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.

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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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Instead of looking at individual company stocks this week, we’re comparing two exchange-traded funds (ETFs). ETFs are like mutual funds in that they are a bundle of companies wrapped up in a fund. However, they trade directly on the stock exchange, instead of through a sales network, which makes them less expensive than mutual funds. There are a lot of socially responsible ETFs on the market right now, including two with opposing takes on LGBTQ+ issues.

Inspire Global Hope ETF (BLES) aims to invest in “the most inspiring, biblically aligned large companies ($5 billion+ market cap) from both the U.S. and around the world.”

Companies that work on cancer treatment and provide clean water are some of the ones considered inspiring and biblically-aligned. About 5% of the fund’s total holdings are exposed to “clean revenue” (like Danish wind turbine manufacturer Vestas), meaning that revenue is aligned with the UN’s Sustainable Development Goals (SDGs). BLES also sinks a chunk of your money into companies with decidedly less sustainable goals, like Kinder Morgan, the contentious pipeline maker, and Jacobs Engineering Group, which produces nuclear weapons.

At the core of the BLES fund’s “biblically responsible investing” are negative screens against companies engaged in activities it considers immoral, such as abortion, pornography, and yes, LGBTQ activism. If a company sponsors a gay pride parade or signs a letter in support of gay marriage BLES would immediately exclude it from the fund. In an open letter to the LGBT community, BLES CEO Robert Netzly writes, “We respect investors who desire to invest in pro-active support of LGBT marriage, and we ask for the same respect for our investors who are investing according to their faith-based convictions to invest in support of what they understand as the Bible’s teaching and advocacy for one-man, one-woman marriage.”

Okay, Mr. Netzly Since you respect pro LGBTQ+ investors, let’s look at the InsightShares LGBT Employment Equality ETF (PRID) mandate to “invest in companies that respect, protect and encourage their LGBT employees.” PRID leans heavily on the Human Rights Campaign’s Corporate Equality Index, which provides corporate ratings based on three key LGBTQ pillars: non-discrimination policies across all of a company’s business entities, equitable benefits for LGBTQ workers and their families and an inclusive culture as well as corporate social responsibility. Companies must earn a score of at least 85 on this index to be included in PRID.

I love the idea of investing only in companies with proactive LGBTQ+ policies. Unfortunately PRID doesn’t screen out companies based on other social or environmental issues. Peer into PRID’s holdings and you’ll find eyebrow-raising companies like Exxon Mobil (which I wrote about last month) and American weapons manufacturer Lockheed Martin. Although they may support their LGBTQ+ employees, I can’t in good conscience encourage you to invest your money in these companies.

You can see why the ethical ETF market is rife with greenwash. So many stocks get bundled together to make it easier for everyday investors to buy according to their values, but there are often questionable companies tucked in the mix. Always be sure to take a close look at the full list of holdings before you buy.

From a strictly financial perspective, PRID has outperformed BLES considerably since it launched in January 2018, but I’d like to see a longer time horizon before I’m ready to declare its approach to be the winner. One helpful metric I track for ETFs is how much money investors have put into the fund, called assets under management (AUM). BLES has attracted an impressive $140 million, while PRID has attracted a paltry $2.5 million. Perhaps PRID would be appealing to more investors if it implemented proper ESG (environmental, social and governance) methodology and ditched the nastiest holdings.

Despite having some very controversial companies inside the fund, PRID wins this Fund Face-off by a (rainbow-coloured wig’s) hair.

Beta is a measure of a stock or fund’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock or fund that swings more than the market over time has a beta above 1.0. Lower beta means less risk.

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

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The four Canadian ETFs that focus exclusively on gender all launched within the span of a year, with Evolve Fund’s Evolve North American Gender Diversity Index ETF kicking things off in mid-2017. And soon after, Mackenzie Investments, RBC, and BMO Global Asset Management all launched gender-focused ETFs of their own, giving everyday investors access to stocks with more women in the leadership than most. RBC’s was the only fund to exclusively track Canadian companies.

As it stands, just 17.9% of women occupy board seats around the globe, as of late 2018. MSCI Inc., the global provider of equity, fixed income and hedge fund stock market indexes, predicts that it will take until 2029 to reach a worldwide average of 30% women on boards among MSCI All Country World Index (ACWI) companies. In Canada, the global non-profit Catalyst is striving for a much earlier date, asking all corporations to reach that goal by 2022.

Canadian companies are getting close, with a reported 27% of women on boards. But we’re still a long way off from true gender parity. Thanks to growing interest from investors (including gender-focused funds) companies are starting to pick up the pace on this issue, says Tanya van Biesen, executive director of Canadian operations at Catalyst. Diversity policies aren’t mandatory in Canada, but the Ontario Securities Commission’s “comply or explain” rule essentially requires companies listed on the TSX to disclose the number of women on their boards as well as their policy on diversity, or else explain why they don’t have one.

Catalyst is urging companies to see diversity and inclusion as a talent issue and essential to creating a productive, innovative and profitable workforce.

Top 25% of organizations that have gender diversity in their executive leadership teams beat out the industry average on profitability and value creation.

“If [companies] are looking for motivated, educated, and talented people, [women are] an obvious place to look,” van Biesen says.  “There have been many studies done to indicate that a gender diverse team generates better outcomes that relate to reputation, financial performance, productivity, innovation and risk management.”

Investors should take note: investing in companies with gender imbalances can cost you – the top 25% of organizations that have gender diversity in their executive leadership teams beat out the industry average on profitability and value creation, according to an oft-cited January 2018 report by management consulting firm McKinsey & Company, an organization dedicated to improving the performance of corporations.

For investors who want to make a difference with their money, several firms have launched Canadian ETF products dedicated to this cause. How do they stack up when it comes to women in leadership?

Mackenzie Global Leadership Impact ETF establishes itself as the clear winner when measuring board diversity — its holdings have an average of 34.7% of women sitting on its companies’ boards.

Other gender diversity metrics reveal that the fund’s holdings have 30% of women in senior management and 34% have a woman CEO or CFO, according to statistics based on holdings as of August 31, 2018.

Evolve North American Gender Diversity Index ETF fares the worst in this lineup when it comes to women on boards (26.8%). To be fair, the ETF is optimized for a range of gender equity criteria that goes beyond the number of female directors. It follows the Solactive Equileap North American Gender Equality Index, which scores companies on 19 different criteria, such as the gender balance of senior management, recruitment strategy, supplier diversity, and freedom from violence, abuse and sexual harassment.

Michael Simonetta, chairman of Toronto-based Evolve Funds Group Inc., says gender diversity should be measured across company culture, so it’s “not really a concern” if Evolve North American Gender Diversity Index ETF has a lower number in the women on boards category than competitive funds.

“You can have a board with 40% women, but if your policies are negative toward women in the workplace, how good is that from a gender balance perspective?” he asks . “It’s not.”

Fund Face-off

So, how well does the leading fund, Mackenzie Global Leadership Impact ETF (MWMN), hold up against one of the standard ETFs not pre-occupied with gender diversity?

The Mackenzie ETF trumps its benchmark (iShares MSCI World ETF) when it comes to promoting environmental, social and governance issues, with superior scores on average CEO-to-worker pay, gender diversity on boards, and its carbon footprint. Interestingly, the positive gender screen also results in more exposure to companies with products or services that benefit the environment, and less exposure to companies whose products or services have negative impacts like weapons and gambling stocks.

With regard to returns, the Mackenzie ETF is ahead of its iShares benchmark (XWD) on a year-to-date and one-year total return basis, but since its inception on December 3, 2017, it is behind with a 10.8% total return versus 12.5% for the benchmark.

Bottom line: the Mackenzie ETF offers investors significantly more gender diversity, a slightly better sustainability profile and comparable returns, beating its benchmark in two of the three time periods evaluated.

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