The interest in investing sustainably continues to proliferate across the Canadian retail investment landscape. Morningstar’s data shows that, at the end of the second quarter, assets invested in sustainable funds and ETFs breached the $26 billion mark, a quarter-over-quarter growth rate of 22% and a year-over-year growth rate of 130%.
Exhibit 1 Aggregate Fund Size of Canadian Sustainable Investments (Excludes Funds of Funds, CAD)
Today we screen for gold-rated sustainable investments that have performed well relative to peers. Before jumping into the list, we want to recognize that the world of sustainable investing is non-binary in nature. Readers are reminded that a ‘sustainable’ fund (as per Morningstar’s definition) consists of an umbrella of different investment approaches. The below diagram serves to outline our framework.
Exhibit 2 Sustainable Investment Framework
Source: Morningstar Research Inc
For example, popular ESG Funds are one type of sustainable investment. A core part of the investment process for ESG funds is to assess the degree of material financial risk connected with environmental, social, and governance issues for a security. Impact funds are another type of sustainable investment. These funds typically try to make a difference around areas like the environment, fossil fuels, diversity, and community development. The 3rd type of sustainable investments are those that invest broadly in an environmental sector like renewable energy. A fund that uses any of the above approaches would be considered sustainable in our framework.
It is also important to note that funds that specifically screen out a controversial area (like firearms or tobacco for example), are not automatically deemed sustainable in our framework, though we do track these exclusions separately. Morningstar’s identification framework is not mutually exclusive. A fund can be both an ESG fund and an impact fund. At present, Morningstar’s analysts look at a funds’ prospectus documents to determine if the investment approach lines up with one or more of these.
For our purposes today, I used Morningstar Direct to screen on sustainable mutual funds and ETFs that meet the following criteria:
A Morningstar Star Rating (informally known as the “star rating”) of five stars. Recall that Morningstar’s star rating is a look back at historical risk-adjusted returns after fees, relative to peers. The star ratings are not forward-looking, but our data show that over the past decade, five-star funds domiciled in Canada were less than half as likely to be liquidated or merged than one-star funds. The star rating is a great starting point for further research
A Morningstar Quantitative Rating of gold, silver or bronze. This is Morningstar’s forward-looking assessment of a fund’s ability to outperform in the future. In the years that the rating has been in existence we’ve found that as a group, medalist-rated funds have outperformed neutral or negatively rated funds, after receiving their ratings.
Sustainable funds that meet both requirements are listed below along with categories, trailing performance, and MERs. I’ve also listed their Morningstar Sustainability Rating though it was not used in the screening criteria. Here are the funds that made the list:
This article does not constitute financial advice. It is always recommended to speak with a financial advisor or investment professional before purchasing any of the products listed here.
