Canadian ESG funds grew faster

Morningstar research found superior strength in sustainable funds during the pandemic and oil price war  

Ruth Saldanha 7 May, 2020 | 7:43AM

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Last month, we talked about how Canadian funds with an environmental, social and governance-focused mandate (ESG) outperformed their non-ESG peers.  On a percentage basis, 74% of sustainable funds outperformed their more traditional peers over the first quarter, certainly an impressive result, while in the global equity category, 18 of the 20 sustainable funds were ranked in the top half of peers over Q1.

Today, Morningstar Canada’s director of investment research Ian Tam released a report titled ‘Sustainable Investing Landscape for Canadian Fund Investors (Q1 2020)’ that confirmed this trend and also found that though the 105 ESG funds in Canada are just a fraction of the total market, sustainable fund launches have increased over the past three years, and have seen a lot of flows. You can find the whole report here.

Fund launches and flows
Tam finds that though the size of the sustainable investment market is still small relative to the larger retail fund market in Canada, it is a growing area outlined by the number of new sustainable fund launches, in particular over the last three years.

Exhibit 3

“The COVID-19 pandemic may have put a damper on new fund launches in the first quarter, but notably BMO pushed ahead with their launch of a new line of sustainable ETFs, which make up the majority of fund launches over the first quarter of the year,” Tam said, adding that though this pales in comparison with the number of sustainable funds in the U.S., it is a trend that he hopes to see continue in Canada as new products hit the market.

In terms of flows, the report finds that Canada experienced positive but negligible net flows through the financial crisis and subsequent recovery.

Asset flows

“The steady growth into sustainable products started to acquiesce after 2013 with a large spike in inflows in the calendar year 2018. The first quarter of 2020 had inflows into sustainable investments that outpaced the whole of 2019, which may point to more significant flows for the rest of 2020,” Tam said.

The report goes on to note that just like in non-ESG options, the share of wallet for sustainable assets is dominated by a handful of large firms including of NEI Investments, Desjardins, and RBC Global Asset Management, together making up 70% of sustainable investments in the Canadian retail market by assets, exclusive of fund of funds products. 

“Although still a small percentage of assets are invested in what Morningstar identifies as sustainable investments in Canada, the number of product launches and recent flows data tells us that there is certainly interest in this area. The COVID-19 pandemic that has caused deep drawdowns in investors’ portfolios provided us with a unique opportunity to observe the merits of having a sustainable approach. Although not nearly enough data is available to make a concerted conclusion, the above tables hope to continue to pique interest and can be interpreted as a commitment that Morningstar will continue to support and monitor this area of investing,” Tam said.

Sustainable Investing Landscape for Canadian Fund Investors (Q1 2020)

Get the Full Report Here

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Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca

 

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