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ESG ETFs: Everything you need to know about responsible investing

    Do you want to invest while keeping a clear conscience? If you care about things like the environment and ethics, then an ESG ETF might be what you need.

    The idea behind this type of ETFs was to fill an ethical, environmental and social need among investors very sensitive to these subjects. Young professionals were the customers most targeted by this new type of product.

    Since the launch of ESG ETFs, they have had great success. It can be said that responsible investing has been very popular for a few years now.

    The philosophy behind ESG ETFs

    Despite their popularity, as of yet there is no clear definition of what constitutes responsible and sustainable investing. In fact, each issuer has shaped its own definition by establishing specific criteria. This unfortunately complicates the task for investors and makes it more challenging to compare the various ETFs available.

    Some issuers use indexes developed by renowned firms such as MSCI (Morgan Stanley Capital International).

    According to Quebec’s Autorité des marchés financiers, an ESG ETF should, in principle, invest in companies:

    • That protect the Environment: (protect biodiversity, use clean energies, reduce greenhouse gas emissions, etc.)
    • That treat their social environments correctly, like their employees, customers and communities (fair working conditions, respect for local communities, equity, don’t manufacture weapons or tobacco, etc.)
    • That apply good governance practices (Independent Board of Directors, non-excessive remuneration for Directors, etc.)

     

    Should you invest in an ESG ETF?

    As with any investment, you should do your homework and not limit yourself to ESG criteria. In the first place, you also have to consider the investment strategy, the level of risk, management fees and performance.

    Then, you can look at the ESG criteria chosen by the fund. These criteria may not match your expectations and your personal definition of responsible and sustainable investing.

    I will recommend that you trust the prospectus. You will find more details about the criteria used by the fund. Another way would be to consult an independent source of information. For example, Morningstar has developed its own assessment of ESG criteria for ETFs. There are brokerage platforms that provide free access to Morningstar research.

    Another important point is that most ESG ETFs replicate an index. This is often a variation of an existing index. In other words, they use a known index, and apply ESG criteria to exclude non-compliant securities.

    If the excluded companies represent only a tiny percentage of the original index, then there is very little difference between the original index and the ESG index. Knowing that for the same index, an ESG fund will cost more in management fees than a non-ESG index fund, it’s up to the investor to decide if it is really worth it.

    Lastly, I would like to reiterate that searching for good returns should be the priority for every investor. It’s more advantageous for you to find a fund that matches your convictions and your expectations in terms of returns. Choosing a fund that places more importance on ESG criteria than  on the performance of securities may prove to be counterproductive and risky.

    ESG ETFs available on the market

    The majority of ESG ETFs were created within the past three years, and the list below is not exhaustive. Check with your brokerage account.

    iShares

    There are several ESG ETFs offered by iShares. To help you, they offer three levels of commitment: 

    • “Aware” series: Controversial companies are eliminated. However, the fund’s objective remains to have a risk-return profile similar to market indexes.
    • “Advanced” Series: Only companies with a relatively high ESG rating are selected. The fund excludes companies in the fossil fuel sector.
    • “Leaders” series: Companies with a high ESG score and leading business practices will be favoured. The manager undertakes to maintain good sector diversification.
    ETFs of Responsible investing Symbol
    iShares ESG Aware MSCI Canada Index XESG
    iShares ESG Aware MSCI USA Index XSUS
    iShares ESG Aware MSCI EAFE Index XSEA
    iShares ESG Aware MSCI Emerging Markets Index XSEM
    iShares ESG MSCI Canada Leaders Index XCLR
    iShares ESG MSCI USA Leaders Index XULR
    iShares ESG MSCI EAFE Leaders Index XDLR
    iShares ESG Advanced MSCI Canada Index XCSR
    iShares ESG Advanced MSCI USA Index XUSR
    iShares ESG Advanced MSCI EAFE Index XDSR
    FNB ESG Obligations Symbole
    iShares ESG Canadian Short-Term Bond ETF XSTB
    iShares ESG Canadian Aggregate Bond ETF XSAB
    FNB tout en un ESG Symbole
    iShares ESG Conservative Balanced ETF Portolio GCNS
    iShares ESG Balanced ETF Portfolio GBAL
    iShares ESG Growth ETF Portfolio GGRO
    iShares ESG Equity ETF Portfolio GEQT

    Royal Bank (RBC)

    RLDR – RBC Vision Women’s Leadership MSCI Canada Index ETF

    RLDR invests in Canadian companies that have demonstrated a commitment to gender diversity as part of their corporate social responsibility strategy. According to the MSCI website, the main criteria are the percentage of women on the executive and management boards, the absence of severe labour disputes and employee diversity. 

     

    Desjardins

    Desjardins offers several ESG ETFs. These funds use a multi-factor approach, the objective being to have a considerable reduction in carbon intensity in the portfolio

    Desjardins is committed to playing an active role in initiating dialogue on ESG practices with the selected securities. Its managers participate in the votes to exert a certain influence and can visit the targeted companies’ facilities. For more details, refer to the “Responsible Investing Leaflet” published on the Desjardins website.

    Here’s a list of ESG ETFs offered by Desjardins:

    ESG Equity ETFs:

    Desjardins RI Canada Multifactor – Low CO2 ETF DRFC
    Desjardins RI USA Multifactor – Low CO2 ETF DRFU
    Desjardins RI Developed ex-USA ex-Canada Low CO2 Index ETF DRFD
    Desjardins RI Emerging Markets Multifactor – Low CO2 ETF DRFE
    Desjardins RI USA – Low CO2 Index ETF DRMU
    Desjardins RI Canada – Low CO2 Index ETF DRMC
    Desjardins RI Developed ex-USA ex-Canada Multifactor – Low CO2 ETF DRMD
    Desjardins RI Emerging Markets Low CO2 Index ETF DRME

    ESG Bond ETFs:

    Desjardins RI Active Canadian Bond – Low CO2 ETF DRCU

     

    AGF

    AGF has developed an internal process that emphasizes ESG criteria. It favours ESG factors that have a significant correlation with the possibility of returns. The fund selects stocks globally, and Apple, Microsoft and Amazon are among the top 3 titles held.

    AGFiQ Global ESG Factors ETF QEF.NE

     

    BMO

    BMO launched a series of ESG ETFs early last year. These funds use the MSCI ESG index developed by Morgan Stanley. See the list below:

    ESG Equity ETFs:

    BMO MSCI Global ESG Leaders Index ETF ESGG
    BMO MSCI Canada ESG Leaders Index ETF ESGA
    BMO MSCI EAFE ESG Leaders Index ETF ESGE
    BMO MSCI USA ESG Leaders Index ETF ESGY
    BMO ESG Corporate Bond Index ETF ESGB

    ESG Bond ETFs:

    BMO ESG US Corporate Bond Hedged to CAD Index ETF ESGF

     

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    Rachid is a graduate in Finance and a member of the Association of Chartered Professional Accountants of Quebec. He has always had a keen interest in ETFs and the portfolio management solutions available in the Canadian market.