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number cruncher

What are we looking for?

ETFs and DIY mutual funds with low degrees of ESG risk.

The screen

With a terrible calendar year now behind us and a booming energy market, an unknowing investor might just give up on the concept of sustainable investing. Remember, though, that investing this way doesn’t necessarily mean you must be particularly motivated by personal values and beliefs. In fact, the core of many environmental, social and governance (ESG) risk measures (like Morningstar’s Sustainability Rating for funds) is the concept of materially financial effects caused by non-financial risks. For example, if a manufacturing company has poor corporate policies regarding wage fairness, it may lead to a strike that ultimately affects a company’s bottom line. Hence, regardless of your intent as an investor, risk is always something worth considering before entering a position. Make no mistake: ESG risk is a type of risk. With this in mind, today I use Morningstar Direct to search ETFs and mutual funds available to the DIY investor that have not only outperformed their peers but also exhibit low degrees of ESG risk. To do this, I used two criteria:

(1) A Morningstar Sustainability Rating of five globes (recall that this rating is a time- and asset-weighted aggregate of the Morningstar Sustainalytics ESG Risk rating of individual holdings within a portfolio. Companies that are able to manage their risks through effective corporate policies, relative to global industry peers, will score better on this measure).

(2) A Morningstar Rating for Funds (a.ka. the “Star Rating”), which is an objective lookback at risk-adjusted returns after fees. Our research shows that although the measure is backward looking, on aggregate five-star funds tend to outperform four-star funds and three-star funds after receiving the rating. The star rating is an excellent starting point for further research.

What we found

Outperforming, less risky funds

Fund Legal NameMER(%)Morningstar CategoryMorningstar Rating OverallMorningstar Sustainability RatingTotal Ret YTD (%)Total Ret 1 Yr (%)Total Ret Annlzd 3 Yr (%)Total Ret Annlzd 5 Yr (%)Total Ret Annlzd 10 Yr (%)Total Ret Annlzd 15 Yr (%)Inception Date
Mackenzie Bluewater Canadian Growth Balanced Fund1.40Canadian Equity Balanced5 Stars5 Globes0.65-9.134.695.941/17/2014
Canoe Global Equity Fund1.59Global Equity5 Stars5 Globes1.06-12.586.539.3113.748.1011/20/1986
Canoe Defensive Global Equity Fund1.63Global Equity5 Stars5 Globes1.03-10.156.168.218/28/2014
Horizons Global Sustainability Leaders Index ETF0.54Global Equity5 Stars5 Globes-0.10-22.798.3010/31/2018
Mawer Global Balanced Fund1.08Global Equity Balanced5 Stars5 Globes0.81-10.173.395.417/2/2013
Canoe Defensive International Equity Fund1.66International Equity5 Stars5 Globes1.15-12.194.596.911/3/2017
Desjardins Overseas Equity Fund1.17International Equity5 Stars5 Globes1.31-13.185.355/11/2018
RBC Life Science & Technology Fund1.21US Equity5 Stars5 Globes0.63-21.778.5511.9117.8712.407/3/2007
Desjardins SocieTerra American Equity Fund2.18US Equity5 Stars5 Globes0.90-16.398.9811.356/14/2016
Beutel Goodman American Equity Fund1.49US Equity5 Stars5 Globes0.869.079.889.5614.9811.294/1/1991
Canoe Defensive U.S. Equity Portfolio Class1.45US Equity5 Stars5 Globes0.90-7.0611.663/8/2019
RBC U.S. Mid-Cap Growth Equity Fund1.21US Small/Mid Cap Equity5 Stars5 Globes0.42-15.867.2710.3313.938.717/3/2007

Source: Morningstar Direct | Data as of January 3, 2023

The funds that meet the above requirements are listed in the accompanying table alongside their categories, MERs, ratings and trailing performance. It is important to note the theme of the screen, as many of the funds listed today are not “intentionally” sustainable. That is, the funds’ investment objectives make no mention of being sustainable, which might be a desirable characteristic for those who wish to invest in line with personal beliefs. Regardless of intentionality, Morningstar seeks to show investors the degree of ESG risk inherent in all funds for investors who still want to monitor the degree of ESG risk inherent in a traditional investment fund.

This article does not constitute financial advice. Investors are encouraged to conduct their own research before buying or selling any of the securities listed here.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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