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Investors may be disappointed in just what is included in ESG funds.

Sergio Perez/Reuters

Canadians who want their retirement savings to reflect their progressive values are charging headlong into environmental, social and governance funds, and setting records in the process.

But those who invest in ESG funds should know that the big stock holdings in many of those portfolios are the same as those at the top of the country’s main stock index – that is, big banks and big tech.

This may disappoint some investors who expected to own collections of wind-power producers, organic food providers and electric vehicle companies (though those are available, too). Some of the discrepancy is a function of different interpretations of what makes up an ESG or sustainability fund.

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“It’s kind of the Wild West here in Canada. There’s no regulated way to define what type of sustainable investments there are,” said Ian Tam, director of investment research for Canada at Morningstar Inc. “You can call yourself an impact fund, an ESG fund or whatever, and a regulator is not saying, ‘No, you can’t do that.’ It’s really how these firms are marketing their products.”

As examples, three ESG funds – Desjardins RI Canada Low CO2 Index ETF, iShares ESG Advanced MSCI Canada ETF and Leith Wheeler Carbon Constrained Canadian Equity Fund – have similar top holdings in similar proportions. All count Royal Bank of Canada , Toronto-Dominion Bank , Shopify Inc. , Bank of Nova Scotia and Bank of Montreal among top positions. Canadian National Railway Co. also figures prominently.

Ranked by market capitalization, those companies are in the top eight of the S&P TSX Composite Index, which is represented by a number of more traditional ETFs.

In its marketing materials, Desjardins is clear that its fund offers broad exposure to the Canadian equity market, integrating ESG considerations. BlackRock’s iShares fund pitches exposure to small-, mid- and large-cap stocks that meet a minimum ESG standard and promises reduced exposure to fossil fuels. Leith Wheeler’s equity fund offers a broad range of Canadian shares, and excludes those in the fossil fuel industry.

In some ways, many ESG funds are defined more by what the exclude – such as oil, gas and coal producers or weapons manufacturers – rather than what they hold. Others concentrate on factors apart from just the environment, such as companies that figure highly in prioritizing women in leadership positions.

ESG funds can include companies that are already employing the latest in sustainability practices as per criteria set out by the manager. The big TSX companies are, but some fund managers have also chosen companies to influence through meetings with senior executives and directors, or even in proxy votes, to make changes.

Generally, ESG funds differ from impact funds, which tend to hold companies focused on measurable improvements in areas such as diversity and inclusion or in combatting climate change, or environmental-sector funds, which hold renewable energy and other cleantech stocks.

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The good news is that most Canadian ESG funds are not charging investors more in management fees than traditional index funds – something that has angered some investors and analysts in the United States. In fact, the fees in Canada are a hair lower, Mr. Tam’s research shows.

The average asset-weighted median net expense ratio for both active and passive funds, a measurement of management fees, is 1.06 per cent for sustainable funds and 1.13 per cent for traditional funds.

The similarity between ESG-focused and traditional equity ETFs is more controversial in the United States. In a recent column, Bloomberg’s Aaron Brown showed that the largest holdings in many U.S. ETFs promising investments screened for ESG criteria or climate-conscious values were nearly identical to the top S&P 500 ETF weighting. It was all Big Tech – Alphabet (Google’s parent company), Amazon , Apple , Facebook and Microsoft – and the performance was also similar. Yet, the management fees for the ESG funds were much higher than the index fund.

There’s no question Canadian sustainable funds were a juggernaut in the first quarter of 2021, with a record $5.3-billion flowing in, according to Morningstar. In that period, 17 new funds entered the market. Total assets topped $18-billion at the end of the quarter, up 160 per cent from the same period a year earlier, when the market had fallen to the depth of its pandemic-fuelled collapse.

The funds have all performed well in the past year, with one, Mackenzie Global Environmental Equity Fund, a portfolio of alternative energy and cleantech companies, more than doubling in value.

Even with all that momentum, sustainable funds and ETFs still make up just 1 per cent of those run by Canadian managers – suggesting there’s still lots of room to grow. As they do, expect calls for more regulated classification so investors have a clearer picture of just how green the investments fuelling their retirements really are.

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Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at

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