It’s been an eventful year for ESG ETFs in Canada. Investor interest in the funds slowed compared with previous years, new guidance and regulations added to the complexity of marketing the products, and political polarization over the role of ESG in asset management intensified.
Yet, some asset managers, financial advisors and investment industry analysts are optimistic that investors will regain interest in the products as their definition solidifies.
“Investors will then feel more confident as to what they’re investing in,” said Adelaide Chiu, vice-president and head of responsible investing with NEI Investments in Toronto.
“Before, there really wasn’t any regulation or standardized way of reporting. That’s coming to fruition today,” Chiu said.
Investor appetite for ESG ETFs has slowed relative to the peak years of 2021–2023, which saw $3 billion to $4 billion in creations each year, said Tiffany Zhang, vice-president of ETFs and financial products research, with National Bank Financial Inc. in Toronto.
Investors redeemed $1.3 billion from the funds this year as of Aug. 31, bringing total assets under management (AUM) to $17.4 billion. Excluding a $1.8-billion institutional reallocation, ESG ETFs would have had a couple hundred million dollars in year-to-date inflows by Aug. 31.
Moreover, launches of ESG ETFs have fizzled since 2023, Zhang said. The number of funds peaked at 143 in 2022 and sat at 128 by the end of August 2024, with no new launches or filings in the ESG ETF space in Canada so far this year.
Nonetheless, “we do believe the concept of ESG has true staying power based on our conversations with financial advisors and institutional clients,” Zhang said. “Many of them have used or are considering allocating to ESG ETFs in their portfolios.”
Other industry participants are less optimistic.
“We no longer have the ability to say, ‘Well, this is new, and therefore you should give it some time,’” said Alex Perel, managing director and head of ETF services with Scotiabank Global Banking and Markets in Toronto. “The numbers, I think, generally reflect attitudes at this point.”
Perel said one reason ESG ETFs are not receiving as much attention is because investors are more focused on a product’s returns than its stated objectives.
Another reason is the sheer number of ESG ETFs released without sufficient clarity as to what they accomplish and how they differ from their traditional counterparts, Perel said.
“ESG means different things to different people,” Perel added.
Taking inspiration from Europe, the U.S. and other jurisdictions, Canadian regulators and decision-makers are working to help address that.
In March, the Canadian Securities Administrators expanded its voluntary guidance for investment funds and fund managers regarding ESG-related disclosures. The guidance aims to increase clarity and consistency in fund documentation and sales communications.
In the same month, the Canadian Sustainability Standards Board (CSSB) released its draft standards for climate-related risks and opportunities based on the International Sustainability Standards Board’s standards, with proposed modifications. The CSSB standards are expected to apply to Canadian companies for reporting periods starting on or after Jan. 1, 2025.
Bill C-59, which contains Canada’s anti-greenwashing provisions and received royal assent in June, requires companies to substantiate any environmental benefit claims.
On the mutual fund side, the Canadian Investment Funds Standards Committee, which aims to provide consistent fund categories, stated that as of Aug. 31, mutual funds can no longer claim the vague strategy of “ESG integration” if they want to be officially recognized by the committee as a responsible investment fund.
Canada is also developing a voluntary green and transition taxonomy for evaluating which investments can be certified as funding “green” projects, projects with low or zero carbon emissions, or “transition” projects (i.e., projects that decarbonize sectors with historically high emissions). Fund managers could determine and disclose how much of their investments align with the taxonomy.
Pat Chiefalo, head of ETFs and indexed strategies with Invesco Canada Ltd. in Toronto, welcomed these developments. Invesco Canada offers an array of ESG ETFs, which, through a partnership with NEI Investments, receive a complementary layer of responsible investing oversight.
“Clarity, and ensuring that investors know what they’re getting and the products are robust, only enhances the industry,” Chiefalo said.
While the guidelines and regulations have not impacted Invesco’s sales communications and investment strategy, he noted, the firm will align with new regulations as they come, as all asset management companies will have to do.
Ron Landry, chairman of the Canadian ETF Association and vice-president of Canadian ETF services with CIBC Mellon, described the regulatory changes as a victory for investors: “Consistency will … enhance the credibility and comparability of ESG products, ultimately benefiting investors,” he said. “These regulations are expected to drive further innovation as managers seek to differentiate their offerings and meet the evolving needs of their clients.”
Anti-ESG sentiment, which seems to be spreading north from the U.S., is another issue the industry must grapple with.
Despite this politicization, Andrew Simpson, senior vice-president and portfolio manager with Mackenzie Investments in Toronto, said he expects “things will sort themselves out over time.” Mackenzie Investments offers a range of ESG ETFs.
“We’re looking out to 2030–2050, and these [funds] are, in our view, a massive opportunity, so we think the market is going to catch up,” said Simpson, who is also head of the Mackenzie Betterworld Team.
“There may be lulls and slowdowns, but with appropriate regulation that we’re seeing, I think you’re going to see the right products available to investors,” Simpson said.
Chiu said she views Canada as being in a unique position, because it’s balancing itself between Europe, where sustainability standards are becoming mandated, and the U.S., where pushback against ESG is intense.
“I think Canada will actually take a very pragmatic approach versus a dogmatic approach, and so I think it’s going to be … beneficial for a lot of stakeholders,” Chiu said.
Advisors are also watching developments in the ESG space.
Ian Robertson, vice-president, director and portfolio manager with Odlum Brown Ltd. in Vancouver, acknowledged that most people do not like regulations as they’re “a bit of a burden and a hassle to all of us, from the client to product providers.”
But he said regulations are necessary for truth in advertising. “I think it will help us get to a better place faster,” Robertson said.
Stephen Whipp, senior investment advisor and responsible investment specialist with Leede Financial Inc. in Victoria, said he applauds regulations that help address greenwashing concerns and provide clarity for investors. But he worries the country is “creating a whole new bureaucracy.”
“It’s unfortunate that we don’t live in a society where managers of ETFs, managers of mutual funds, CEOs of companies, don’t just do this voluntarily and understand what needs to be done,” he said.
Whipp has worked in the responsible investment space for nearly 25 years, and he’s impressed by the growing share of advisors and investors educating themselves.
“We’ve come a long way,” he said. “And now the hard work starts.”
This article appears in the October issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.