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What are we looking for?

Exposure to energy funds that have low levels of ESG risk.

The screen

One of the biggest misconceptions around sustainable investing is the idea that it requires a binary approach – is it sustainable, or is it not? In reality, the approaches utilized by portfolio managers to incorporate sustainability into a portfolio can vary a great deal.

Take exposure to the oil and gas sector. Though some fund managers may opt to completely screen out this sector (to the detriment of returns this year), others might seek to own energy companies with low degrees of ESG risk relative to their peers (a “best-in-class” approach). Investors are reminded that ESG risk refers to a company’s materially financial risk tied with its exposure to, and ability to manage, environmental, social and governance risks.

Today, we use Morningstar Direct to showcase mutual funds and exchange-traded funds available to the do-it-yourself investor that have exposure to the energy sector, yet exhibit low overall levels of ESG risk when considering the whole portfolio. To find examples of these funds, I screened Canadian-domiciled funds and ETFs on three dimensions:

  • Holdings in the energy sector exceeding 15 per cent of the portfolio (for reference the S&P/TSX Composite holds about 13.6 per cent in energy);
  • A Morningstar Sustainability Rating of four globes or better (recall that this rating is an time and asset-weighted aggregate of the Morningstar Sustainalytics ESG Risk rating of individual holdings within a portfolio. Companies who are able to manage their risks through effective corporate policies, relative to global industry peers, will score better on this measure);
  • An overall Morningstar star rating of three stars or better (out of five). As a reminder, the star rating is a look back at a fund’s risk-adjusted after-fee returns against peers within the same fund category.

Only funds available through discount brokerages and ETFs were considered in the screen.

As mentioned in this space last week, Morningstar provides a sustainability rating for funds regardless of whether the core intent of the manager is to invest in a sustainable manner. The rating is useful regardless of intent, but investors are urged to keep an eye on the rating as portfolio characteristics shift over time.

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

Canadian-domiciled funds exposed to the energy sector with low overall levels of ESG risk

FundTickerMER (%)Morningstar CategoryMorningstar Rating OverallMorningstar Sustainability RatingYTD Ttl. Rtn. (%)1Y Ttl. Rtn. (%)3Y Ann. Ttl. Rtn. (%)5Y Ann. Ttl. Rtn. (%)10Y Ann. Ttl. Rtn. (%)Inception DateBasic Materials (%)Comm. Svcs. (%)Cons. Cyclical (%)Cons. Defensive (%)Health Care % Indust. (%)Real Estate (%)Tech. (%)Energy % Fin'l Svcs. % Utilities %
Vanguard FTSE Canadian High Div Yld ETFVDY-T0.21Cdn. Div. & Income Eqty.5 Stars4 Globes34.947.115.111.2n/a2012-11-
TD Dividend Growth - D1.19Cdn. Div. & Income Eqty.4 Stars4 Globes29.638.612.59.9n/a2015-10-
iShares Jantzi Social ETFXEN-T0.55Canadian Equity4 Stars4 Globes29.739.712.610.39.62007-05-
RBC O'Shaughnessy All-Cdn Equity Fd D1.21Cdn. Small/Mid Cap Eqty.3 Stars5 Globes28.934.710.67.08.92007-07-0310.
Horizons Pipelines & Energy Services ETFHOG-T0.64Energy Equity5 Stars4 Globes42.558.78.55.6n/a2014-07-
BMO Global Infrastructure D1.74Global Infra. Equity3 Stars4 Globes8.310.46.96.2n/a2014-04-
AGFiQ Global Infrastructure ETFQIF-T0.45Global Infra. Equity3 Stars4 Globes16.116.48.1n/an/a2018-02-

Source: Morningstar Direct; data as of Nov. 9

The mutual funds and ETFs that meet the above requirements are listed in the accompanying table, along with their star rating, management expense ratios, trailing performance, inception dates and Morningstar category. Also included are the sector weights; note that HOG has a great deal of exposure to the energy sector yet scores well on sustainability.

Readers are reminded again that sustainable investing is not one-size-fits-all. It would behoove those interested to first understand their own motivations for investing sustainably, then find products that might fit that need. Above all else, remember that sustainable investments are still investments, and should provide reasonable after-fee risk-adjusted returns.

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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