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What are we looking for?

Canadian equity ETFs showing above-average sustainability ratings.

The screen

Environmental, social and governance (ESG) risks in investing are priorities for institutional investors in Canada, and rightfully so. For the world to meet requirements of the Paris Agreement (with the goal of limiting warming to 1.5 degrees above preindustrial levels), global investment leaders, non-profit organizations and advocates are coming together to ensure investors have investment options available that consider social responsibility and climate change. This quickly evolving approach to investing no longer simply means excluding certain stocks from the portfolio (for example, tobacco or oil companies), but rather considers whether company management is taking an active part in handling ESG risks through its actions and corporate policies.

This week, I look for Canadian equity ETFs whose holdings appear to have lower levels of ESG risk. This category of ETFs tends to hold stocks representing most sectors, so assessing risk at the portfolio level is particularly useful since each sector will be exposed to different issues. To do this, I screened our Canadian ETF database on two dimensions:

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  • The Morningstar rating over all, known to most as the “star” rating – a backward-looking assessment of risk-adjusted return against similar funds. Ratings range from one to five stars, where funds receiving five stars have outperformed their peers historically. The star rating is a great starting point in understand which funds have historically performed the best within a category.
  • The Morningstar Sustainability Rating, or “globe” rating – a holdings-based analysis that rolls up the individual company ESG risk levels. To be considered material to the risk rating, an ESG issue must have a potentially substantial impact on the economic value of a company and therefore on the risk/return profile of an investment in the company. For example, a company heavily exposed to carbon-based energy will likely be at high risk as the world transitions to a low-carbon economy. The ESG issues that are material vary across industry groups and companies. Ratings range from one to five globes, where a fund with five globes has the lowest exposure to ESG risk. Like the star rating, globe ratings are scored relative to a fund’s peers within a category.

To qualify, the fund must be rated four or five stars, and four or five globes.

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multiasset analysis platform built for asset management and financial services professionals. Sustainalytics, a leading independent global provider of ESG research and ratings, is a strategic partner to Morningstar. Morningstar Canada on Twitter: @MorningstarCDN.

What we found

I used Morningstar Direct to pull the relevant information on the funds from the screen, including their trailing returns, management expense ratios, inception dates and equity sector exposure as of the portfolio holdings date shown. The funds appear in no particular order.

This column does not constitute financial advice. It is always recommended to speak to a financial adviser or investment professional before investing.

Select Canadian equity ETFs 

Exchange-traded fundTickerInception DateMER (%)Morningstar Rating OverallMorningstar Sustainability RatingTtl. Rtn. YTD (Jan 31)1Y Ttl. Rtn. 3Y Ann. Ttl. Rtn.5Y Ann. Ttl. Rtn.Sector Basic Materials (%)Sector Comm. Services(%)Sector Consumer Cyclical (%)Sector Consumer Defensive (%)Sector Health Care (%)Sector Industrials (%)Sector Real Estate (%)Sector Technology (%)Sector Energy (%) Sector Financial Services (%)Sector Utilities (%)Portfolio Holdings Date
BMO Low Volatility Canadian Equity ETFZLB-T10/21/20110.395 Stars4 Globes3.4818.8010.728.713.1211.367.7914.140.0011.5410.464.091.5218.3515.7712/31/2019
CI First Asset Canadian Buyback ETFFBE-T9/9/20160.835 Stars4 Globes-0.608.797.74n/a2.644.846.6813.093.5812.902.394.7815.5832.750.0012/31/2019
CI First Asset MSCI Canada Quality ETFFQC-T5/3/20161.015 Stars4 Globes1.6118.1710.75n/a4.538.6311.4913.670.0016.131.759.859.0324.370.0012/31/2019
Invesco S&P/TSX Composite Low Vol ETFTLV-T4/24/20120.345 Stars4 Globes3.6319.068.818.070.009.600.005.891.911.7532.251.783.7122.6020.2312/31/2019
iShares Edge MSCI Min Vol Canada ETFXMV-T7/24/20120.335 Stars4 Globes2.8019.078.167.097.978.011.809.490.007.125.833.8413.5433.149.082/3/2020

Source: Morningstar Research Inc. 

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

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