What Is an ESG Index? 5 ESG Indexes to Know

Just as equity indexes include companies that fit certain categories (e.g., small-cap stocks, tech stocks, etc.), an ESG index consists of companies that meet specific environmental, social, and governance standards.

That said, owing to the political outlook in 2026, some ESG indexes have been renamed, and some exchange-traded funds (ETFs) with an ESG focus have shuttered owing to underperformance and a challenging climate. Nonetheless, some ESG indices have outperformed the broader market.

Broadly speaking, an ESG index can be used as a benchmark for companies in a given sector, just as a large-cap equity index like the S&P 500 can be used as a benchmark for the performance of large-cap U.S. stocks.

The challenge in most aspects of ESG or sustainable investing, including the construction of ESG indexes, is that most ESG standards are voluntary. Thus different companies may take a different approach to selecting the criteria and metrics they use to evaluate their progress toward ESG goals, or mitigate ESG risks.

What Are ESG Indexes?

An index is a selection of companies that are chosen to reflect the performance of a certain industry, region, or sector. There are many thousands of indexes, and they are constructed as benchmarks for the performance of that part of the market: e.g., large-cap companies, tech companies, pharmaceuticals, U.S. Treasurys, agricultural commodities, and so forth.

An ESG index can be helpful to those who are interested in pursuing sustainable investing strategies when investing online or through other channels because an ESG index tracks companies that meet certain environmental, social, or governance standards.

According to Morningstar, there are some 50,000 sustainability-oriented indexes. There are broad-based indexes as well as specific indices that focus on a certain industry, region, or sector: e.g., renewable energy, water treatment, carbon management, equitable hiring practices, and so on.

Some ESG indexes may exclude companies that don’t meet certain ESG criteria. For example, some ESG indexes exclude companies that manufacture certain types of weapons, are involved in gambling, or produce fossil fuels.

Unfortunately, investor interest in ESG investing strategies has flagged in recent years, largely owing to political pressures that have led to restrictions on 401(k) investments as well as the newly launched Trump Accounts for children.

Reason for ESG Indexes

Nonetheless, some investors believe in investing their money in buying stocks of companies (or other securities) that reflect proactive values regarding the planet, society, and fair and ethical corporate structures, while still delivering potential returns.

In addition, adherence to ESG frameworks is considered by many stakeholders as a form of risk management.

For example, investors might choose to assess a company’s ESG scores or ratings to gauge its risk exposure, as well as possible future financial performance.

While you cannot invest in an index directly, investors can gain exposure to the ESG companies in an index by purchasing an index mutual fund or exchange-traded fund (ETF) that seeks to replicate the performance of that index (a.k.a., passive investing).

There are still hundreds of ESG index mutual funds and ETFs that investors can consider.

ESG Criteria Explained

Although there isn’t a single set of ESG criteria investors can use to measure where companies stand in light of ESG goals or risk factors, it’s useful to know what different ESG scores and metrics are referring to.

Environmental Factors

The environmental component of ESG includes factors that impact the natural environment. These can be general, or tailored to specific industries, and may include:

•   Water, air, and other pollutants (e.g., toxic waste)

•   Hazardous waste management

•   Carbon emissions and mitigation efforts

•   Water conservation

•   Renewable energy use (such as solar, wind, biofuels)

Social Factors

The social component evaluates a company’s relationships to employees, vendors, and the surrounding community. Factors may include:

•   Worker safety

•   Diverse hiring practices

•   Employee pay and equity

•   Corporate investment in the community

•   Relationships with vendors

•   Supply chain management (fair labor use, sustainable sourcing, etc.)

Governance Factors

Governance refers to ethics and transparency in how a company is managed. For example:

•   Selection of board of directors

•   Executive compensation

•   Transparency toward shareholders

•   Accounting practices

•   Data privacy

Recommended: How to Invest in ESG Stocks

Mixed Growth in the ESG Sector

After more than three years of net outflows from sustainable funds in the U.S., the first half of 2026 showed an uptick in investor interest.

According to Morningstar, these funds saw an added $3 billion by the second quarter of the year. In addition, the infusion of capital, plus market appreciation, has meant that total assets in sustainable funds have landed at close to $400 billion, a new high for the category.

In addition, the S&P 500 Scored & Screened Index, formerly the S&P 500 ESG Index, has outperformed the broader S&P 500 Index in the last five years by a significant 1.63%.

ESG vs Socially Responsible Investing: What’s the Difference?

There are various terms for investing according to a certain set of values — including impact investing and socially responsible investing (SRI) — and not all of them refer to green investing strategies. Some terms may be used interchangeably, but there are some key differences to understand.

•   Impact investing is a broad term that encompasses investors who seek measurable outcomes. Impact investing may or may not have anything to do with environmental or social factors.

•   Socially responsible investing is also a broader label, typically used to reflect progressive values of protecting the planet and natural resources, treating people equitably, and emphasizing corporate responsibility.

•   Securities that embrace ESG principles, though, may be required to adhere to specific standards for protecting aspects of the environment (e.g. clean energy, water, and air); supporting social good (e.g. human rights, safe working conditions, equal opportunities); and corporate accountability (e.g. fighting corruption, balancing executive pay, and so on).

ESG Investing Standards

That said, there isn’t one universal set of criteria that define an ESG investment or an ESG index. Rather, each ESG index and corresponding index fund is typically based on proprietary metrics of qualitative and quantitative factors relating to environmental, social, and governance factors.

These metrics may be formulated internally by investment managers/research teams, based on metrics established by popularly accepted ESG frameworks, or a combination of both.

While it’s clear where the money’s been trending with regards to ESG investments, prudent investors should still remain selective when it comes to picking an ESG fund, as how these indexes are constructed can sometimes be based on opaque methodologies.

5 Commonly Used ESG Indexes

Following is an overview of five ESG indexes commonly used as benchmarks for some of the largest ESG index mutual funds.

1. S&P 500 Scored & Screened

The S&P 500 Scored & Screened Index, formerly the S&P 500 ESG Index, launched in January 2019, and is a large-cap broad-market index that includes companies that meet S&P Global ESG Score metrics.

The S&P Global ESG Scores consist of sustainability-related data points reflecting each company’s performance along environmental, social, and governance dimensions. The data is collected as part of the S&P Global Corporate Sustainability Assessment, from public and other disclosures. In addition, reported data is cross-checked against a range of sources (e.g., stakeholder analysis, media reports, and the like).

2. Nasdaq-100 ESG Index

The Nasdaq-100 ESG Index consists of 89 securities from the Nasdaq 100 that meet ESG criteria established by Nasdaq and Morningstar Sustainalytics. The parent index includes 100 of the largest domestic and international non-financial firms that trade on the Nasdaq exchange.

ESG Criteria: Firms must meet a number of requirements to qualify under the index. These are determined by an exclusionary screening process by Nasdaq, that removes companies based on environmental, social, and good governance criteria.

The constituents of the Nasdaq-100 ESG Index are further refined by criteria developed by Morningstar Sustainalytics. These include a number of standards and metrics:

•   ESG risk ratings

•   Impact metrics

•   Global standards screening

•   Carbon emissions data

3. MSCI KLD 400 Social Index

Established in 1990, the MSCI KLD 400 Social Index is one of the oldest socially responsible investing (SRI) indexes, making it a popular standard for evaluating long-term ESG performance.

The KLD 400 Social index consists of 400 U.S. securities that meet the ESG standards set by the MSCI ESG Research team.

ESG Criteria: MSCI uses the following methodology to determine eligibility and inclusion as well as exclusion from the index.

•   Companies involved in nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, GMOs, and adult entertainment are excluded.

•   Must have an MSCI ESG rating above “BB.”

•   Must have an MSCI Controversies score above “2.”

4. MSCI USA Extended ESG Focus Index

The MSCI USA Extended ESG Focus Index selects constituents from the MSCI USA parent index using an optimization process that targets companies with high ESG ratings in each sector.

Companies that meet “business involvement criteria” in sectors such as tobacco, controversial weapons, producers of or ties to civilian firearms, thermal coal (and other fossil fuel companies), are excluded from the index.

The MSCI USA Index has 589 constituents while the MSCI USA Extended ESG Focus Index has around 284, which means an exclusion of about 52%.

5. FTSE US All Cap Choice Index

The FTSE U.S. All Cap Choice Index is part of the FTSE Global Choice Index Series, which is market-cap weighted. The index uses a rules-based methodology to exclude companies based on their involvement in business areas that could have a negative impact on the environment and/or society.

•   Vice-related industries (e.g. alcohol, tobacco, gambling, adult entertainment)

•   Non-renewable energy (e.g. fossil fuels, nuclear power)

•   Weapons (conventional military weapons, controversial military weapons, civilian firearms)

•   Companies are also excluded based on controversial conduct and diversity practices

ESG Investing Risks

As with all investments, the risks of choosing ESG-focused investments is that they may not necessarily outperform over your desired timeframe. There are also unique ESG risk factors to consider.

Diversification Risk

The primary risk of using an ESG-based strategy is the risk of underperformance and the risk of reduced portfolio diversification relative to cheaper, broader-market index funds.

This isn’t a surprise, as many of the top ESG indexes are market-cap (“capitalization”) weighted, which means that the largest firms in the index bear the greatest responsibility for changes in index values.

Given that some of the most popular ESG funds also track the performance of the broader-market indexes, this may make these particular funds less attractive as part of a diversified strategy.

Higher Costs

Another issue of concern is that some ESG funds charge higher fees and expense ratios relative to conventional funds.

While these fees aren’t necessarily head and shoulders above broader-market index funds, they can get progressively more expensive depending on how nuanced the fund’s investing strategy is. This is because ESG is a factor-based investment strategy which entails more complexity than traditional broader-market indexing.

Typically, the longer the time frame for comparison, the greater the risk for underperformance becomes, net of fees.

Inconsistency of ESG Standards

Perhaps the biggest drawback of ESG investing is the inconsistency around reporting, and the desire for more uniformity among which ESG frameworks are applied.

In other words, the ESG criteria established at one institution for their index or funds has little or no bearing on the ESG criteria employed by another firm.

Because sustainable investing has grown over the past decade, there has been an industry-wide movement towards greater consistency in ESG criteria and reporting. The Securities and Exchange Commission (SEC) has even recently undertaken efforts to codify aspects of financial reporting when it comes to ESG-related investments.

Nevertheless, these efforts remain in their early stages, and investors should continue to be discerning when it comes to picking ESG-linked investments.

Relevance of ESG Criteria

Existing ESG frameworks run the gamut when it comes to which metrics they choose to apply. For example, metrics related to carbon emissions may be relevant to heavy industry, but how relevant would those metrics be to the financial or technology sectors?

To address the issue of relevance, individual investors would do well to identify and assess when these solutions are applied.

Finally, expect to encounter data consistency issues when trying to quantify information that is naturally qualitative, particularly when management at each firm has wide discretion over how they choose to represent those metrics.

Benefits of ESG Investing

Some investors may be drawn to the potential advantages of ESG investing.

Investing With Values in Mind

Although it’s unclear whether ESG strategies make a tangible difference in the health of the environment, the well-being of society, or whether these strategies improve the quality of corporate governance, many investors appreciate the ability to invest in companies that espouse these values.

Moreover, as ESG strategies continue to expand, investors may choose from an even wider range of sustainable options that may align with their values: e.g., companies that support women, people of color, that focus on specific types of bio-techology, and so on.

Comparable Performance

As noted above, ESG strategies have come a long way in terms of assuaging investors’ fears of underperformance, or missing out on market returns.

While any strategy is subject to market volatility, and there are no guarantees of future performance, recent industry research suggests that ESG strategies perform comparably to conventional strategies over time.

Risk Management

Owing to the rise of climate-related disasters, worldwide viruses, and similar shared risk factors, companies must take new steps to protect themselves from these risks. Today, many ESG metrics take risk mitigation efforts into account.

The Takeaway

Despite a challenging political climate, enthusiasm for ESG investing has grown over the past year, and inflows into ESG funds have been rising.

Understanding ESG indexes and how they apply sustainability rules and criteria to the companies in the index can help investors understand the corresponding index mutual funds and ETFs they may want to invest in.

Due to the sheer number of ESG-centric investments available to date, it’s a good idea to be selective when reviewing the underlying strategy of each fund, and understanding the underlying methodology of how each index constructs its portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.

Take a step toward reaching your financial goals with SoFi Invest.

¹The probability of a member receiving $1,000 is 0.028%. If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Members must fund their account with a minimum of $50.00 to qualify. The probability percentage is subject to decrease. Members are only eligible for the Stock Award promotion upon opening their first brokerage account; subsequent cash brokerage accounts are ineligible for the promo, including for members with multiple accounts.

FAQ

What are the main components of ESG investments?

The main factors involved in ESG investing are how a company’s operations and products impact the environment (e.g., air, water, land, and other resources in the natural world); society (workers, community members, other stakeholders); and the overall governance of the company itself (e.g., its leadership, accounting practices, security measures).

How do ESG investments differ from traditional investments?

In order to be considered a type of ESG-focused investment, a company or security must meet certain standards in terms of the environment, society, and or its governance. These criteria vary depending on the framework being used, and are not applied to traditional or non-ESG securities.

How does an ESG index work?

An ESG index is similar to any kind of benchmark index; it includes a representative grouping of companies from a certain industry or sector (there are bond indices, commodities indices, and many more, as well). The index serves to track the performance of that sector using the constituents of the index as a proxy for that industry or sector as a whole.

---

Photo credit: iStock/StefaNikolic

SoFi Invest®

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.
Investment Risk: Diversification can help reduce some investment risk, but cannot guarantee profit nor fully protect in a down market.
Mutual Funds (MFs): Investors should read and carefully consider the information contained in the prospectus, which contains the Mutual Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or SoFi's customer service at: 1.855.456.7634. Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risks. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may have tax implications.

SOIN-Q326-021