How are Canadian ESG funds doing?

An impressive performance worth considering

Ian Tam, CFA 23 April, 2020 | 1:50AM

 

 

This video is part of our Earth Week special report

Ian Tam: As the global pandemic continues to dominate your daily news feed, the idea of sustainable investments or responsible investing may have fallen to the wayside. But it should not, because the first quarter was an excellent example of how sustainability and good performance results were actually not mutually exclusive. Jon Hale, who is Morningstar's Global Head of Sustainability Research, recently published an article or some research that showed that in the U.S. and other developed markets the majority of sustainable funds outperformed their more traditional peers during the drawdown that we saw in Q1.

But does that trend apply to Canada? Before we get to that, let's actually define what a sustainable fund is.

Morningstar identifies sustainable investments by looking at a fund's regulatory filings including their prospectus and related documents to understand how the manager is approaching the mandate. Broadly speaking, we classify three types of sustainable investments. One, funds that use environmental, social and governance considerations when picking companies or are actively engaging with company management around these areas. Two, investment strategies that seek to make a measurable impact alongside financial return on issues like gender diversity, community development, et cetera. And three, funds that are invested in environmentally oriented industries like renewable energy or water.

In Canada, we've identified 105 of these funds with 11 products launched just this calendar year to understand how these types of funds performed over the first quarter. Let's have a look at their rankings relative to their category averages over Q1 of 2020.

On the screen here you will see how sustainable funds within each Morningstar category were ranked based on the year-to-date performance ending April 13, 2020. For example, of the 11 Canadian equity funds that we've identified as sustainable investments, two are ranked in the top quartile or the top 25% of funds within the category. Two of them were in the second quartile. Five of them were in the third quartile. And two of them were in the bottom quartile or the worst 25% of funds within that category. So, clearly, not all sustainable investments outperformed their categories. But if you have a look at the boom of the chart, you'll see that on whole 29 of the 77 funds placed within the respective top quartiles and 25 funds were in the second quartile.

On a percentage basis, a whopping 74% of sustainable funds outperformed their more traditional peers over the first quarter, certainly an impressive result. Of particular interest to investors might be sustainable funds within the global equity category. Here, 18 of the 20 sustainable funds were ranked in the top half of peers over Q1. For a list of global equity funds that outperformed the category average and the Morningstar benchmark index, feel free to consult the table that's attached to the transcript to this video.

For Morningstar, I'm Ian Tam.

Table

For a larger version of the above table, click here

Table 1

Table 2

About Author

Ian Tam, CFA  Iam Tam, CFA, is Director of Investment Research at Morningstar Canada. 

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