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In wild west of sustainable investing, which funds are the most responsible?

There isn’t a lot of trust in the marketing and branding of sustainable investments, but Corporate Knights drilled into more than 1,000 ETFs and mutual funds to find the top scorers

sustainable investing
Illustration by Matthew Billington

If 2020 was the year sustainable investing went mainstream, then 2021 was the year it was tested.

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.
FundsFinancial Score (3 years)Sustainability ScoreOverall Score
Canadian Equity
iShares ESG Advanced MSCI Canada Index ETF (XCSR)N/A97.3%97.3%
iShares ESG MSCI Canada Leaders Index ETF (XCLR)N/A94.2%94.2%
BMO MSCI Canada ESG Leaders Index ETF (ESGA)N/A92.4%92.4%
TD Morningstar ESG Canada Equity Index ETF (TMEC)N/A90.6%90.6%
NBI Sustainable Canadian Equity ETF (NSCE)N/A86.6%86.6%
NBI Sustainable Canadian Equity Fund Adv/ISCN/A86.6%86.6%
Desjardins RI Canada - Low CO2 Index ETF (DRMC)86.3%78.2%82.3%
Invesco S&P/TSX Composite ESG Index ETF (ESGC)N/A80.4%80.4%
iShares ESG Aware MSCI Canada Index ETF (XESG)N/A75.5%75.5%
iShares Jantzi Social Index ETF (XEN)42.1%99.1%70.6%
US Equity
Invesco S&P 500 ESG Index ETF (ESG)N/A97%97%
Desjardins SocieTerra American Equity Fund A Class94%100%97%
iShares ESG Advanced MSCI USA Index ETF (XUSR)N/A96.1%96.1%
TD Morningstar ESG U.S. Equity Index ETF (TMEU)N/A95.7%95.7%
Desjardins RI USA - Low CO2 Index ETF (DRMU)91.2%97.4%94.3%
iShares ESG Aware MSCI USA Index ETF (XSUS)N/A94.1%94.1%
iShares ESG MSCI USA Leaders Index ETF (XULR)N/A88.9%88.9%
BMO MSCI USA ESG Leaders Index ETF (ESGY)N/A88.6%88.6%
Fidelity Women's Leadership System Cur Hgd Fd AN/A80.8%80.8%
North Growth U.S. Equity Advisor Fund Series D70.6%64.6%67.6%
Global/International Equity
BMO Clean Energy Index ETF (ZCLN)N/A100%100%
Harvest Clean Energy ETF - Class A Units (HCLN)N/A99.7%99.7%
AGF Global Sustainable Growth Equity ETF (AGSG)N/A98.8%98.8%
iShares ESG MSCI EAFE Leaders Index ETF (XDLR)N/A98.3%98.3%
CI MSCI World ESG Impact ETF (CESG)N/A98.1%98.1%
BMO MSCI EAFE ESG Leaders Index ETF (ESGE)N/A97.8%97.8%
Desjardins SocieTerra Positive Change Fund A97.5%97.8%97.7%
Mackenzie Greenchip Glo Environ All Cap Fd A96%99.2%97.6%
Manulife Climate Action Fund Advisor SeriesN/A97.4%97.4%
Dynamic Energy Evolution Fund Series AN/A95.7%95.7%
Fixed Income Funds
BMO ESG Corporate Bond Index ETF (ESGB)N/A98.2%98.2%
NBI Sustainable Canadian Corporate Bond ETF (NSCC)N/A93.7%93.7%
BMO ESG US Corporate Bond Hgd C$ Index ETF (ESGF)N/A91.7%91.7%
BMO ESG High Yield US Corp Bond Index ETF(ESGH)N/A73.8%73.8%
NEI Global High Yield Bond Fund42.5%59.7%51.1%
Balanced Funds
Mackenzie Greenchip Global Environ Balanced FundN/A100%100%
TD North American Sustainability Balanced FundN/A99.2%99.2%
IA Clarington Inhance Monthly Income SRI Fund96.5%77.6%87.1%
Fidelity Climate Leadership FundN/A85%85%
Mackenzie Global Sustain Balanced53.7%79.8%66.8%

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).

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