Investing in Canadian Socially Responsible Equity ETFs
Are you looking to invest in companies that align with your values? As socially responsible investing (SRI) gains popularity in Canada, exchange-traded funds (ETFs) have become a popular way to do just that. In this article, we’ll explore the different Canadian socially responsible ETFs available, helping you choose the right one for your investment goals.
Investing in a sustainable future has become increasingly important for individuals and institutions alike. With the rise of environmental, social, and governance (ESG) investing, there are now many options available for those looking to align their investments with their values. In terms of environmental impact for instance, it is important to think about what is most important to you. Are you interested in investing in companies that have a low carbon footprint, or those whose primary focus is addressing climate change?
What are Socially Responsible ETFs?
Socially responsible ETFs invest in companies that align with social and environmental values. These ETFs track a specific index of companies that meet certain sustainability criteria, such as their environmental impact, labour practices, or corporate governance. By investing in socially responsible ETFs, you can align your investment decisions with your values and beliefs.
What to Look For
Many Canadian index ETFs track the performance of the S&P/TSX Composite Index, which covers approximately 95% of the Canadian stock market. When it comes to socially responsible ETFs, there can be major differences to consider. SR ETFs typically have fewer holdings, which means less diversification and higher risk. There can also be differences in terms of the investment mix.
In this post, we’ll delve into the sector exposure of each SR ETF, with a focus on energy and financials. We’ll highlight the importance of energy since oil and gas production is Canada’s largest carbon-emitting sector, and financials as they take up a significant portion of the market (about one third). It is important to remember that before you invest, it’s important to do your own research and consider your personal financial goals and risk tolerance. So, let’s get started and explore the different Canadian socially responsible ETFs that are available.
iShares Jantzi Social Index ETF (XEN)
The iShares Jantzi Social Index ETF (XEN) was the first socially responsible investing (SRI) ETF to be introduced in Canada (and North America for that matter). Managed by global investment management firm BlackRock, XEN tracks Canadian companies that follow stringent environmental, social, and governance (ESG) criteria. Despite having only 50 holdings, which may increase risk, XEN’s sector diversification means that it is not overly reliant on banks. While its management expense ratio (MER) of 0.55% is relatively high, its exposure to the financial sector is around 30%, slightly lower than the S&P/TSX Composite Index. Its weighting towards energy is over 18%, which is about the same as the index, but in principle might not align with your definition of building a SRI portfolio. Notably, Canadian Natural Resources and Suncor are the major holdings in the energy sector, so knowing more about those companies specifically might help you decide whether XEN is a good investment for you.
Wealthsimple North America Socially Responsible Investment Index ETF (WSRI)
The Wealthsimple North America Socially Responsible Investment Index ETF (WSRI) is an ETF that seeks to track the performance of the Solactive North American Socially Responsible Investment Index. The index is composed of large and mid-cap companies that meet certain environmental, social, and governance (ESG) criteria. This ETF provides investors with a way to invest in socially responsible companies in the US and Canada. The split is about 81% US to 19% Canada. As such, the sector allocation is quite diverse; financials only take up about 11.5% with virtually no energy holdings. The fund has a management expense ratio (MER) of 0.20%, which is relatively low compared to other similar ETFs.
A portion of the management fee charged on WSRI is donated by Wealthsimple to charitable causes, making this ETF an excellent choice for investors who not only want to invest in socially responsible companies but also contribute to philanthropic efforts.
In summary, WSRI is an ETF that provides investors with an opportunity to invest in socially responsible companies across the US and Canada. The ETF’s diversified portfolio, low MER, and charitable contributions by Wealthsimple may appeal to investors who prioritize ESG factors and wish to contribute to philanthropic efforts.
iShares ESG Advanced MSCI Canada Index ETF (XCSR)
The iShares ESG Advanced MSCI Canada Index ETF (XCSR) is a socially responsible ETF that focuses on investing in Canadian companies with strong ESG practices, lower carbon footprint, and a commitment to social responsibility. With 167 holdings across various sectors, XCSR provides investors with a diversified portfolio. However, it’s worth noting that the fund is heavily weighted towards the financial sector, with almost 46% of its holdings in banks. Despite this, XCSR boasts a low expense ratio of 0.17%, which makes it an attractive option for many investors. Additionally, XCSR intentionally limits its exposure to fossil fuel production and other industries with increased sustainability risks, resulting in no energy holdings. Overall, XCSR is a solid choice for investors looking to align their investments with their values and support sustainable business practices.
RBC Vision Women’s Leadership MSCI Canada Index ETF (RLDR)
The RBC Vision Women’s Leadership MSCI Canada Index ETF (RLDR) is a Canadian equity ETF that invests in companies that are committed to promoting gender diversity and advancing women’s leadership. The fund is designed to track the performance of the MSCI Canada IMI Women’s Leadership Select Index, which includes companies that have demonstrated a commitment to promoting gender diversity and have a strong representation of women in leadership positions.
RLDR is positioned well in terms of risk profile and investment mix. It hold about 150 investments, and sector exposure is very similar to the S&P/TSX Composite Index.
By investing in RLDR, investors can align their portfolio with their values and support companies that are promoting gender diversity and inclusion. This may also potentially lead to higher financial returns, as studies have shown that companies with more diverse leadership teams tend to perform better financially over the long term. RLDR has an MER of 0.28%.
iShares ESG Aware MSCI Canada Index ETF (XESG)
The iShares ESG Aware MSCI Canada Index ETF (XESG) is another socially responsible ETF option for Canadian investors. Launched in 2019, XESG tracks the performance of Canadian companies that have been selected based on ESG criteria, including carbon emissions, board diversity, and human rights policies.
Managed by BlackRock, XESG has a management expense ratio (MER) of 0.16%, which is relatively low compared to other socially responsible ETFs. Additionally, XESG has a similar exposure to the financial sector as the S&P/TSX Composite Index. It is important to note that XESG has a higher weighting toward the energy sector, which accounts for over 19% of the fund’s holdings. Enbridge holds the top spot.
Despite its higher exposure to energy, XESG is a well-diversified ETF, with about 120 holdings across various sectors. This can help reduce overall investment risk. Additionally, XESG has been recognized by various third-party rating agencies for its ESG practices, which may make it an attractive choice for investors looking to align their investments with their values.
Purpose Global Climate Opportunities Fund (CLMT)
The Purpose Global Climate Opportunities Fund (CLMT) invests in companies that are working to address climate change. By investing in the Purpose Global Climate Opportunities Fund, investors can support companies that are working to address one of the biggest global challenges we face today: climate change. This ETF is managed by Purpose Investments, a Canadian investment management firm, and has an MER of 1%. That’s a high cost, but perhaps you get what you pay for.
The structure is much different than the other ETFs we’ve discussed thus far, as the fund invests in 5 main sectors. Clean energy takes up about 52% of the sector allocation, Energy Efficiency comes in second at almost 23%. The remaining 3 are: Energy Transition, Transportation & Infrastructure and Circular Economy.
By going with this fund, investors can potentially contribute to reducing greenhouse gas emissions, improving energy efficiency, promoting sustainable business practices, and developing renewable energy solutions.
CI MSCI World ESG Impact ETF (CESG.B)
The CI MSCI World ESG Impact ETF (CESG) tracks the MSCI World ESG Select Impact ex Fossil Fuels Index Hedged to CAD, which includes companies that meet certain environmental, social, and governance (ESG) criteria and do not engage in fossil fuel-related activities. By investing in CESG, investors can support companies that are committed to sustainable practices and do not contribute to climate change through their operations. The fund invests in companies that have demonstrated a commitment to ESG criteria, such as reducing their carbon footprint, promoting diversity and inclusion, and upholding strong corporate governance standards.
The sector allocations again are quite different than what we’ve seen thus far, with virtually no allocations to financials. This makes sense since most Canadian banks support the oil and gas industry. Similarly, energy takes up less than 1% fund. CESG has an MER of 0.39%; the cost may be worth it if you’re looking for environmental impact.
Desjardins RI Canada – Low CO2 Index ETF (DRMC)
The Desjardins RI Canada – Net-Zero Emissions Pathway ETF (DRMC) aims to invest in companies with low carbon footprints and uses a proprietary methodology to screen companies with lower greenhouse gas emissions, water usage, and waste production. This ETF is managed by Desjardins Global Asset Management, a leading provider of responsible investment solutions in Canada.
The ETF primarily invests in Canadian equities across various sectors such as financials, materials, and industrials. As of July 31, 2023, the fund had 59 holdings. The fund’s top three sectors are financials (42.5%), materials, and information technology. DRMC has a management expense ratio of 0.17%, which is relatively low. This lower fee could make DRMC an attractive option for investors who want to invest in environmentally conscious companies while keeping their investment costs down.
BMO MSCI Canada ESG Leaders Index ETF (ESGA)
The BMO MSCI Canada ESG Leaders Index ETF (ESGA) is designed to track the performance of Canadian companies with strong ESG practices, specifically those included in the MSCI Canada ESG Leaders Index. This means that ESGA invests in companies with high ESG scores relative to their industry peers, indicating that they are more likely to have sustainable business practices and better equipped to handle environmental, social, and governance risks. The ETF is managed by the Bank of Montreal and has a low MER of 0.17%. However, it is worth noting that the fund has a higher weighting towards financials, compared to the S&P/TSX Composite Index, at nearly 38%. Additionally, energy holdings account for around 12% of the fund, with Enbridge having the largest share. A final thing to consider is that this ETF has only 43 holdings, thus it may expose you to more risk than you are comfortable with. Nonetheless if you’re seeking a Canadian socially responsible equity fund with exposure to the energy sector, ESGA is worth considering.
Conclusion
Investing in socially responsible ETFs is a great way to align your investment decisions with your values and beliefs. Before investing in any SR ETF, it’s important to do your research and consider the fund’s management fee, sustainability criteria, risk profile, investment mix and strategy. By following these tips and investing in socially responsible ETFs, you can make a positive impact on society and the environment while achieving your investment goals.
