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number cruncher

What are we looking for?

Mutual funds and exchange-traded funds with low degrees of ESG risk for the do-it-yourself investor.

The screen

For some investors, the concept of investing in a sustainable manner may have fallen to the wayside as attention turns to managing short-term volatility, given current market conditions. Investors are reminded, though, that the heart of many ESG risk ratings (like those provided by Morningstar Sustainalytics) isn’t how morally “good” a company is, but rather a gauge of materially financial risk. In other words, how much does a company stand to lose over the long term by poor corporate policies around environmental, social, and governance areas?

ESG risk is indeed a type of risk, just like credit risk or interest rate risk, and a worthwhile consideration regardless of where you stand on the idea of sustainable investing. To this end, today I use Morningstar Direct to look for DIY mutual funds and exchange-traded funds that have outperformed their respective category peers, while maintaining low degrees of ESG risk. To find ideas along this vein, I screened the database of roughly 1,900 or so Canadian-domiciled ETFs and funds available to DIY investors using two criteria:

  • The Morningstar Rating for funds (informally known as the “star” rating), which is an objective measure of after-fee risk-adjusted returns relative to category peers;
  • The Morningstar Sustainability Rating, which is an asset-weighted aggregation of individual company ESG risk (as gauged by Morningstar Sustainalytics) at the fund level, relative to global category peers. Funds that have negligible degrees of ESG risk relative to peers receive five globes, while those with severe degrees of ESG risk receive one globe. Important note: Morningstar provides the globe rating on funds regardless of whether the fund has a sustainable investment objective or not.

To qualify, funds must receive five stars and five globes.

What we found

Funds & ETFs with low degrees of ESG risk

FundMorningstar CategoryMorningstar Rating OverallMorningstar Sustainability RatingMER (%)YTD Ttl. Rtn. (%)1Y Ttl. Rtn. (%)3Y Ann. Ttl. Rtn. (%)5Y Ann. Ttl. Rtn. (%)10Y Ann. Ttl. Rtn. (%)Inception Date
BMO U.S. Small Cap DU.S. Small/Mid Cap Eqty.5 stars5 globes1.28-16.5-8.18.8n/an/a5/14/2018
BMO MSCI USA High Quality ETF (ZUQ-T)U.S. Equity5 stars5 globes0.34-20.6-12.79.813.0n/a11/5/2014
Canoe Defensive U.S. Equity Port Cl DU.S. Equity5 stars5 globes1.45-14.3-3.110.0n/an/a3/8/2019
Desjardins SocieTerra American Equity DU.S. Equity5 stars5 globes1.26-21.6-12.810.9n/an/a5/11/2018
RBC Life Science & Technology Fund DU.S. Equity5 stars5 globes1.21-23.1-14.611.513.918.07/3/2007
Canoe Defensive International Eq DInternational Equity5 stars5 globes1.66-19.7-
Desjardins Overseas Equity DInternational Equity5 stars5 globes1.38-22.8-17.94.7n/an/a5/11/2018
Mawer Global Balanced AGlobal Equity Balanced5 stars5 globes1.08-14.2-
Horizons Global Sustainability Ldrs ETF (ETHI-T)Global Equity5 stars5 globes0.54-25.1-20.810.8n/an/a10/31/2018
RBC CA Bank Yield ETF (RBNK-T)Financial Services Equity5 stars5 globes0.33-10.5-1.211.3n/an/a10/19/2017
RBC Target 2025 Education Fund D2025 Target Date Portfolio5 stars5 globes0.95-8.1-

The funds and ETFs that met the above requirements are listed in the accompanying table, alongside their category, fees, trailing performance, inception dates and ratings. Of note are the Desjardins SocieTerra American Equity Fund and the Horizons Global Sustainability Leaders ETF, both of which Morningstar has identified as using sustainable investment approaches in their prospectuses. Investors are urged to consider the category to which each fund belongs to get an understanding of where the fund fits in their overall asset allocation.

This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

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

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