Canadian ESG Investors have More Fund Options Available to…

For Canadian investors still interested in investing sustainably, the number of mutual fund choices continues to expand.

Morningstar’s recently released Q2’24 Canadian Sustainable Landscape highlights a notable shift: Off the heels of a period of inflows in the first quarter, Canadian sustainable funds experienced a record outflow of C$2.1 billion in the second (a significant number, given the size of this market in Canada is C$61 billion).

However, the outflow was almost entirely due to a large institutional investor withdrawing over C$1.9 billion from the BMO MSCI USA ESG Leaders ETF ESGY. There’s no question that this headline-making withdrawal is something to watch, but there are a few other trends Canadian investors should consider before assuming the lights are turning off for sustainable investing. Here are some other highlights from this quarter’s reports.

Assets in Sustainable Funds Continue to Grow

Despite outflows, assets in sustainable funds continue to reach all-time highs. In the second quarter, assets in sustainable funds grew to C$61 billion, a 19.6% increase since the end of March 2024. Growth was supported by strong performance: 29% of sustainable funds ranked in the top quartile and 24% ranked in the second quartile of their respective peer groups as of June 30, 2024. Sustainable allocation funds had the strongest results, with 60% of funds landing in the top half of their peer groups.

Asset Managers Continue to Expand Their Sustainable Investment Lineups

Sustainable investment products continue to be top of mind for mutual fund and ETF manufacturers. National Bank launched a six-fund target risk lineup, and Desjardins launched its seventh sustainable bond fund in two years, the Desjardins Sustainable Canadian Corporate Bond Fund. All these funds follow a ESG Best-in-Class, ESG Thematic Investing, and ESG Related Engagement and Stewardship approach, per the Canadian Investment Funds Standard’s Committee’s Responsible Investment Framework. Desjardins’ fund also follows an ESG Exclusion approach.

Investors Have More Sustainable Fund Providers to Choose From

As asset managers continue to grow their sustainable fund lineups, investors have more options than ever. As of the end of June, no asset manager represented more than 20% of sustainable fund assets – down over 30% from 2019, when a single asset manager (NEI Investments) represented over 50%. Firms such as NEI Investments, Desjardins, National Bank, Mackenzie, and iShares top the list of sustainable fund providers and offer funds across asset classes and investment vehicles (mutual funds or ETFs). In short, the sustainable fund market has flattened with newer competitors taking increased market share.

It is important to remember that sustainable investing remains in its early stage relative to traditional investments. In Canada, the prominence of institutional investors and balanced funds can at times meaningfully impact market trends. That said, asset managers remain committed to providing options for investors looking to align their financial objectives with their responsible investment values.

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