10 ESG Funds for Passive Investors

The choices are far fewer when it comes to sustainable ETFs – of the 116 sustainable funds in Canada, only 30 are passive

Ian Tam, CFA 24 September, 2020 | 1:28AM
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Earlier this week, I wrote about actively managed options for investors interested in sustainable funds. Today, I extend this thought by looking at passively managed (or indexed) options.

As a reminder, active fund managers make conscious decisions on which companies and securities to invest in to (hopefully) produce returns in excess of a given benchmark. On the other hand, index or passive investing takes positions in the benchmark itself. Passive funds tend to have lower fees than actively managed funds.

This said, the choices are far fewer when it comes to passive sustainable funds. We identified 116 sustainable mutual funds and ETFs (exchange traded funds) domiciled in Canada, of which roughly 30 are passive investments.

Moreover, the vast majority of these funds (27 of 30) have launched in the last three years. Although we are pleased to see growth in this area, the limited performance history of these products makes selecting an appropriate passive fund a daunting task. To help with this, we used Morningstar Direct to screen for sustainable index funds that have met the following criteria:

  • Are deemed a sustainable investment by Morningstar, determined through our analysis of a fund’s prospectus documents. More information about our framework for identifying sustainable investments can be found here.   
  • Have a Morningstar Sustainability Rating of three globes or better.
  • Have a Morningstar Quantitative Rating of Bronze or better.

Because many of these index funds have limited history, here we will rely on Morningstar’s assessment of the funds’ ability to outperform peers over the long term. Our framework for assessing this revolves around three pillars: people (the quality of management team), process (how the fund invests) and parent (the quality of product line up and alignment with investor interests). For passive strategies, more consideration is given to the process pillar than the other two.

Strategic Beta indices (those that straddle the line between active and passive investments) were excluded in the search. The funds that met the above requirements along with the MER’s performance history, and ratings are listed in the table.

Chart of 10 ESG Funds

This article does not constitute financial advice. It is always recommended to speak to a financial advisor or investment professional before investing in any of the products listed here. 

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About Author

Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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