Given the poor performance of green energy stocks and the chorus of opposition against anything viewed as “woke,” it’s easy to get lost in the narrative that the shine has worn off sustainable investing. But that’s not what I’m seeing. The negative sentiment doesn’t match the tremendous progress that is being made.

Sustainable investments soared in 2020 and 2021, and that was certainly when the shine was on. They mostly outperformed traditional investments, and we also saw tons of new funds launch, giving sustainable investors more options. It was a different story in 2022. Sustainable investments underperformed as oil prices spiked and a pronounced backlash against ESG (investing that optimizes environmental, social and governance factors) emerged, especially in the U.S. Comparatively few new ESG-labelled funds have been launched in the last two years.

Despite record oil-company profits and a surge in military share prices stemming from instability in the Middle East, most sustainable investments have quietly outperformed in 2023. But big financial firms like BlackRock aren’t talking about it anymore. Most of the media attention has been focused on the ESG blowback while ignoring the successes. We used to be concerned about greenwashing, but now it seems that many companies are deliberately staying quiet in what some are calling greenhushing – the practice of downplaying or keeping quiet about their sustainability initiatives.

Green stocks have come back to earth

That’s not to say there haven’t been lows. The worst-performing area for sustainable investors was certainly in renewable energy. Clean energy stocks performed tremendously in 2020 and early 2021, but in hindsight this was clearly a bubble.

Companies became way too over-valued, and share prices that once surged have settled back down. It didn’t help that tech companies in general have had a rough time since 2022, and now higher interest rates are negatively affecting utilities with high up-front capital costs for large green energy projects.

Those of us who invested in 2019 or earlier are still doing well, but I feel terrible for people who jumped on the green energy bandwagon in 2020. Now that prices have fallen back to more reasonable levels, I think investors should take another look to see if now is a good time to buy.

Negative sentiment hasn’t affected capital flows

Despite the negative sentiment and falling share prices of green energy stocks, the inflows of capital are still tremendous. According to reports from Bloomberg New Energy Finance and the International Energy Agency, green themes like renewable energy, green buildings and electric cars are seeing double-digit growth in capital investments.

The green economic transition is unstoppable. We can argue whether it’s happening fast enough to avoid the worst-case climate scenarios, but there is no denying the investment flows that continue to pour into the green economy.

A big reason for the increased money flow was the passing of the historic Inflation Reduction Act in 2022. We saw the benefits in 2023 with huge growth in green jobs in the U.S. Even better, the majority of these jobs are in red states. It’s hard to argue against the green transition when your livelihood (or the livelihood of someone you love) is dependent on it.

In Canada, the climate policy conversation, sadly, has circled back to attacks on the carbon tax. Whatever your politics, I think we can all agree that a carrot is more popular than a stick.

Anti-ESG funds have stalled

There was so much pushback against sustainable investing in 2022 that we saw the launch of several anti-ESG funds with ticker symbols like YALL and DRLL. You’ve probably heard of Republican presidential candidate Vivek Ramaswamy, but did you know that in early 2022 he co-founded Strive Asset Management, which offers “anti-woke” investment funds?

Although these funds got off to a roaring start with lots of initial investment, they haven’t seen nearly the capital flows that actual ESG funds experienced. I tracked one fund – the Constrained Capital ESG Orphans ETF – which invested in companies that are usually excluded by sustainable investors. It launched in May 2022 but failed to attract investors and closed, or “de-listed,” in June 2023.

Language has been standardized

I’ve been frustrated by people misusing and conflating various sustainable investment strategies. Divestment is different from ESG, which is different from impact investing. Thankfully, we now have a partnership between the CFA (Chartered Financial Analyst) Institute, the UN Principles for Responsible Investment and the Global Sustainable Investment Alliance to harmonize definitions of sustainable investment approaches.

Check out quick descriptions of the five approaches in the glossary (below).

Now’s the time to act

Amidst the economic turmoil this year, green sprouts are growing. People are increasingly recognizing that our economic system is broken and are actively looking for solutions. One of the easiest solutions to implement is shifting your investments in a more sustainable direction.

It’s still a challenge to pick the good funds amidst the greenwashers, so look to these lists for inspiration. Make sure you consider the risks before carefully deciding how much to invest in each category.

Corporate Knights reviewed 2949 funds and rated the equity funds deemed responsibly managed in four categories, with 40 funds listed below. Download the complete list.

FUND NAME	% market weight covered by Corporate Knights ratings*	Weighted rating**	Final score***	Holdings date
INTERNATIONAL
Invesco S&P International Developed Dividend Aristocrats ESG Index ETF (IIAE)	95.9%	20%	100%	2023-09-30
Franklin ClearBridge Sustainable International Growth Fund	93.7%	19%	95%	2023-08-31
iShares ESG MSCI EAFE Leaders Index ETF (XDLR)	94.9%	17.7%	85.2%	2023-09-30
BMO MSCI EAFE ESG Leaders Index ETF (ESGE)	95%	17.7%	83.3%	2023-09-30
Invesco S&P International Developed ESG Tilt Index ETF (IITE)	94.8%	17.7%	82.3%	2023-09-30
Wealthsimple Developed Markets EX North America Socially Responsible Index ETF (WSRD)	92.4%	17.4%	81.3%	2023-09-30
iShares ESG Aware MSCI EAFE Index ETF (XSEA)	96.9%	17.3%	79.4%	2023-09-30
TD Morningstar ESG International Equity Index ETF (TMEI)	94.9%	17.2%	78.4%	2023-09-30
NEI International Equity RS Fund	92.2%	17%	75.4%	2023-08-31
Desjardins SocieTerra International Equity Fund	92.4%	16.9%	74.5%	2023-09-30
GLOBAL
AGF Global Sustainable Growth Equity	95.5%	27.7%	100%	2023-03-31
Black Diamond Impact Core Equity Fund	92.5%	23.6%	99%	2023-06-30
NEI Environmental Leaders Fund	96%	21.7%	98.5%	2023-08-31
Mackenzie Betterworld Global Equity Fund	92%	21.7%	98.1%	2023-03-31
IA Clarington Inhance Global Equity SRI	95.8%	21.4%	97.6%	2023-03-31
VPI Sustainability Leaders Pool	75.5%	21.1%	97.1%	2023-09-30
Mackenzie Greenchip Global Environmental All Cap Fund	88.8%	20.6%	95.7%	2023-03-31
CI Global Climate Leaders Fund	87.6%	20.5%	95.2%	2023-03-31
Desjardins SocieTerra Positive Change Fund	89.4%	20.5%	94.8%	2023-09-30
Global Iman Fund	100%	18.7%	93.8%	2023-06-30
U.S.
Invesco ESG NASDAQ 100 Index ETF (QQCE)	99.3%	21.3%	100%	2023-09-30
Desjardins SocieTerra American Equity Fund	98.8%	20.9%	99.5%	2023-09-30
Invesco S&P 500 ESG Index ETF (ESG)	99.7%	17.7%	92.6%	2023-09-30
Invesco S&P 500 ESG Tilt Index ETF (ISTE)	99.8%	16.9%	91.1%	2023-09-30
Invesco S&P US Total Market ESG Index ETF (IUCE)	99.1%	16.8%	90.6%	2023-09-30
Mackenzie Bluewater US Growth Fund	97.7%	16.5%	89.6%	2023-03-31
iShares ESG Aware MSCI USA Index ETF (XSUS)	100%	16.1%	88.6%	2023-09-30
Invesco S&P US Total Market ESG Tilt Index ETF (IUTE)	99%	16.1%	88.1%	2023-09-30
iShares ESG MSCI USA Leaders Index ETF (XULR)	100.1%	15.8%	87.1%	2023-09-30
BMO MSCI USA ESG Leaders Index ETF (ESGY)	99.7%	15.8%	86.6%	2023-09-30
CANADIAN
iShares Jantzi Social Index ETF (XEN)	97.9%	21%	99.1%	2023-09-30
Desjardins SocieTerra Canadian Equity Fund	92%	18.2%	95.5%	2023-09-30
RBC Vision QUBE Fossil Fuel Free Low Volatility Canadian Equity Fund	89.1%	18%	94.6%	2023-06-30
iShares ESG MSCI Canada Leaders Index ETF (XCLR)	92.8%	17.8%	93.8%	2023-09-30
BMO MSCI Canada ESG Leaders Index ETF (ESGA)	95.8%	17.4%	92%	2023-09-30
TD Morningstar ESG Canada Equity Index ETF (TMEC)	95.5%	17.2%	90.2%	2023-09-30
Invesco S&P/TSX Composite ESG Index ETF (ESGC)	94.9%	17%	88.4%	2023-09-30
Invesco S&P/TSX Composite ESG Tilt Index ETF (ICTE)	93%	16%	84%	2023-09-30
Invesco S&P/TSX 60 ESG Tilt Index ETF (IXTE)	97.8%	15.9%	81.4%	2023-09-30
CIBC Sustainable Canadian Equity Fund	95%	15.7%	78.7%	2023-06-30

*Sum of a given fund’s underlying constituents’ weights that are rated by Corporate Knights
**The weight of a constituent of a given fund multiplied by its rating by Corporate Knights, summed up for all of that fund’s underlying constituents
***The score of a given fund (based on the percent-ranking calculation approach) derived by comparing its weighted rating against that of other funds in the same category

GLOSSARY – Five common approaches:

Screening
Applies strict rules to decide what companies are in or out of a fund. Negative screening – also known as divestment – is common for “sin sectors” like tobacco, weapons and (increasingly) fossil fuels.

ESG integration
Considers environmental, social and governance factors within investment decision-making to lower exposure to financial and reputational risks. ESG-integrated funds don’t screen out particular companies.

Stewardship
This can include engagement with a company’s senior leadership on a wide range of ESG issues and voting for shareholder resolutions.

Thematic investing
Selects only companies that contribute to a sustainability “theme” like clean energy, water or green buildings.

Impact investing
Investing with the intention to generate measurable social and/or environmental impact.

Tim Nash is the founder of Good Investing.

The post Sustainable investments had secretly great year appeared first on Corporate Knights.

2023 Responsible Funds|Winter 2023

2023 responsible funds guide: ESG investing matures while markets reel

Love it or hate it, you can no longer ignore ESG and responsible investment strategies. Where should conscientious investors put their money?  

view previous rankings »

2022 RESPonsible funds

2021 eco-fund guide

2020 ECO-FUND GUIDE

2019 ECO-FUND GUIDE

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The post 2023 Responsible Funds Guide: ESG investing matures while markets reel appeared first on Corporate Knights.

It feels almost fashionable to bash responsible investing these days. 

Most of the criticism targets the acronym “ESG,” which stands for “environmental, social and governance.” ESG is used alongside traditional financial analysis to account for previously ignored “externalities” such as carbon emissions, boardroom diversity and employee satisfaction. Unfortunately, some circles erroneously refer to ESG as some sort of “woke” form of investing that pushes a “socialist agenda” into capital markets.

These misguided attacks are increasingly coming from people in high places. Elon Musk recently tweeted that “ESG is a scam” after Tesla got removed from a major ESG index for a lack of disclosure around key environmental and social issues and allegations of racism on the factory floor. Noted venture capitalist and PayPal founder Peter Thiel said in an April speech that “ESG is a hate factory” and equated it to the Chinese Communist Party. Even former U.S. vice-president Mike Pence joined the attack, saying “liberal activist investors are forcing private companies to abide by ESG investing principles, elevating left-wing environmental, social, and corporate governance goals over the interests of the business.”

Most of these hit jobs seem intended to score political points with a specific audience. Musk’s comments align closely with his recent embrace of right-wing politics. Thiel’s speech was made at a Bitcoin conference where attendees must have been upset about cryptocurrencies coming under fire for their heavy carbon footprint. Pence was speaking at an oil and gas conference where executives are being asked tough questions by investors looking to decarbonize their portfolios. Investors in unsustainable assets are feeling the heat, so we shouldn’t be surprised that they would fight back with anger against a movement that makes them accountable for the pollution they are generating.

But it’s not all broad-brushstroke political attacks. I’m seeing more nuanced critiques from industry insiders. Tariq Fancy, former BlackRock chief investment officer for sustainable investing, in a recent TEDx talk called fossil fuel divestment a placebo, equating it to giving wheatgrass juice to a cancer patient. Stuart Kirk was suspended from his job as head of responsible investing at HSBC after dismissing climate risk at a conference and telling us what he really thinks: “Who cares if Miami is six metres underwater in 100 years? Amsterdam has been six metres underwater for ages and that’s a really nice place.”

These comments have understandably caused quite a stir. They show that many large financial firms are just paying lip service to sustainable investing, and we shouldn’t kid ourselves to think that they are in it to change the world. Profit maximization is still the end goal, so sustainable investors need to expect greenwashing and do their homework before buying in.

These comments also show that there is a massive skills gap in the sustainable investment industry. Fancy and Kirk have no background in environmental studies, systems thinking or sustainability, and it shows. We are fooling ourselves if we think that a profit-first worldview will help us solve sustainability challenges. Fancy and Kirk have done a great job calling out problems in the responsible investment industry, but they offer little in the way of solutions.

Are these critiques a good excuse to dismiss all responsible investment funds and companies? Of course not. If anything, the political attacks show that we’re on the right track – we’ve got their attention. The more nuanced critiques are an opportunity for us in the responsible industry to step up our game, and fight back. We need better communication and explanation of what ESG is and what it isn’t. We need rigorous academic research to back up our claims. We need to be leaders in disclosure and transparency, opening up the curtain for anyone who asks. And we need change-makers and social innovators to learn finance so that we have people with the right worldview in positions of power at our large financial institutions.

The post ESG isn’t a scam. Here’s why. appeared first on Corporate Knights.

There was so much optimism at the end of 2020 as President Joe Biden was entering the White House and green stocks surged to all-time highs. Unfortunately, those hopes were dashed as it became clear that the United States wasn’t going to become the climate leader so many of us wanted it to be. Renewable energy stocks fell back to pre-election levels, and then dropped even further later in the year as the Democrats’ Build Back Better bill – that would have ramped up public investment in green infrastructure – morphed into Build Back Never.

It could have been a terrible year for sustainable investors. Military and oil and gas stocks (which sustainable funds tend not to own) shot up in value with the Russian invasion of Ukraine, while thematic funds focused on green technologies have fallen alongside the tech sector. But broader “do less evil” funds that incorporate environmental, social and governance (ESG) criteria remain resilient and have performed nicely, demonstrating the need for sustainable investors to remain diversified and not get too caught up in sexy cleantech.

There’s no doubt that sustainable investors are affecting boardroom conversations, and these discussions dug deeper in the last year. Proxy voting is usually a dreadfully boring topic, but things got spicy in 2021. ExxonMobil’s annual general meeting was a turning point, when asset managers like BlackRock and Vanguard joined a small activist hedge fund, Engine No. 1, to elect three board members who could help steer the company toward a climate transition. With major asset managers now understanding ESG risks and opportunities, sustainable investors should get out their popcorn for the 2022 proxy voting season. Activist investors should be pushing companies much harder to get serious about going net-zero.

As of spring, the sustainable investment ecosystem is looking ripe for growth, with even more new mutual funds and exchange-traded funds (ETFs) on the market. The money is flowing, with assets invested in sustainable mutual funds and ETFs doubling from US$17 billion to $34 billion.

Sustainable investing is still a bit of a wild west when it comes to marketing and communications, but I’m happy to see some sheriffs riding to town.

However, it is still a small slice of the $2-trillion market. Retail investors seem cautious about sustainable investing, and greenwashing is a huge concern. Serious criticisms around ESG rating systems are emerging, forcing the sustainable investment industry to prove that it is creating real impact. Morningstar recently removed more than 1,200 funds from its sustainable investment list for using ambiguous language in legal filings. There isn’t a lot of trust in the marketing and branding of sustainable investment funds, which is why research like this ranking of responsible funds is so important. Investors still need to take a hard look under the hood of any fund before they buy.

The good news is that we’re seeing further advancements in the areas of transparency and taxonomies that should rein in greenwashing. The Task Force on Climate-Related Financial Disclosures (TCFD) has emerged as the global standard for climate change reporting and disclosure. The European Union published a taxonomy for sustainable finance that, although controversial for the inclusion of natural gas and nuclear energy, provides us with a clear, common language across the financial sector.

Closer to home, the Canadian Securities Administrators published a notice that forces mutual funds and ETFs to declare openly what ESG strategies they are using, and ensure that these strategies are baked into their formal investment objectives. Sustainable investing is still a bit of a wild west when it comes to marketing and communication, but I’m happy to see some sheriffs riding to town.

My final observation for 2021 is that the sustainable investment industry is suffering from a severe shortage of qualified labour. Back in 2008, when I started my career in investing with a master’s degree in sustainability, I couldn’t find a job to save my life. Any job postings in this space were overflowing with applicants, and I didn’t stand a chance. Now, every financial firm is trying to staff up in this area and is having a devil of a time finding people who can bridge the knowledge gap between sustainability and finance. I’ve long said that it’s easier to teach a sustainability expert about finance than to teach a finance expert about sustainability. So, if you’ve got a background in social or environmental studies, you might find it lucrative to switch careers into finance right about now.

Overall, 2021 was a mixed bag for sustainable investing. Lots of optimism and ecosystem development, but also lots of disappointment and frustration with the status quo. We are rapidly approaching a breakdown of our social and environmental systems, but finance is like a giant ship trying to change course in the water. Is it turning fast enough? Only time will tell.

Tim Nash is the founder of Good Investing.

Corporate Knights ranked more than 1,000 mutual funds and ETFs based on their financial and sustainability performance and ESG-aligned management commitments.

Here are the top scorers.

Methdology: Funds are scored according to 1) three-year net return percentile rank (50%) and 2) weighted sustainability rating* percentile rank based on analysis of their holdings** (50%). If the fund is less than three years old, its final score is based on #2, which is grossed up to 100%. Only funds that have an ESG mandate are eligible for the ranking. Qualifying funds must have at least two-thirds of their holdings rated in the Corporate Knights Research Universe. For balanced/corporate fixed income funds, the minimum threshold is 50% of the holdings to be rated in the Corporate Knights Research Universe.***

*Based on Corporate Knights’ rating methodology as deployed in the 2022 Global 100 Most Sustainable Corporations in the World ranking, which consists of 24 key performance indicators as follows: Clean Revenue, Clean Investment, Paid Sick Leave, Sustainability Pay Link, Energy/GHG/Water/Waste/VOC/NOx/SOx/Particulate Matter Productivity, CEO–Average Worker Pay Ratio, Board and Executive Racial and Gender Diversity, Supplier Sustainability Score, Percentage Tax Paid, Pension Fund Quality, Sanction Deductions, Injuries and Fatalities.

** Holdings that are red-flagged automatically receive a 0% CK Sustainability Rating Score. Red-flag holdings include companies that are classified in the Corporate Knights database for one or more of the following criteria: access-to-nutrition laggards, access-to-medicine laggards, adult entertainment, companies blocking climate policy, cement-carbon laggards, civilian firearms, controversial and conventional weapons, deforestation and palm-oil laggards, fossil fuels (energy), farm-animal-welfare laggards, for-profit prisons, gambling, gross corruption violations, harmful pesticides, illegal activity, oil sands laggards, severe environmental damage, severe human rights violations, thermal coal and tobacco.

*** Corporate fixed income instruments are mapped to the ultimate parent company in the Corporate Knights Research Universe.
Sources: Corporate Knights Research, Fundata, Responsible Investment Association, Refinitiv, S&P Capital IQ, InfluenceMap, Norges Bank Investment Management (NBIM), Chain Reaction, NZ Super Fund, Stockholm International Peace Research Institute, American Friends Service Committee, Access to Nutrition Initiative, Access to Medicine Initiative, Motley Fool, animal welfare experts, Unearthed, Urgewald/GCEL, Deforestation Free Funds, Wespath, Sin Stocks, RedLightNetwork, Rainforest Action Network, Farm Animal Investment Risk and Return (FAIRR).

The post In wild west of sustainable investing, which funds are the most responsible? appeared first on Corporate Knights.

The COVID-19 crash came on suddenly. Investors panicked when they realized the severity of the situation, and there was talk that we could be headed into a depression. Central banks including the Bank of Canada and the U.S. Federal Reserve stepped in quickly, providing liquidity to prevent the bond market from collapsing. Many of us were afraid that it would be a repeat of the 2008/09 crash, when sustainability got thrown on the backburner. Fortunately, it feels like this time is different, as leading economies around the globe are baking social and environmental concerns into their economic recovery strategies.

It’s fair to assume that more of that baking lies ahead in Canada, with the appointment of impact investing maven Michael Sabia as deputy finance minister in November. The Canadian government is also in the midst of creating a Sustainable Finance Action Council to help ratchet up action on that front, and the Bank of Canada is launching a pilot project with major banks and insurance companies to assess and understand climate risk.

South of the border, things are looking even more optimistic. After four years of a White House that dismissed climate science, we’re seeing an administration that actually treats climate change like the crisis it is. The nomination of Janet Yellen to the role of Treasury secretary is encouraging, since she just co-chaired the G30 Working Group on Climate Change and Finance with Mark Carney, former governor of the Bank of Canada. Yellen has made her position clear: “Carbon must be priced appropriately to internalize the costs of polluting the planet.” A carbon tax in the U.S. would be a catalyst for further sustainable investment gains.

Sustainable investors are happy right now. According to the most recent report from the Responsible Investment Association, 80% of responsible investment funds have outperformed the average of their asset classes this year. The biggest winners have been the “doing more good” funds that invest in sustainability themes like cleantech and renewable energy. Electric car shares have been particularly impressive, with Tesla up eightfold (it’s now worth two and a half times more than ExxonMobil) and Chinese EV maker NIO up 20-fold.

Investors should be cautious since it’s unlikely that green sectors will continue to grow at such a rapid pace, but it does indicate markets have accepted that a green transition is underway and explains why sustainable investments have performed so well.

In addition to terrific financial performance, we’ve also seen the sustainable investment ecosystem mature considerably. Corporations are tripping over each other pledging to be net-zero by 2050, and 2020 saw the launch of a record number of new sustainable investment funds, including new exchange-traded funds (ETFs) from BMO, BlackRock and Wealthsimple. Sustainable investors now have more choice than ever, and demand is growing. A global report from Morningstar shows that more than US$347 billion poured into sustainable funds in 2020, eclipsing 2019’s record $160 billion of inflows. Much of that growth was in Europe, but in Canada, 41 new sustainable funds and ETFs were launched in 2020 alone, more than double 2019.

According to the 2020 RIA Investor Opinion Survey, 75% of respondents want their financial services provider to show them sustainable investment options, but only 28% of respondents have been asked if they are interested. For those of you who have been dragging your feet on switching your investments, consider this a kick in the butt to get it done ASAP. Almost every bank and financial advisor now has sustainable investment products on the shelf, and the myth that sustainable investments underperform financially has been thoroughly busted. If your advisor isn’t up to speed on these options, it’s time to find a new advisor (RIA has a marketplace for investment advice) or explore do-it-yourself investing. I’m hopeful that the 2021 Eco-Fund Ranking will be a helpful resource as you evaluate the options and decide which approach is right for you.

Tim Nash is the founder of Good Investing.

Corporate Knights ranked more than 1,000 mutual funds and ETFs based on their financial and sustainability performance and ESG-aligned management commitments.

Here are the top scorers.

Methodology: Funds are scored according to 1) three-year net return percentile rank (50%), 2) weighted sustainability rating percentile rank based on analysis of their holdings (40%), and 3) fund-manager intention to manage the fund according to responsible guidelines (10%). If the fund is less than three years old, its final score is based on #2 and #3, which are grossed up proportionately to 100%. Funds that do not have an ESG mandate or are not operated according to responsible guidelines are automatically excluded from the ratings. Funds that score in the highest or second-highest quintile among category peers receive a five-tree or four-tree rating respectively.

* Holdings that are red-flagged automatically receive a 0% CK Sustainability Rating Score. Red-flag holdings include companies that are classified in the Corporate Knights database for one or more of the following criteria: access-to nutrition laggards, access-to-medicine laggards, adult entertainment, companies blocking climate policy, cement-carbon laggards, civilian firearms, controversial and conventional weapons, deforestation and palm-oil laggards, fossil fuels (energy), farm-animal-welfare laggards, for-profit prisons, gambling, gross corruption violations, harmful pesticides, illegal activity, oil sands laggards, severe environmental damage, severe human rights violations, thermal coal, tobacco, alcohol, companies blocking climate resolutions, companies financing misleading media, industrial meat, nuclear energy, and companies most exposed to ESG and business-conduct risks.

Sources: Corporate Knights Research, Fundata, Responsible Investment Association, Refinitiv, InfluenceMap, Norges Bank Investment Management (NBIM), Chain Reaction, NZ Super Fund, Stockholm International Peace Research Institute, American Friends Service Committee, Access to Nutrition Initiative, Access to Medicine Initiative, Motley Fool, animal welfare experts, Unearthed, Urgewald/GCEL, Media Matters, MVIS, RepRisk

The post 2021 Eco-Fund Guide: The Ultimate Guide to Responsible Investing appeared first on Corporate Knights.

Do-it-yourself investors who want to divest from fossil fuels can now purchase a single fund and get a broad mix of global stocks and bonds. The new iShares ESG ETF portfolios (available in Canada through any online brokerage) are part of BlackRock’s – the world’s largest asset manager – commitment to put climate change and sustainability at the centre of its investing approach. These portfolios are game-changers for sustainable investing, making it so much easier and more accessible for smaller investors who want to use a buy-and-hold strategy.

Up until a few years ago, DIY investors using exchange-traded funds (ETFs) had to go through the pain of buying stock ETFs and bond ETFs separately. Moreover, stocks were split up by geographic location, so we had to buy at least three or four different funds to get global exposure. The ETF industry has been steadily catching up, and I’ve watched as the Canadian Couch Potato model portfolios (the standard bearer for Canadian DYI investors) have quickly gone from five funds down to three, and now to a single “all-in-one” ETF from providers like Vanguard, iShares and BMO.

All-in-one ETFs, also known as “asset allocation” or “one-click” funds, are very similar to the balanced mutual funds that are so popular at the banks. Instead of buying separate funds for Canadian stocks, U.S. stocks, international stocks, and bonds, asset-allocation ETFs combine all those different asset classes in just one fund. All-in-one ETFs automatically rebalance as the market swings back and forth, ensuring that investors never end up taking too much – or too little – risk. Understandably, these all-in-one ETFs are very popular in Canada, with more than $4.5 billion under management.

Sustainable investment options have always lagged behind with these types of innovation in the investment world. When a pipeline activist came to me in 2014 demanding that not one penny go toward coal, tar sands or pipelines, I had to stretch my creative boundaries and cobble together a model portfolio using 11 different sector ETFs. Even funds labelled “ethical” and “green” generally contained fossil fuel holdings. So imagine my delight that iShares announced a lineup of ‘all-in-one’ ETFs based on their “ESG Advanced” series of sustainable funds.

According to its methodology brief, the iShares ESG Advanced funds exclude ethically questionable businesses, including fossil fuels, adult entertainment, alcohol, weapons, for-profit prisons, gambling, genetically modified organisms (GMOs), nuclear power, palm oil, predatory lending and tobacco. Additionally, the funds exclude companies from any sector with a major controversy or that have a poor environmental, social and governance (ESG) rating.

The most stringent of sustainable investors will still take issue with some companies in this iShares portfolio. The funds have what’s called a “home bias,” meaning that they have a deliberately high allocation to the Canadian stock market, so investors in these funds end up overweight in the financial sector. Big banks like RBC, TD Canada Trust and Scotiabank still feature prominently despite their massive investments in oil and gas, since they have a heavy weight in the Canadian market. The same is true with mining, since a disproportionate number of mining companies are listed in Canada.

These new ETF portfolios are just so cheap, simple and straightforward that they eliminate many of the trade-offs that sustainable investors previously had to contend with. Whether they win favour with every sustainable investor in Canada is another matter.

The post New BlackRock ETFs let Canadians divest from fossil fuels – sort of appeared first on Corporate Knights.

The COVID-19 pandemic is pushing every industry into the future, and the investment industry is no exception. Canadian investors are increasingly embracing the shift away from more expensive mutual funds and into lower-cost exchange-traded funds (ETFs). According to a report from the Investment Funds Institute of Canada, more than $18 billion has flowed into ETFs so far in 2020, compared to only $4 billion into mutual funds. As the stock market crashed and recovered in March, ETF investors stayed the course by investing $3 billion, while mutual fund investors panicked and sold more than $14 billion.

A big part of the growth in ETF assets has come from so-called robo advisors like Wealthsimple, which automate the process and make it very easy for people to start investing in ETFs. These robo advisors have only increased in popularity during the pandemic: Wealthsimple, for example, saw twice as many sign-ups in March of this year compared to March of last year. Not every robo advisor offers a socially responsible portfolio, but for those that do, approximately one third of new investors opt in. Up until now, most of the offerings were similar and offered a very loose definition of “socially responsible,” so I’m very happy to see Wealthsimple raising the bar.

I wasn’t impressed when Wealthsimple launched its first socially responsible portfolio in March 2016. The portfolio consisted of a mishmash of exchange-traded funds (ETFs), all with different and often conflicting definitions of social responsibility. Wealthsimple itself admits that the original methodology left a lot to be desired. Thankfully, the company updated the portfolio in June by launching its own socially responsible ETFs, with lower management fees and a unique methodology.

With more than $5 billion of assets under management, it’s worth examining Wealthsimple’s new socially responsible portfolio to see whether it really lets people “invest in a better world” – or is just clever marketing. Wealthsimple’s updated socially responsible portfolio is chiefly made up of two new ETFs: the Wealthsimple North America Socially Responsible ETF (ticker: WSRI) that includes Canadian and U.S. companies, and the Wealthsimple Developed Markets ex-NA Socially Responsible ETF (ticker: WSRD) that includes companies from Europe, Japan and Australia. Both ETFs trade on the Toronto Stock Exchange and use the same screening methodology to determine which companies are allowed in. WSRI charges an annual management fee of 0.2%, while WSRD costs 0.25%.

Contrary to some of the ETFs in Wealthsimple’s old socially responsible portfolio, the new ETFs explicitly exclude weapons manufacturing, defence contracting, tobacco, alcohol, adult entertainment and any company found to be in violation of the UN Global Compact (principles covering human rights, child labour and corruption). The new funds also exclude companies related to oil, gas and coal, making them fossil-fuel free. Additionally, the top 25% of carbon emitters in each industry are scrapped, as are companies with fewer than three women or less than 25% female representation on their boards of directors. According to a 2019 report from Osler, a leading business law firm, just 39% of TSX-listed companies have more than one female director on their board. That means Wealthsimple’s gender screen excludes roughly 60% of Canadian stocks.

Even with all those screens, Wealthsimple’s new ETFs still include a number of companies that would raise eyebrows among many ethical investors. Its North American ETF includes Amazon, which is being sued by Canadian delivery drivers claiming unfair treatment, and Facebook, which is facing a growing boycott from advertisers unhappy with the social media’s hands-off approach to hate speech.

The fundamental problem with the “one-size fits all” approach to ethical investing that robo advisors and funds offer is that the methodology never goes far enough for some investors – and goes way too far for others. Wealthsimple has stated that the new funds will continue to improve and evolve, so we could see something like a racial equality screen introduced (pretty please). But there are currently only 233 companies in both ETFs combined, and I would expect additional ethical screens to keep reducing diversification.

Does the new portfolio, as advertised, let people “invest in a better world”? Well, not quite. It does a good job of excluding problematic companies, and it does include a handful of stalwarts on Corporate Knights’ list of the Global 100 Most Sustainable Corporations in the World, including McCormick. But the portfolio has lacklustre exposure to companies whose main business is providing sustainable solutions such as renewable energy, electric cars, green buildings and energy efficiency – all themes that are outperforming with good long-term growth prospects. For example, in the Wealthsimple Developed Markets ex-NA Socially Responsible ETF (WSRD) fund, just 20% of the companies have a significant line of green or sustainable products or services, according to the Corporate Knights Green Flag Database.

For the time being, investors who want to invest in sustainable solutions will need to incorporate additional products like green ETFs or community bonds if they want their investment to have a positive impact.

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing. This article was provided by Corporate Knights magazine.

The post How sustainable are Wealthsimple’s new socially responsible funds? appeared first on Corporate Knights.

Meanwhile, protests have erupted across the world calling for racial equality and police reform. Although these protests have had little impact on the market, they’ve raised a good question: can investors support companies that promote minority empowerment while earning market-rate financial returns?

The NAACP Minority Empowerment ETF (ticker: NACP) is an exchange-traded fund (ETF) from Dallas-based Impact Shares, which specializes in socially conscious ETFs. According to its fact sheet, the NAACP ETF “is designed to provide exposure to U.S. companies with strong racial- and ethnic-diversity policies in place, empowering employees irrespective of their race or nationality.”

While the fund is not sponsored or endorsed by the National Association for the Advancement of Colored People, it holds shares of companies screened according to 10 racial-equity metrics inspired by the NAACP’s opportunity and diversity report cards: criteria such as board diversity, freedom-of-association policies and conflict-mineral programs. To be included in the fund, companies must report on at least five of the 10 criteria and be free of major controversies. Research is performed by Sustainalytics (recently acquired by Morningstar), and the in-depth methodology can be found by downloading the “playbook” from the Morningstar site.

Incorporating social-equity criteria into the decision-making process is important work, but investors will question whether this requires a sacrifice in financial performance.

Since its inception in July 2018, the NAACP Minority Empowerment ETF has closely tracked and actually outperformed the S&P 500 by about 4%. I doubt that the outperformance is due solely to better social-equality scores (the fund skews toward bigger companies with more momentum), and we don’t know whether the outperformance will continue. But fund investors have been happy to earn higher-than-market-rate returns so far.
Investors considering the NAACP Minority Empowerment ETF should think of it as a replacement for a traditional U.S. equity fund in their portfolios. Despite the strong financial performance and social-equity lens, there are some negative trade-offs to consider. The fund currently contains only 172 companies – well below the 500 companies in the S&P 500 – which makes it less diversified. And with only about US$4 million in assets under management, liquidity issues could arise.

In addition, the fund has a high management-expense ratio (MER) of 0.75%, well above the 0.09% investors pay to own the Vanguard S&P 500 Index ETF. Although this might seem like a money grab, Impact Shares is a non-profit organization that donates any net proceeds from the ETF to the NAACP. Unfortunately, these fees come out of investment performance, and investors don’t get a charitable receipt. There is an argument to be made that investors would be better off paying a lower management fee and making their own donations to charities, non-profits or crowdfunding campaigns.

The NAACP Minority Empowerment ETF is clearly a big step toward investing in racially diverse companies, but does it go far enough? A quick look at its list of holdings reveals some big head-scratchers, such as Amazon. The methodology lets the e-commerce giant through because it publishes workforce race and gender data. What’s telling is that African Americans represent 26.5% of Amazon’s workforce but just 8.3% of management and 10% of the board of directors.

Amazon is also dealing with labour disputes inside its warehouses, as employees voice concerns over minimal protections against COVID-19. The company is notoriously anti-union and has fired workers who have attempted to organize employees – including Christian Smalls, a Black employee who led a walkout in March asking for better sanitation in Amazon’s Staten Island, New York, warehouse.

Amazon’s inclusion in the NAACP Minority Empowerment ETF speaks to the challenge of supporting corporate-diversity champions while earning market-rate returns. Ultimately, conscientious investors will need to decide for themselves whether the ETF’s methodology goes far enough, and whether they would be willing to sacrifice the financial returns from Amazon’s growth.

Whether it goes far enough or not, I’m happy there’s an option for investors to support companies that are leading on diversity policies and minority empowerment. The NAACP Minority Empowerment ETF might not be perfect, but it is a clear step in the right direction. I’m hopeful that data will continue to improve as investors ask tough questions about how companies are addressing racial inequality.

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing.

The post Pandemic Portfolio: Spotlight on the NAACP Minority Empowerment ETF appeared first on Corporate Knights.

Financial markets seem to have found a comfortable trading zone, oscillating between the hope of a quick recovery and the fear of a second pandemic wave.

Federal Reserve Chairman Jerome Powell suggested in an interview that GDP could fall by as much as 20–30%, with unemployment hitting Depression-era levels. However, the Chairman also expects a quick recovery by the end of this year and noted the unprecedented response from central banks and governments to keep markets liquid and provide emergency benefits to struggling people and businesses. This mixed message has the bulls and bears of the market duking it out day-to-day, keeping prices relatively flat over the past month.

With uncertainty remaining, investors should hope for the best and plan for the worst. We examine two sustainability leaders that are positioned to grow if the economy reopens quickly and will continue to earn profits during a longer period of pandemic-induced economic pain.

Note: These are investment ideas, not recommendations. Speak to a financial professional before investing and ensure that any holdings are part of a more diversified investment strategy.

Unilever

Who hasn’t indulged in comfort food a little more often since the pandemic started? Well, if you think people are more likely to drown their sorrows in a pint of Ben & Jerry’s ice cream, then you might consider taking a closer look at Unilever. Unilever owns a whole bunch of well-known brands from soaps (Dove) and cleaners (Seventh Generation) to soups (Knorr) and ice cream (Ben & Jerry’s). Consumer behaviour has changed drastically since the pandemic and consumer staples companies like Unilever are quickly trying to figure out what changes will persist.

Unilever released its 2020 Q1 trading statement last month and reported that overall sales were flat. Hidden in this boring top line figure is a much more nuanced story. Sales of packaged foods, cleaning supplies and beauty products were up due to households ‘stocking up’ but Unilever’s food service business and restaurant sales were way down. Moreover, management noted that the use of beauty products like deodorant was down about 25%. Yes, we’re getting stinky working from home. Unilever seems like the perfect company for investors caught in the hope and fear dichotomy. The company is positioned to weather an ongoing storm but will also get a boost if the economy reopens quickly.

Unilever has set ambitious environmental, social and governance targets in its Sustainable Living Plan, like halving the environmental footprint of its products by 2030. The company’s sustainability reporting is top-notch and measures progress on issues like gender diversity, the health and hygiene of consumers and carbon emissions. Forty-sixth on the 2020 Corporate Knights’ Global 100 list of the world’s most sustainable corporations, I’m confident positioning Unilever as a global sustainability leader.

Unilever’s share price fell by 27% during the crash and is currently down about 11% since the start of the year. The stock is expected to pay a 3.39% annual dividend.

Cisco

Cisco is an American tech company that earns most of its revenue from selling infrastructure platforms made up of networking hardware like routers, switches and data centres. As more business happens online, Cisco has diversified to offer applications, security and technical support services. Cisco’s customers are mainly large corporations, and its revenues declined in March as hardware supply chains were impacted and companies cut back on major investments due to market uncertainty. However, security revenues grew and the use of Cisco’s WebEx video conferencing software tripled.

Large companies are quickly realizing just how important online infrastructure platforms are to continued profitability while everyone works from home, so I expect to see corporate investment in digital hardware pick back up whether or not the pandemic drags on. Even if the economy rebounds quickly, companies are noticing the benefits of an online workforce and many of the work from home and shop from home trends will persist. Cisco is heavily involved in the deployment of 5G networks throughout the world as it sells high-speed routers and switches that manage back-end data transfers. The company is hoping to build on its leadership in the Internet of Things space, and I expect this rollout to occur whether or not the pandemic persists in spite of the 5G COVID-19 conspiracy theories my uncle is posting on Facebook.

From a sustainability perspective, Cisco stands out as a leader in the tech sector. The company has assessed a wide range of environmental, social and governance issues based on both business and stakeholder importance, and has created concrete targets like impacting 1 billion people through social impact grants and programs by 2025 and cutting Scope 1 and 2 greenhouse gas emissions worldwide by 60% by 2022. Cisco publishes a thorough annual corporate social responsibility report to measure and track progress towards these goals. The company gets top marks from sustainability data providers Sustainalytics and MSCI, and is ranked fourth on the 2020 Corporate Knights’ Global 100 list of the world’s most sustainable corporations.

Cisco’s share price fell by 33% during the crash and is currently down about 11% since the start of the year. The stock is expected to pay a 3.2% annual dividend.

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing. This article was provided by Corporate Knights magazine.

The post Pandemic Portfolio: Two stocks positioned for an economic recovery – and a second COVID wave appeared first on Corporate Knights.

The Bank of Canada struck an optimistic note in its April Monetary Report, suggesting that “Canada’s economy will begin to recover as the health impacts of COVID-19 fade, businesses begin to reopen and gradually resume their operations, and people start returning to their normal lives.”

Of course, uncertainty remains over if, how and when the economy will return to pre-crash levels. The bank’s report highlighted unprecedented levels of monetary and fiscal stimulus but also noted concerns about historically low oil prices, a surge in unemployment and sharply lower business and consumer confidence.

Without the ability to forecast with confidence, we should prepare for the recovery period to drag on for some time and continue to examine greener companies that are expected to profit during a longer period of pandemic-induced economic pain.

Note: These are investment ideas, not recommendations. Speak to a financial professional before investing and ensure that any holdings are part of a more diversified investment strategy.

McCormick & Company

With restaurants closed, home chefs are having their moment. Unfortunately, we’re not all great cooks. I’m leaning heavily on my spice cabinet to make my home-cooked meals a little tastier. When in doubt, throw a little hot sauce in the dish! McCormick & Company is a spice and flavour manufacturer that sells a wide array of spices, condiments and sauces. You’ll likely recognize some of its popular household brands, like Old Bay seasoning, French’s condiments, Thai Kitchen and Frank’s hot sauce. The company is well positioned to benefit as families keep eating at home.

In 2017, McCormick set impressive sustainability goals, such as slashing its greenhouse gas emissions by 20 per cent, sourcing all herbs and spices sustainably, and committing to making 100 per cent of its plastic packaging reusable or recyclable by 2025. The company has a long way to go in meeting these goals, but I’ll give it the benefit of the doubt, since its environmental, social and governance (ESG) scores from the Corporate Knights research arm, as well as MSCI and Sustainalytics, are among the best in its sector. Furthermore, McCormick ranked 22nd on the 2020 Corporate Knights Global 100 Most Sustainable Companies in the World.

McCormick’s share price fell by 32 per cent with the rest of the market during the crash but has rebounded nicely and sits down just five per cent since the start of the year. The stock is expected to pay a 1.58 per cent annual dividend. (Scorecard below)

Northland Power

Renewable energy utilities are in the enviable position of having consistent cash flows, since they have long-term purchase price agreements that set a fixed price on the electricity they generate. Northland Power, headquartered in Toronto, is one such utility. With a mix of solar, wind and thermal (natural gas) projects, the company’s cash flows shouldn’t suffer if the pandemic’s stay-at-home orders persist.

Most of Northland’s facilities generate renewable energy, but about 26 per cent of its revenues come from natural gas. This will be a turnoff for some green investors, while others will appreciate a diversified approach. I’m disappointed that Northland has taken a step backward in its ESG data disclosure. The company produced a 2018 Sustainability Report but didn’t disclose any information for 2019. This lack of ESG disclosure could hurt them as investors increasingly incorporate the data into investment decision-making. Still, generating 74 per cent of revenues from renewable energy is enough to make me feel good about this stock.

Northland’s share price fell by 36 per cent during the crash but bounced right back and is up almost 13 per cent since the start of the year. The stock is expected to pay a 3.91 per cent annual dividend. (Scorecard below)

The post Pandemic Portfolio: Two stocks to watch as COVID-19 drags on appeared first on Corporate Knights.