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What are we looking for?

Sustainable funds that outshone peers in a tumultuous year.

The screen

Although largely overshadowed by the pandemic and events surrounding the U.S. election, 2020 turned out to be an incredible year in the realm of sustainable investing in Canada. By Morningstar’s count, 41 new sustainable mutual funds and exchange-traded funds were brought to the Canadian market last year, more than doubling the number launched in the year prior. Demand for these products has also risen. By our calculations, the assets within the retail sustainable fund market saw a year-over-year growth of roughly 66 per cent. With many new products coming to market as low cost ETFs, Canadians now have more choices than ever when choosing to invest sustainably. Moreover, 2020 showed, at least anecdotally, that choosing to investing sustainably does not necessarily mean sacrificing returns. Today, I use Morningstar Direct to showcase examples by screening our universe of 1,051 Canadian-domiciled ETFs for those that:

  • Morningstar has deemed a sustainable investment through our analysis of fund prospectus documents. Sustainable investments include funds that have a focus on ESG (environmental, social, governance) risk factors; impact funds (those that seek a measurable change in areas such as gender and diversity, alongside financial gains for investors); or environmental sector funds (those that invest broadly in areas such as renewable energy).
  • Have ranked in the top third of peers within their category (which include traditional non-sustainable funds) based on risk-adjusted after-fee performance over the 2020 calendar year.

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.

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What we found

The ETFs that met the above screen are listed in the accompanying table alongside their category, fees, inception dates, performance and 2020 percentile rank. As an example, the NBI Canadian Family Business ETF ranked in the fourth percentile of funds that manage primarily Canadian equities. In other words, the after-fee, risk-adjusted performance for this fund in 2020 was better than 96 per cent of funds in that category.

Though not used in the screen, also displayed is the Morningstar Sustainability Rating for funds (known informally as the “globe rating”), which is Morningstar’s assessment of the degree of ESG risk present in the fund portfolio. The rating is derived by first analyzing financially material ESG risks for a given subindustry and then comparing an individual company’s ability to manage those risks with 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. Finally, the individual company analysis is compiled and aggregated at the fund portfolio level, then compared with global fund peers to arrive at the globe rating, where five globes would be the top sustainability rating.

Sustainable ETFs that have outperformed their category rivals

FundTickerIndex FundMorningstar CategoryMER (%)2020 Category Rank (Percentile)Morningstar Sustainability RatingYTD Ttl. Rtn. (%)Ttl. Rtn. in 2020 (%)Inception Date
iShares ESG MSCI Canada ETFXESG-TPassiveCanadian Equity0.23302 globes2.15.33/18/2019
Desjardins RI Can Low CO2 Index ETFDRMC-TPassiveCanadian Equity0.29104 globes3.389/27/2018
RBC Vision Women's Ldrshp. MSCI Cda. ETFRLDR-TPassiveCanadian Equity0.29162 globes2.16.53/5/2018
NBI Canadian Family Business ETFNFAM-TPassiveCanadian Equity0.4043 globes3.513.81/15/2019
Desjardins RI Act. Cdn. Bnd. Low CO2 ETFDRCU-TActiveCdn. Fixed Income0.4110Not rated-19.89/27/2018
AGFiQ Global ESG Factors ETFQEF-NEActiveGlobal Equity0.45334 globes2.413.92/12/2018
CI First Asset MSCI Wld ESG Impact ETFCESG-NEPassiveGlobal Equity0.67164 globes2.9219/17/2019
Horizons Global Sustainability Ldrs. ETFETHI-TPassiveGlobal Equity0.6955 globes2.835.510/31/2018
CI First Asset MSCI Wld ESG Ipt ETF UnHCESG-B-NEPassiveGlobal Equity0.73134 globes2.523.29/17/2019
iShares ESG MSCI USA Index ETFXSUS-TPassiveU.S. Equity0.28194 globes2.6203/18/2019
Desjardins RI USA Low CO2 Index ETFDRMU-TPassiveU.S. Equity0.29164 globes2.421.59/27/2018

Source: Morningstar Direct. YTD returns as of Jan. 26.

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

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

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