What are we looking for?
Canadian-listed ETFs with sustainable investment objectives
The screen
Despite the negative, sometimes politicized, views on sustainable (or ESG) investing, it might come as no surprise that to the average investor, the topic is far less polarized. Morningstar’s behavioural science team recently analyzed 26,000 Reddit posts around the topic of ESG, and found that most (about 69 per cent) of posts had a neutral sentiment. In other words, most Reddit posters do not have a particular stance on sustainable investing. Because the topic is rife with jargon, it can be challenging for even motivated investors to find investment fund products that have a core focus on sustainability.
Luckily in Canada, our regulators recently updated their guidance to investment fund managers on what must be disclosed in prospectus documents for funds that say they have an ESG core focus. In the guidance, regulators point to the concept of “ESG objective” funds, or those that have a sustainability-related investment objective alongside financial objectives described quite clearly in regulatory documents.
Investment objectives are an important core element of a fund’s disclosure because they define the purpose of the fund and outline features that make the fund unique from other funds. The statements made in the investment objective also set the bar for the degree and nature of regulatory scrutiny placed on the fund’s claims (particularly in the ESG space). This said, the universe of funds that consider ESG-related information in the investment process is much larger, but only a few (about 350 of approximately 4,000 unique investment funds, based on Morningstar’s data) funds have ESG-related investment objectives.
Today, we look for ideas within this space, using the Canadian Investment Funds Standards Committee’s responsible investing framework, which identifies mutual funds and ETFs that have a sustainability-related investment objective. To ensure ideas are indeed reasonable, I screened the Canadian ETF universe on two additional parameters:
- ETFs that have received a four- or five-star Morningstar Rating for Funds (also known as the “star” rating), indicating that the fund has historically outperformed respective category peers after fees, on a risk-adjusted basis, and
- ETFs that have received Morningstar Medalist Rating of gold, silver or bronze, highlighting funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (quality of the management team), parent (stewardship of the fund company) and process (robustness of investment decision making).
What we found
The ETFs that qualified in the screen are listed in the table accompanying this article, alongside categories, MERs, trailing performance, inception dates and ratings. The list is sorted first by category, then by the star rating. Investors are urged to first look at the category to which each fund belongs, given that Morningstar’s ratings are meant to measure performance against category peers.
This article does not constitute financial advice. It is always recommended to conduct one’s own independent research before buying or selling any of the funds or ETFs mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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