to ESG failures?
- Does the fund's voting record align with its stated ESG voting policy?
Engagement disclosures:
- Does the fund report specific engagement outcomes (company names, topic, outcome)?
- Are engagement themes aligned with portfolio ESG risks?
Signatory commitments:
- Is the manager a PRI signatory? What is its PRI assessment score?
- Does the manager participate in collaborative engagement initiatives (Climate Action 100+, IIGCC, CDP)?
Dimension 5: Disclosure Quality
Funds with higher ESG quality typically also have higher ESG disclosure quality — the two tend to be correlated:
SFDR documentation quality: Is the pre-contractual disclosure specific and verifiable, or generic?
Portfolio-level data availability: Does the fund publish carbon footprint, ESG score distribution, PAI metrics?
Impact reporting (for impact/Article 9 funds): Are impact metrics specific and independently verified? Does impact reporting cover additionality?
Methodology transparency: Is the ESG methodology document publicly available and detailed?
Practical Tools for ESG Fund Comparison
Morningstar Sustainability Rating (1–5 globes): Aggregate fund sustainability score based on portfolio-weighted company ESG risks (Morningstar/Sustainalytics). Useful screening tool; does not capture stewardship or climate alignment depth.
MSCI Fund ESG Rating (AAA–CCC): Based on MSCI ESG Ratings of portfolio companies. Correlates closely with MSCI-based fund selection criteria; less useful for Sustainalytics-scored portfolios.
Fossil Free Funds (US only): Analyzes US mutual fund and ETF exposure to fossil fuel companies. Useful for specific fossil fuel exclusion comparison.
Own Calculation from Holdings Data: For the most rigorous comparison, download fund holdings and calculate carbon intensity and ESG score distribution using a chosen data provider. Most resource-intensive but provides genuinely comparable data.
Common Mistakes
Comparing ESG quality scores across different data providers. An MSCI-rated portfolio with average ESG rating AA is not comparable to a Sustainalytics-rated portfolio with average ESG risk score of 15 without conversion. Cross-provider comparisons require harmonization.
Comparing only financial performance, not ESG quality. Two ESG funds with similar 5-year returns may have very different ESG quality — one achieved returns through genuine ESG integration, the other through incidental factor exposure. Performance similarity does not imply ESG quality similarity.
Over-relying on aggregate ESG tools. Morningstar globes and MSCI fund ratings aggregate useful information but miss stewardship quality, climate alignment depth beyond WACI, and PAB/CTB compliance. Aggregate tools are starting points, not endpoints.
Related Concepts
Summary
ESG fund comparison requires a multi-dimensional framework covering ESG quality (carbon intensity, fossil fuel exposure, ESG score distribution), investment characteristics (return vs. benchmark, tracking error, active share), cost (explicit and implicit), stewardship quality (voting record, engagement outcomes), and disclosure quality. Strategy type classification before comparison prevents misleading like-for-unlike comparisons. Carbon intensity and fossil fuel exposure provide the most objective portfolio-level ESG quality metrics for direct comparison. Stewardship quality — requiring review of actual voting records and named engagement outcomes — is the most frequently skipped due diligence dimension. Aggregate ESG rating tools (Morningstar, MSCI) are screening tools, not sufficient for final selection decisions.