Sustainable index investing: what ESG, SRI and PAB actually mean (and cost)

You go looking for a sustainable index fund and run into four acronyms that look alike: ESG Screened, ESG Enhanced, SRI and PAB. They are not. Between the mildest and the strictest there is a huge difference in what actually gets excluded — and in what you are charged for it.

The scale, from loosest to strictest

• ESG Screened. The minimum filter. It drops a few controversial activities (controversial weapons, tobacco, thermal coal above a threshold) and little else. The resulting index looks a lot like the original: it can keep 90% or more of the companies.
• ESG Enhanced / Leaders. Beyond excluding, it reweights: it raises the weight of better-scoring companies within each sector and cuts the worst. Sector exposure stays close to the parent index.
• SRI (Socially Responsible Investment). The serious cut. It keeps only the best in each sector — typically the top 25% — so it can remove three out of four companies from the original index.
• PAB / CTB (Paris Aligned / Climate Transition Benchmark). Categories defined by EU rules, with quantified obligations: an immediate carbon-footprint cut (50% for PAB against the parent index) and a 7% annual decarbonisation path.

The practical consequence: an "ESG" fund can be almost identical to its plain index, while an "SRI" one can be a very different and noticeably more concentrated portfolio. The acronym matters.

How much more it costs

Here is a figure that surprises people. In this catalog, the average fee for sustainable products is 0.44%, against 0.20% for conventional global funds: a premium of 0.24 points, about €24 a year per €10,000 invested.

But the average hides the interesting part: the cheapest sustainable fund in the catalog charges 0.18% — less than the average global fund. Sustainability does not have to cost you more; what costs is choosing badly within the category.

Fund	Index	TER
Amundi MSCI World SRI Climate Net Zero Ambition PAB	MSCI World SRI Climate PAB	0.18%
Xtrackers MSCI Emerging Markets ESG	MSCI EM ESG	0.18%
iShares MSCI World SRI	MSCI World SRI Select Reduced Fossil Fuel	0.20%
Xtrackers MSCI World ESG	MSCI World Low Carbon SRI Leaders	0.20%
Vanguard ESG Global All Cap	FTSE Global All Cap Choice	0.24%

The risk nobody mentions: concentration

If an SRI index keeps 25% of the companies, what you are buying is no longer "the market". Two concrete effects:

• Less diversification. Fewer holdings, each weighing more. SRI versions of the MSCI World typically carry noticeably higher exposure to their largest positions.
• Sector bias. Excluding energy and mining while rewarding high ESG scorers tends to load the portfolio with technology and healthcare. You can end up with a sector bet you never intended.

This is not an argument against them: it is something to know beforehand rather than discover in a drawdown. To measure the effect, compare the SRI index against its parent in the comparator.

Article 8 and article 9: what they say and what they do not

You will see these numbers in the documentation. They come from the EU's SFDR regulation and classify the product by what it declares:

• Article 8: "promotes environmental or social characteristics". A very wide bucket — almost any filter fits, however mild.
• Article 9: has sustainable investment as its objective. Far more demanding, which is why there are far fewer.

It is a disclosure classification, not a quality seal: it says what the product commits to reporting, not how much good it does.

What to accept going in

An honest caveat: ESG scores are produced by private providers and they disagree with each other a lot. The same company can be rated well by one agency and poorly by another, because they measure different things and weight them differently. "Sustainable" is not an objective measure like the TER; it is a label built on contestable criteria.

That does not invalidate the idea. It means that if you care, you should read the specific index and its exclusion rules rather than trust three letters in the name.

In short

• ESG Screened barely excludes anything; SRI can remove three out of four companies; PAB adds quantified carbon obligations.
• The average cost premium is 0.24 points, but the cheapest sustainable fund costs less than the average global one: choosing well matters more than the label.
• The stricter the filter, the less diversification and the more sector bias.
• Article 8/9 is a disclosure classification, and ESG scores disagree across providers.

Fee data taken from this site's catalog. Educational content, not investment advice and not an assessment of any product's real-world impact.