Although 2018 was a tough year for stock markets around the world, it marked a turning point for responsible investment in Canada. According to the 2018 Canadian Responsible Investment Trends Report, more than $2 trillion in Canadian assets (just over half of all investments) now use one or more responsible investment strategies. Big investors like the Canada Pension Plan, Ontario Teachers’ Pension Plan and Alberta Investment Management Corporation are all firmly on board, knowing that sustainability equals profitability.
I’m encouraged that the big pension funds in Canada are all moving in this direction, but my fear is that regular investors might get left behind. Most brokers and advisors are badly misinformed when it comes to environmental, social, and governance (ESG) issues and are not responsive to investors who want to clean up their portfolio. Now more than ever, people need to take control of their money and invest in companies that are poised to succeed in tomorrow’s economy. Sustainable investments have performed as well as traditional investments, so there is no need to sacrifice financial returns. If your advisor won’t listen to your requests, it’s probably time to find a new advisor or learn how to do it yourself.
The good news is that there are now more options than ever for sustainable investors in Canada! You’ll notice that most of the top funds listed below are quite new, and therefore lack a financial track record. The only fund in the group with long-term performance data is the Jantzi Social Index. It appears both as a mutual fund and as an exchange-traded fund (ETF). As expected, the ETF performed better financially due to its lower fee. Both Jantzi Social Index funds outperformed funds linked to the S&P/TSX 60, the traditional benchmark for Canadian equities. This should come as no surprise since the Jantzi Social Index has beat en the S&P/TSX 60 every year since 2011.
[pullquote]The challenge for investors is determining which funds are just paying lip service to the notion of “socially responsible” or “ESG” and which ones are truly sustainable.[/pullquote]
It feels like mutual fund and ETF providers are jumping on the sustainable investment bandwagon with new funds coming out all the time. The challenge for investors is determining which funds are just paying lip service to the notion of “socially responsible” or “ESG,” and which ones are truly sustainable. That’s where the CK Sustainability Ratings come in. Funds are penalized for including companies that are destructive for people and the planet, so greenwashers will fall to the bottom of the list. Top funds are unlikely to include any companies that sell weapons, tobacco or thermal coal. Top funds also tend to avoid controversial issues like factory farming, tropical deforestation and for-profit prisons. I won’t promise that every fund on this list is squeaky clean, but they do represent a great starting point for anyone looking for the most sustainable investment funds on the market today.
The biggest challenge will be for individuals to decide which funds are the best fit for both their financial risk/return profile and their unique personal values. Many of the funds on this list are “thematic,” only investing in green sectors, which tend to include smaller companies focused on growth. I would expect these specialized funds to be less diversified and more volatile. It’s never a good idea to put too many of our eggs in one basket, so investors need to carefully consider how much of their money to invest in each fund as part of an overall investment plan. At the same time, investors should dig into the holdings of these funds to make sure there isn’t any company in there that is a deal-breaker from an ethical perspective.
I hope this fund ranking proves to Canadians that they now have lots of good options when it comes to sustainable investing. It’s an exciting time to be following this trend as it moves further into the mainstream.
Tim Nash is the founder of Good Investing, an investment coaching firm whose goal is to help “one million Canadians invest intentionally.”
| Rank | Fund Type | Name | 3-Year Compound Return | Weighted CK Sustainability Rating | Final score |
|---|---|---|---|---|---|
| 1 | Global Equity | NEI Environmental Leaders Fund Series A | NA | 32% | 99.60% |
| 2 | Global Equity | Greenchip Global Equity Fund* | NA | 29% | 99.30% |
| 3 | Global Equity | Desjardins SocieTerra Cleantech Fund A Class | NA | 25% | 98.00% |
| 4 | Global Equity | Russell Investments ESG Global Equity Fund | NA | 24% | 97.00% |
| 5 | Canadian Equity | NEI Jantzi Social Index Fund Series A | 6.2 | 38% | 91.10% |
*Retail version named Mackenzie Global Environmental Equity Fund
| Rank | Fund type | Name | 3-Year Compound Return | Weighted CK Sustainability Rating | Final score |
|---|---|---|---|---|---|
| 1 | Global Equity | AGFiQ Enhanced Global ESG Factors ETF (QEF) | NA | 26% | 100.00% |
| 2 | Global Equity | Mackenzie Global Leadership Impact ETF (MWMN) | NA | 26% | 97.50% |
| 3 | Canadian Equity | iShares Jantzi Social Index ETF (XEN) | 8.2 | 39% | 95.80% |
| 4 | Global Equity | Evolve Automobile Innovation Index ETF (CARS) | NA | 23% | 92.70% |
| 5 | U.S. Equity | Desjardins RI USA - Low CO2 Index ETF (DRMU) | NA | 18% | 90.00% |
Note: In both tables above, NA indicates no 3-year returns value available.
Methodology
1. The three-year after-fee compound returns are percent-ranked against funds in the same category to determine the 3-Year Compound Return Score, which is then weighted 50 per cent.*
2. Fund holdings are assigned a sustainability rating^, based on up to 21 indicators including percentage of revenues earned from “clean” products or services that benefit the planet, and then given a Weighted CK Sustainability Rating based on the weighted average score of its holdings**. This rating is percent-ranked against other funds in the same category to determine the Fund CK Sustainability Rating Score, which is then weighted 40 per cent.
3. The fund manager’s intention (yes/no) to manage the fund using responsible guidelines (identification made through the Responsible Investment Association – Canada) is assigned either 100 or zero per cent, which is then weighted 10 per cent.
* Note: If a fund is less than three years old and therefore has no three-year returns figure, its final score is based on fund holdings and fund manager’s intention only, then grossed up proportionately to 100 per cent.
** Holdings that are red-flagged automatically receive a zero per cent CK Sustainability Rating Score. Red flag holdings include companies which are classified in the Corporate Knights database for one or more of the following criteria: farm animal welfare laggard, industrial meat, high corporate fines, penalties or settlements, tobacco, controversial weapons, conventional weapons, small arms (hand guns), blocking climate policy, severe environmental damage, thermal coal, tropical deforestation, for-profit prison, repressive regime, Global Compact principles violators, gambling, pornography, or bank power asset financing for fossil power greater than renewable power.
Sources: Corporate Knights Research, FactSet (for revenue thresholds), Business Benchmark for Animal Welfare, Stockholm International Peace Research Institute, InfluenceMap, Oxford Sustainable Finance Programme, Global Canopy Programme, Enlace, Freedom House, RepRisk, NBIM, and Wespath.