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

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Of course, that was before the coronavirus began pummelling the economy. COVID-19 is only deepening our desire to support companies that behave nobly and put people and planet ahead of profits.

It just so happens that corporations with better environmental, social and governance (ESG) scores are proving themselves to be more financially resilient during the pandemic. Yes, sustainably minded funds have taken a big hit because of COVID-19, but Bloomberg found that they have been outperforming their conventional peers. Bloomberg’s analysis of 2,800 responsible investing (or RI, also known as sustainable, socially responsible or ethical investing) funds globally found that the average RI fund has fallen by about 12% this year as of March 12. That stings, but it’s just half the decrease seen by the S&P 500 Index over the same period.

According to Ipsos polling released by RBC Global Asset Management in January, two thirds of Canadians surveyed say they’re interested in RI. Nearly three out of four believe RI is “the way of the future.”

So why do so few Canadian banks offer any sustainably focused investing options?

Most bank advisors are poorly informed about ethical options

Corporate Knights anonymously visited Toronto branches of the Big Five banks in January and inquired about ethical investing. While some bank advisors were enthusiastic and fairly well informed, many advisors didn’t know whether their banks offered ethical investments or what those offerings entailed. Some advisors downright discouraged us from putting our savings into RIs. Notably, BMO and RBC were the only two banks that had dedicated RI funds.

The Toronto-based Responsible Investment Association (RIA) did its own polling with Ipsos in 2019 and found that while 79% of Canadian respondents would like their financial services provider to inform them about RI options, only 23% have been asked by their banks if they’re interested in RI. That helps explain why only a quarter of Canadians say they already have responsible investments, according to stats from Wealthsimple, BMO and the RIA.

In the U.S., meanwhile, new investments into sustainable funds quadrupled in 2019 compared to 2018 (pulling in a record US$20.6 billion in new money last year), and European investments doubled to a record-busting €120 billion, according to Morningstar.

Push to regulate the wild west of green investing

The tricky part for would-be purchasers is figuring out what investments genuinely align with their values. One CIBC branch advisor told Corporate Knights that “all the mutual funds we offer have gone through these ESG checks.” Ditto for all of RBC’s funds around the globe. That doesn’t mean they screen out any dubious companies or sectors. Only exclusionary funds with negative screens do that – and they may just screen out, say, tobacco and gambling but not thermal coal and oil. Part of the problem is there’s no universal standard for how terms like “ESG,” “low carbon” and “fossil-fuel free” are defined or applied, leaving funds vulnerable to “impact washing.”

Many Canadian ethical fund managers choose not to screen out fossil-fuel companies, instead investing in those they consider sector leaders. Which is fine for some responsible investors – if funds are transparent about it. But after the RIA received flak for listing fossil-fuel-free funds in its directory that were later exposed to contain oil and gas companies, the association is now considering creating a certification process for RI funds in Canada.

It gets even more muddled when retail investors start exploring the wider world of self-directed online trading accounts and robo-advisors (digital platforms such as apps that rely on software to offer financial advice), which often offer access to a number of American and international ETFs, or exchange-traded funds. (Branch-level bank advisors are generally not able to sell ETFs despite their booming popularity.) One ETF known as iShares MSCI ACWI Low Carbon Target ETF was called out for having holdings in Shell, Chevron and a number of other high-carbon companies.

To counter potential “impact washing” in Europe, the EU sets standards for the labelling of financial products, mandating that financial advisors disclose the sustainability risks of a finance product to investors, “regardless of the sustainability preferences of the end investors.”

Canada’s federally convened Expert Panel on Sustainable Finance recommended we do something similar here. The panel (which included Tiff Macklem, a Scotiabank director and Rotman School of Management dean, as well as RBC director Andy Chisholm) recommended that Finance Canada create “financial incentive for Canadians to invest in accredited climate-conscious products through their registered savings plans.”

How green are the banks’ own investments and loan books?

Many climate-conscious investors will also want to know just how their banks are dishing out their own money. All five banks have signed on to the UN-supported Principles for Responsible Investment, promising to fold ESG factors into investment decisions, though research by Corporate Knights has found that while the Big Five invest billions in sustainable-solution companies, they also invest billions in controversial weapons, for-profit prisons and severe environmental violators, as well as a number of other themes that would register as egregious on many responsible investors’ radars. All five also have loan books bulging with fossil fuels in relation to their renewable energy lending, putting them at odds with global money trends.

With former Bank of Canada governor Mark Carney cautioning that firms that ignore the climate crisis “will go bankrupt without question,” Canadians should be able to readily invest their retirement savings in environmentally-conscious options, sustainable finance champions say

With even central bankers now warning of climate-induced systemic financial crisis and former Bank of Canada governor Mark Carney cautioning that firms that ignore the climate crisis “will go bankrupt without question,” Canadians should be able to readily invest their retirement savings in climate-conscious options, sustainable-finance champions say.mo

In the meantime, the first RRSP deadline of the new decade gives Canadians a chance to rethink their finances, knowing there are now some options on the shelf that allow them to bank on a sustainable future.

Big Five ethical investing report card

We visited Toronto-area branches of the Big Five banks and asked advisors what ethical or sustainable investment options they offered. Here’s what we found:

Scotiabank

Ethical options: No responsible funds available in branch, though Scotiabank said in a statement that it has “considered” ESG factors in the investment process, and added, “Scotia iTRADE offers sustainable investing tools [online].”

Fossil-fuel-free or climate-conscious funds: No.

Knowledge of adviser: The personal banking adviser was unaware of any sustainable options and returned five minutes later to confirm that no options exist that the bank’s financial advisers were aware of.

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): Scotiabank dishes out the second-most oil and gas loans ($14.8 billion), compared to zilch in loans to renewables.

Score: D-

TD Canada Trust

Ethical options: TD Canada discontinued its sustainability funds in 2013, and at this point there are no specific RI-themed­ funds available to Canadians at branch level. TD did not respond to our request for comment.

Fossil-fuel-free or climate-conscious funds: No.

Sustainability knowledge of advisor: One bank advisor was blunt, saying “To be completely honest, most socially aware investment funds don’t make a lot of profit. As such, we don’t have funds that invest in these companies.”

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): TD has the smallest oil-and-gas loan book of the Big Five, but its investment book is another story. Among the Big Five, it has the worst ratio of investments in sustainable-solution companies to harmful companies.

Score: D-

CIBC

Ethical options: No specific RI funds. CIBC’s VP of Public Affairs says that “ESG factors are included in our investment process across all funds.”

Fossil-fuel-free or climate-conscious funds: No.

Sustainability knowledge of advisor: Initially, the branch manager said that CIBC has some ethical funds that “don’t invest in tobacco companies or oil companies,” but the manager and a financial advisor weren’t aware of specifics, so they placed a phone call. “We don’t get asked this question frequently,” the manager said. After their call, the manager updated earlier comments: “The good news is there’s no specific mutual funds that actually do that since all the mutual funds we offer have gone through these ESG checks.”

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): CIBC says all its funds are filtered through an ESG lens, but it has $2.7 billion, or 6.4% of assets, invested in companies flagged for harmful products and activities, including palm oil deforestation and severe human rights violations. On the bright side, the bank has 9.4% of its investments in companies tagged as sustainable-solution providers, because they earn more than a fifth of their revenue from themes like renewable energy and electric cars. On the loan side, CIBC’s exposure to oil and gas companies is almost five times as large as its renewable energy book.

Score: D

RBC

Ethical options: RBC’s Vision line uses ESG filters to determine holdings while screening out weapons makers, as well as traditional sin stocks like tobacco and alcohol. RBC Vision also has a Women’s Leadership fund.

Fossil-fuel-free or climate-conscious funds: Yes: the RBC Vision Fossil Fuel Free Global Equity Fund. Though a financial planner at one branch said the bank doesn’t offer entirely fossil-free options, suggesting that omitting a whole sector could limit the opportunity to grow. RBC’s Vision Fossil Fuel Free fund actually outperformed RBC’s Global Equity Fund in both 2018 and 2019.

Knowledge of adviser: The financial planner was well versed in the Vision line (besides fossil-free funds) and enthusiastic about the Vision balanced fund, saying it has outperformed RBC’s regular balanced fund (“being green is saving companies a lot of money down the road”).

Cost of values-aligned portfolio: Varies, but many are slightly lower than conventional funds.

Bank loans and investments (clean vs. dirty): Canada’s largest bank has the highest total amount of oil-and-gas loan exposure on its books ($16.4 billion). That’s more than seven times more than its renewable loans, which gets it into trouble with environmental activists, though it also has the biggest ratio of investments in sustainable solutions to harmful companies among the Big Five.

Score: C+

BMO

Ethical options: Branches offer BMO’s Sustainable Opportunities Global Equities mutual fund, as well as a Women in Leadership fund. There are eight new ESG ETFs for self-directed online accounts.

Fossil-fuel-free or climate-conscious funds: Yes: the BMO Sustainable Opportunities fund.

Knowledge of adviser: The personal bank associate was enthusiastic about BMO’s sustainable opportunities fund, explaining that she invests in it herself, but she cautioned that it is mid-to-high risk and is best for longer-term investments. A financial planner follows up via email to discuss ESG options further.

Cost of values-aligned portfolio: Fees vary, but the Sustainable Opportunities fund has a somewhat lower fee than comparable BMO funds. The ESG ETF fees are also priced lower than many non-RI equivalents.

Bank loans and investments (clean vs. dirty): BMO has both the biggest renewable-energy loan book and sustainable-solutions investment book among the Big Five, but it has the largest amount invested in companies classified as “harmful.”

Score: B-

A version of this article appeared in the Toronto Star.

*Note: This article was updated for the Spring Issue of Corporate Knights magazine.

** Sustainable solution investments includes 512 companies in the Corporate Knights database that earn more than 20% of their revenues from products or services (such as reneable energy, energy efficiency, electric cars, public transit and organic food) that benefit the environment or society as tracked by Corporate Knights Radar.

*** Harmful investments include 451 companies in thermal coal, weapons, for-profit prisons, as well as companies with severe human rights and environmental violations, and other types of egregious products and misconduct tracked by Corporate Knights Radar.

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For most, the default setting is to walk into their bank, buy mutual funds, and walk out as quickly as possible. The problem is that people rarely have any idea how much they’re paying in fees and they have no clue what companies are inside those funds.

That’s why the new trend is to purchase exchange-traded funds (ETFs) that have much lower fees and are much more transparent than mutual funds, making it easier for Canadians to invest with their values.

ETFs have surged in popularity over the last decade. What started as a niche offering for do-it-yourself investors has now become the most popular investment vehicle in Canada. ETFs represent about 11 per cent of the almost $2 trillion that Canadians have invested, but Canadian ETFs attracted a record $30 billion in 2019, outpacing the sale of mutual funds, according to the Canadian ETF Association.

While there were only a few sustainable ETFs a decade ago, the industry is evolving, and more sustainable ETFs are coming out every year.

Following RBC’s launch of six sustainability-themed iShares ETFs in 2019, BMO joined in this January, by releasing a new lineup of eight sustainable ETFs called ESG ETFs into the Canadian marketplace.

The two most popular strategies for responsible investors are sector exclusion (often called divestment) and the integration of environmental, social and governance (ESG) data.

Historically, responsible investing was heavily influenced by the Mennonite community in Canada, which meant that the most typical ethical fund exclusions were “sin sectors” like tobacco, alcohol, gambling and weapons.

In recent years, environmentalists started calling for investors to divest from fossil fuels; there is lots of momentum behind this movement. ESG integration is a little more nuanced, with companies being graded on their promises, policies and performance regarding ESG issues.

One critique of ESG integration is that it doesn’t consider the product or service the company is selling, which is why it should really be used alongside sector exclusion.

Nonetheless, BMO’s new ESG ETFs are impressive. The funds exclude tobacco, alcohol, gambling, conventional weapons and civilian firearms, any controversial weapons, as well as companies involved in severe controversies.

Additionally, by following the MSCI ESG Leaders Index methodology, they are employing one of the strongest ESG integration definitions I’ve seen among Canadian ETFs. Companies are ranked by ESG rating and the funds include roughly the top half of companies within each sector.

This methodology means that sector breakdowns will be the same as traditional ETFs but with only about half of the number of companies — those with the highest ESG scores.

Investors who want to divest from fossil fuels will be disappointed in the Canadian equity offering since oil, gas and pipelines are still included. For example, Suncor and Enbridge make up a combined 15 per cent of the BMO MSCI Canada ESG Leaders Index ETF (ESGA). Suncor and Enbridge both have decent ESG ratings, which is why they are still included in the fund.

Otherwise, their “all-in-one” ETFs make life easier for sustainable investors. For example, the BMO MSCI Global ESG Leaders Index ETF (ESG) is a combination of their Canadian, U.S. and Europe/Australia/Japan funds, while the BMO Balanced ESG ETF (ZESG) takes this global diversification and adds in Canadian bonds to create a balanced portfolio. This “all-in-one” approach is popular among traditional investors, so I’m thrilled to have it as an option for sustainable investors.

On the fee front, Canadians pay some of the highest investment fees in the world. The average mutual fund Management Expense Ratio (MER) is about 2.25 per cent. ETFs, by comparison, have an average MER of about 0.3 per cent and the BMO ESG ETFs have MERs that even lower, at 0.17–0.22 per cent, continuing the downward trend of management fees.

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

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