Morningstar - Q1 2021 - 21

Positive Trends for
Sustainable Funds

Sustainable Fund Launches Passive funds are a growing portion of new funds.
Passive

Active

30

16
AMERICAS

Canada

20
10

At the end of the third quarter of 2020, assets
invested in Canada-domiciled sustainable mutual
funds and exchange-traded funds exceeded
$10 billion, exhibiting a substantial year-over-year
increase of 30%. That's a small milestone
relative to the size of retail fund and ETF assets
in Canada, but it indicates the potential of the
sustainable fund market. The third quarter of 2020
brought 13 new sustainable products to
market, according to Morningstar's taxonomy
identifying sustainable funds. With a quarter still
remaining in the year, the number of new
products brought to market in 2020 has outpaced
every previous year.
The sustainable fund market in Canada continues
to be dominated by three main players that
together control over half the retail assets invested
in sustainable funds: NEI Investments, RBC
Global Asset Management, and Desjardins. This
has not changed substantially. However, as
assets invested in sustainable funds continue to
grow, so does competition among Canadian
asset managers. Over the past quarter, for example,
Mackenzie Investments and Wealthsimple
launched the Wealthsimple North America Socially
Responsible ETF WSRI and the Wealthsimple
Developed Markets ex-North America Socially
Responsible ETF, which are likely held in many of
the robo platform's client accounts. The two
ETFs have already collected $470 million in assets,
accelerating Mackenzie's position within the
top 10 sustainable fund managers in Canada.
Both BMO and iShares launched suites of
sustainable target allocations funds, with iShares
taking a passive approach. An increasing
number of sustainable funds are passive products.
The majority of launches in 2019 and so far in
2020 were indexed.
As sustainable investment strategies continue to
evolve in Canada, so do regulations. Over the

11
1
1

3

2

7
1

4

2
7

6
1

1

7

13

10
7

6

1

0

2000 2001 2002 2006 2007 2008 2009 2012 2015 2016 2017

2018 2019 2020

Source: Morningstar.

Comparative Costs Passive offerings bring sustainable equity fund expenses down.
Asset Class

Sustainable Funds

Fund Count*

Traditional Funds

Fund Count*

Allocation

2.09

84

1.98

5,952

Equity

1.06

261

1.13

9,461

Fixed Income

0.61

15

0.50

1,801

*All share classes
Source: Morningstar. Data as of 10/13/2020.

summer, a task force commissioned by Ontario's
Minister of Finance released a report
recommending enhancements to environmental,
social, and governance-related disclosures
for issuers listed on the Toronto Stock Exchange.
Separately, organizations like the Responsible
Investment Association, the Canadian Investment
Funds Standards Committee, and the CFA
Institute are also laying groundwork for the
identification and verification of sustainable funds
in Canada. This puts the onus on fund
managers to ensure that their research teams,
technology, and investment processes are
up to task and raises the question of whether these
required additional resources will raise costs
for investors.
We calculated the asset-weighted median
net expense ratios for both sustainable investments
(as defined by fund prospectuses and through
Morningstar's sustainable fund taxonomy)
and their traditional counterparts. Using an
asset-weighted expense calculation illustrates

what Canadian investors are paying based on
assets currently invested.
In both allocation and fixed-income categories, the
asset-weighted median net expense ratio for
sustainable investments was 11 basis points higher
than for traditional funds. Yet the median for
sustainable equity funds was 7 basis points lower
than traditional counterparts'. This is attributable
to the fact that of the 38 passive sustainable
investments in Canada, 30 are equity funds.
Meanwhile, there are relatively few sustainable
fixed-income funds available. As additional
offerings come to market, expenses may become
more competitive.
Ian Tam, CFA, is director of investment research
at Morningstar Canada.

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