Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

What are we looking for?

Growth-oriented Canadian stocks with lower levels of ESG risk relative to global peers.

The screen

The 2021 federal budget released this week outlined the government’s plan to invest in clean-tech projects and confirmed the issuance of the first federal green bond, among many other initiatives. Alongside these announcements, Morningstar’s own data show that the market for sustainable mutual funds and exchange-traded funds in Canada has grown by a whopping 160 per cent in the one-year period ended March 31. It is clear that the idea of investing sustainably is not going away. Along this same vein, today I use Morningstar CPMS to look for growth-oriented companies in the S&P/TSX Composite Index that show lower degrees of environmental, social and governance risk relative to peers. To do this, I ranked the 229 stocks in the index on the following metrics:

  • Five-year average return on capital (a profitability metric, higher figures preferred);
  • Latest reported return on equity;
  • Five-year average growth rate in earnings per share (on average, how much the bottom line has grown each year over the past five).

I also placed a screen using Morningstar Sustainalytics’ ESG Risk score. The score is meant to measure the ESG risk associated with a company and is derived by analyzing financially material ESG risks for a given subindustry and comparing a company’s ability to manage those risks against global peers. For example, an energy producer will have higher environmental risks as the world transitions to a low-carbon economy and hence greater emphasis would be put on the company’s ability to manage these risks. Technology companies that hold large amounts of client information have a greater need to manage social risks. The Sustainalytics’ ESG Risk score appears as a number from zero to 100. A company with a score greater than 40 would be deemed to have a high degree of ESG Risk relative to peers. In today’s strategy I only included companies with a score less than 20.

Story continues below advertisement

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 multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

What we found

I used Morningstar CPMS to back-test this strategy from November, 2011, to March, 2021, using a maximum of 15 stocks with no more than four per economic sector. Once a month, stocks were sold if they fell below the top 35 per cent of the index based on the aforementioned metrics and replaced with the highest ranking stock not already held in the portfolio. It should be noted that the ESG Risk score was first made available in November, 2018; prior to that, the screen was not used. On this basis, the strategy produced an annualized total return of 10.3 per cent, while the S&P/TSX Composite gained 7.9 per cent. Between November, 2018, and March, 2021, the strategy produced an annualized total return of 15 per cent while the index advanced 12.9 per cent on the same basis.

The stocks that meet the requirements to be purchased today are listed in the accompanying table. This article does not constitute financial advice. It is always recommended to speak with a financial adviser or professional before investing.

TSX stocks with lower levels of environmental, social and governance risk relative to global peers 

RankCompanyTickerMorningstar IndustryMkt. Cap. ($ Mil.)5Y Avg. ROC (%)Trailing ROE (%)5Y Avg. EPS Grth. (%)ESG Risk ScoreDiv. Yld. (%)12M Ttl. Rtn. (%)Recent Close ($)
1Labrador Iron OreLIF-TSteel2,490.931.139.833.416.49.5119.738.92
2BRP Inc.*DOO-TRec. Vehicles4,569.244.753,501.028.714.40.5333.6112.06
3Cdn. Pacific RailwayCP-TRailroads59,684.421.332.816.917.00.846.2447.71
4Westshore Term.WTE-TMarine Shipping1,262.626.117.63.318.64.049.119.96
5Cdn. Nat'l RailwayCNR-TRailroads98,679.921.319.94.917.31.827.7138.85
6CGI Inc.GIB-A-TIT Services24,151.420.218.79.918.80.027.7107.42
7Sleep Country CdaZZZ-TSpecialty Retail1,226.518.122.26.216.50.0190.233.42
8Open Text Corp.OTEX-TSoftware - App.16,760.015.422.014.815.11.614.561.44
9CCL Industries Inc.CCL-B-TPckg./Containers12,382.716.818.08.718.51.262.869.1
10Metro Inc.MRU-TGrocery Stores14,732.516.014.38.019.71.70.459.31
11IGM Financial Inc.IGM-TAsset Mgt.9,575.216.616.11.015.15.662.740.18
12CIBCCM-TBanks - Div.55,354.217.412.00.918.34.760.1123.6
13TranscontinentalTCL-A-TSpecialty Bus. Svc.2,017.216.613.40.98.33.9114.423.18
14Cdn. Tire Corp.CTC-A-TSpecialty Retail12,118.911.420.38.516.72.4111.1199.3
15Cogeco Comm.CCA-TTelecom Services3,802.311.117.38.816.62.122.0119.67

Source: Morningstar CPMS. Data as of April 20. *BRP Inc.'s high ROE is due to the negative book value of the company's equity. This extreme value was accounted for in the ranking process. 

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

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies