Twenty Canadian mutual funds and ETFs with low ESG risk

What are we looking for

Canadian-domiciled mutual funds and exchange-traded funds that exhibit low degrees of environmental, social and governance risk and that have outperformed peers

The screen

Canadian retail investors continue to give mixed signals on investing sustainably. On one hand, the sustainable mutual fund and ETF market saw net redemptions over 2024, something that hasn’t happened since 2019. On the other, industry surveys (such as the Responsible Investment Association’s Annual Investor Opinion Survey conducted by Ipsos) continue to point to desire by retail investors to invest sustainably, citing that two-thirds of Canadians are interested in the concept.

The disconnect between investor interest and actual investment behaviour might stem from a lack of clarity around the purpose of sustainable investing. While some investors view ESG considerations as a way to align investments with personal values, this perspective can overlook the growing relevance of the considerations to financial performance. Increasingly, factors such as climate risk, corporate governance and social responsibility are being recognized as material to a company’s long-term success – and, by extension, to investor returns.

As such, evaluating ESG risks should not be seen merely as a values-based choice, but as a prudent step in making informed, forward-looking investment decisions.

This opinion largely aligns with that of Canadian Prime Minister Mark Carney. He sees ESG risks as financially material factors that investors must consider to properly assess long-term value and risk. In his book Value(s), he writes that ESG criteria help investors “identify common factors that assist risk management and value creation but also deliver superior financial returns.” He also asserts that “fiduciary duty is not a barrier to considering ESG factors – it demands it,” emphasizing that ignoring such risks could breach legal and ethical responsibilities. For Mr. Carney, ESG is not a peripheral concern, but a core component of financial analysis.

With all of this in mind, today I use Morningstar Direct to find outperforming mutual funds and ETFs that, based on Morningstar’s assessment, exhibit lower degrees of ESG risk when compared to global peers. To do this, I screened for Canadian funds and ETFs (a universe of roughly 4,400 unique investments) for those that:

• Have received a Morningstar Rating for Funds of five stars, signifying that they have historically outperformed their category peers on a risk-adjusted basis after accounting for fees.
• Have received a Morningstar ESG Risk Rating of five globes. The rating evaluates how well a fund is managing ESG-related risks – such as environmental damage, social controversies or governance failures – by analyzing the underlying companies and sovereign holdings in the portfolio and comparing the fund’s overall ESG risk exposure to its peers. 

Only the oldest share class of Canadian-domiciled mutual funds and ETFs were considered in the search.

What we found

The mutual funds ETFs that qualified for today’s screen are listed in the table accompanying this article. The table includes tickers, management expense ratios, asset class, category, ratings and returns. Readers are urged to first look at the asset class and category to which each fund belongs, given that ratings are relative to these peer groups.

I note importantly that I did not screen on the intent of the fund, only the ESG risk scores. As such, there are funds on the list that don’t necessarily align their marketing (or names) with a sustainability tilt. However, the portfolio holdings (according to Morningstar’s analysis) reflect lower degrees of ESG risk.

This article does not constitute financial advice. Investors are encouraged to conduct their own analysis before buying or selling any of the investments listed here.

Ian Tam, CFA, is director of investment research for Morningstar Canada.