Just a few years ago, arguably the hottest trend in investing was environmental, social, and governance (ESG) portfolios. Using various screens and valuation metrics, investors sought to match investment dollars with ideas that fell outside traditional financial metrics. Doing good and rewarding firms that do the right thing while making a decent return. Various institutional investors, pension funds, college endowments, and even regular retail investors plowed billions of dollars into the trend. However, in a short period, ESG and socially responsible investing (SRI) went from being a top trend to a flash in the pan. Political pressures have made the sector a pariah.
But that could be changing.
The growth of active ETFs is quietly re-lighting the fire under ESG investing and is providing some real, decent market-beating returns. Removing some of the headaches associated with ESG, active ETFs could finally rescue the investing style from the grave.
ESG- Politics & Indexing Hurt
At its core, ESG investing is simply a method of screening investments based on a company’s environmental, social, and governance (ESG) practices. Ultimately, the goal is to generate financial returns while also creating a positive impact on society and the environment. It’s a form of dollar voting. Company A uses practices to reduce its water usage, while Company B doesn’t. Therefore, Company A gets selected under an ESG scenario. Generally speaking, ESG isn’t intended to be a political tool.
But politics is just one of the ways that the investing form has been hit hard in recent years.
A few years ago, led by legislators in Texas, a variety of anti-ESG laws were enacted, barring pension funds from using ESG metrics in their investment processes and removing certain asset managers from doing business with the state. Eighteen other states, like Florida and Oklahoma, followed suit.
The Trump Administration expanded upon these rules and anti-ESG curtailments with various executive orders that removed DEI requirements and limited SEC provisions for climate change and ESG reporting.
As if political pressure weren’t enough, ESG has suffered another blow- index construction.
When looking at a “value” index, you pretty much know what you are getting. But with ESG, this is not the case. And that’s a huge issue. For example, some index makers will simply rank stocks based on their ESG scores, while others attempt to maintain the same sector weightings as a parent index. This means an ESG index could include exposure to oil companies or defense firms. For investors considering index funds for their ESG assets, this is where it gets tricky. You may expect X and actually receive Y.
Secondly, as many firms have started to focus on ESG as a way to boost shareholder returns and court significant pension funds, the universe of “haves” versus “have nots” is growing. As such, many major ESG indexes closely resemble their broader and less expensive market benchmark counterparts.
The combination of these factors has managed to put ESG assets into a tailspin.
Active ETFs Could Be ESG's Savior
But investors may not want to write off ESG investing just yet. Yes, there is considerable political pressure, and many of the broad ESG funds have fallen short of their standards. However, there may be a way for ESG to rebound. And that’s active ETFs.
The active ETF movement has taken the investment world by storm. And it’s easy to see why. Active ETFs enable managers to realize their full potential and generate additional alpha. When coupled with lower cash drag and a smaller fee hurdle, active managers can actually bring that alpha generation right into investors’ hands. Adding in the additional tax savings that ETFs can have, it’s a match made in heaven.
For ESG, it’s a real win.
The beauty of active management is that you don’t have to follow a broad market index to build your portfolio. Managers can use ESG scores and data as a starting point to develop their allocations. This can involve creating their own ranking systems, utilizing ESG data as a filter for stock selection, combining bonds and stocks, and even excluding firms with stock/fundamental issues, even if they score well on ESG. After all, it doesn’t matter if a firm has perfect ESG metrics if they have debts and deteriorating cash flows.
Moreover, active ESG managers can go beyond data and engage in active management. How is a firm changing, and how might those changes affect its bottom line? Committing to using less water in a process doesn’t show up on a data score.
Additionally, the fact that active ETFs are low-cost also helps on the political pressure side of things. That’s because they can meet fiduciary duties. It’s a lot easier to win court challenges when you argue that you selected a fund based on low costs, especially when they provide returns equal to or greater than those of regular benchmarks.
The result is that active ETFs could be the answer many investors are looking for regarding ESG. According to J.P. Morgan, 51% of respondents to its J.P. Morgan Asset Management Future Focus survey are expecting to increase their allocation to active ESG ETFs over the next five years. Moreover, as shown in the chart from the survey, more than 28% of those surveyed expect to use active ETFs as their sole allocation, while 40% plan to use both active and passive ETFs for ESG purposes. 1
Source: J.P. Morgan
ESG & Active Go Hand-in-Hand
With active ETFS providing plenty of lift for ESG, it’s easy to see how the fund vehicle could resurrect the investing style from the grave. Investment sponsors appear to share the same sentiment. BlackRock and Capital Group have recently seeded new ESG active ETF strategies and models. In contrast, other fund managers have continued to launch active ESG products while closing those with poor performance.
For retail investors, the growth of active ETFs is exciting in terms of ESG. Ultimately, it means maximizing the potential of the investing style and utilizing it to unlock the best of the business world and our portfolios.
Active ESG ETFs
These ETFs were selected based on their low-cost exposure to ESG, utilizing active management. They are sorted by their YTD total return, which ranges from 4.1% to 30%. They have expense ratios ranging from 0.2% to 0.65% and manage assets under management between $7M and $260M. They are currently yielding between 0% and 4.2%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| ACGR | AAmerican Century Large Cap Growth ETF | $15M | 29.6% | 0.1% | 0.39% | ETF | Yes |
| ACLC | American Century Large Cap Equity ETF | $198M | 24.1% | 1% | 0.39% | ETF | Yes |
| QQMG | Invesco ESG NASDAQ 100 ETF | $88M | 19% | 0.42% | 0.2% | ETF | Yes |
| TEMP | JPMorgan Climate Change Solutions ETF | $7.3M | 16.6% | 1.3% | 0.49% | ETF | Yes |
| NWLG | Nuveen Winslow Large-Cap Growth ESG ETF | $10.5M | 12.1% | 0% | 0.65% | ETF | Yes |
| PLDR | Putnam Sustainable Leaders ETF | $260M | 7.6% | 0.4% | 0.59% | ETF | Yes |
| PCRB | Putnam ESG Core Bond ETF | $260M | 6.2% | 3.8% | 0.35% | ETF | Yes |
| EMNT | PIMCO Enhanced Short Maturity Active ESG ETF | $192M | 4.1% | 4.2% | 0.36% | ETF | Yes |
Overall, ESG investing remains promising. The key is in how we access it. For investors, active ETFs could be the answer. The fund vehicle has much to offer ESG investing and could be a great way to get over the various hurdles facing the investing style. Investors are catching on already.
Bottom Line
Thanks to poor index construction and political hurdles, ESG has suffered over the past couple of years, experiencing asset outflows and regulatory challenges. But active ETFs could be its savior. Thanks to several benefits and factors of the fund structure, active ETFs could be the way to enhance ESG and make it work.
1 J.P. Morgan (August 2025). ESG: The active advantage
