The theory of ESG is easy. The build is the hard part: which screens, which funds, whose ratings, and how to tell a genuinely sustainable fund from a marketing exercise. Here’s the process, step by step.
Step 1: Choose Your Screening Approach
| Approach | How it works | Strengths | Weaknesses |
|---|---|---|---|
| Exclusion (negative screening) | Removes tobacco, weapons, fossil fuels | Simple, cheap | Limited influence |
| Integration | ESG scores folded into stock selection | Broad diversification | Scores vary by agency |
| Best-in-class | Top ESG scorers in each sector | Diversified | Still holds oil majors |
| Thematic | Clean energy, water, circular economy | Conviction exposure | Concentrated, volatile |
| Impact | Funds measurable outcomes (green bonds) | Real-world change | Smaller, less liquid |
Start with a core of exclusion and integration funds (80–90%) and treat thematic funds as a satellite.
Step 2: Choose the Right ESG Fund
Ask five questions before buying any fund:
| Question | What to look for |
|---|---|
| What’s the benchmark? | An ESG-screened index (MSCI World SRI, FTSE All-World Choice) or a custom one? |
| What does it exclude? | Read the exclusion list, not the fund name |
| Tracking error | How far can it deviate from the parent index? |
| Fee (TER) | Screening costs money — 0.15–0.25% for ETFs is normal |
| Track record | At least 3 years, so you can see how screens behaved in a downturn |
Step 3: Understand ESG Ratings
Three agencies dominate, and they disagree as often as they agree:
| Agency | Scale | Direction | What it measures |
|---|---|---|---|
| MSCI | AAA to CCC | Higher is better | Industry-relative ESG score |
| Sustainalytics | 0 to 100 | Lower is better | Exposure to material ESG risks |
| S&P Global | 0 to 100 | Higher is better | Corporate sustainability assessment |
A company can be MSCI AA and Sustainalytics “High Risk” at the same time — the agencies measure different things (relative score vs absolute risk). Never compare a MSCI score to a Sustainalytics score directly. Use ratings to compare funds within the same agency only.
Step 4: Check for Greenwashing
A fund’s marketing page is not its holdings. Run this detection checklist:
| Green flag | Red flag |
|---|---|
| Publishes the full holdings list | ”ESG” in the name, fossil fuels in the top 10 |
| Exclusion list is in the prospectus | Only a vague “ESG tilt” with no screens |
| Screens against the benchmark index | Tracks a plain index and calls it ESG |
| Discloses engagement and voting | No engagement policy disclosed |
| Fees in line with peers | Premium fees with no extra screening |
Case in point: some best-in-class ESG funds hold energy majors because those firms score top of their sector. That’s defensible — but it must be what you intended to buy.
Step 5: A Sample 5-Fund Sustainable Portfolio
| # | Fund (ticker) | Focus | TER | Allocation |
|---|---|---|---|---|
| 1 | Vanguard ESG Global All Cap (V3AA) | Global equities incl. small caps, ex-controversial | 0.24% | 40% |
| 2 | iShares MSCI World SRI (SUSW) | Developed world, strict SRI screen | 0.20% | 20% |
| 3 | Xtrackers MSCI World ESG (XDWD) | Developed world, benchmark-style ESG | 0.19% | 15% |
| 4 | Vanguard ESG US Stock (ESGV) | US large/mid cap ESG | 0.09% | 15% |
| 5 | iShares Global Clean Energy (INRG) | Thematic satellite (wind, solar) | 0.65% | 10% |
Weighted TER is roughly 0.26% — barely above a plain index portfolio. The three global funds serve different jobs: V3AA adds small-cap breadth, SUSW tightens the screen, and XDWD keeps tracking error low. Rebalance back to these weights each year, inside an ISA or SIPP to avoid tax.
Step 6: Annual Review Checklist
| Check | Why |
|---|---|
| Holdings still match the mandate? | Screens drift as indices change |
| Any new controversies among top holdings? | Ratings can lag reality |
| Has the TER changed? | Fee creep quietly compounds |
| Has the thematic satellite grown past 10%? | Rebalance it back to size |
| Are my values still matched? | The one metric no rating agency measures |
Bottom Line
Building a sustainable portfolio is a six-step process: pick a screening approach, choose funds with real exclusions, understand that ratings are not interchangeable, run a greenwashing check on every holdings list, start from a low-cost ESG core like V3AA, and review annually. Done this way, an ESG portfolio costs little more than a plain one — and reflects your values in the way that matters.