ESG Investing

ESG stands for Environmental, Social, and Governance. ESG investing means selecting investments based on how companies score in these three areas. Environmental covers things like carbon emissions and resource use. Social looks at labour practices, diversity, and community impact. Governance is about how a company is run, including executive pay, board independence, and transparency.

How it works

ESG investing can take different forms. Some funds exclude certain industries entirely (oil, tobacco, weapons). Others include all sectors but tilt toward companies with better ESG ratings. And some take an active ownership approach, investing in companies they want to influence through shareholder voting.

In Canada, several ETFs and mutual funds carry an ESG label. They tend to have slightly higher fees than their non-ESG equivalents, since the screening process adds a layer of work. This is one example of how not all ETFs are built the same, even if they look similar on the surface.

Things to watch for

ESG ratings aren’t standardized. Two rating agencies can look at the same company and come to very different conclusions. A company that scores well on environmental factors might score poorly on governance, and different funds weigh those factors differently.

Example

Say you’re comparing two broad Canadian equity ETFs. The standard version has an MER of 0.06% and holds all sectors, including oil and gas. The ESG-screened version excludes fossil fuels and weapons manufacturers, but its MER is 0.20%. On a $25,000 investment, that’s a cost difference of about $35 per year. Whether that tradeoff is worth it depends on how much the screening matters to you and whether the excluded companies would have changed your returns.

There’s also the question of “greenwashing,” where a fund markets itself as ESG-friendly but still holds companies you might not expect. If ESG matters to you, it’s worth looking at what a fund actually holds rather than trusting the label alone. Read the fund’s methodology and check the top holdings to see if they match what you had in mind.