A plain-English guide to ESG and SRI investing for Canadians. What the funds actually hold, how screening works, and whether they outperform or underperform.
The terms are often used interchangeably in fund marketing, but they describe different approaches to incorporating non-financial considerations into investing.
The original term. SRI typically involves exclusion screening — removing companies that operate in sectors considered harmful (tobacco, weapons, gambling, fossil fuels) from the portfolio. A traditional SRI mutual fund might simply be a standard index fund with a list of companies removed. Negative screening is the defining feature.
A broader framework that rates companies on three dimensions: environmental impact (carbon emissions, waste, resource use), social factors (labour practices, supply chain standards, community relations), and governance (board composition, executive pay, shareholder rights). ESG investing doesn't necessarily exclude entire sectors — it may tilt toward higher-rated companies within all sectors, including energy.
A smaller category focused on investments with an explicit, measurable positive outcome — affordable housing, clean energy infrastructure, microfinance. Most retail ESG mutual funds are not impact investments. True impact investing is more common in private equity and institutional contexts than in retail mutual funds.
Greenwashing is real: In Canada, there's no standardized regulatory definition of what makes a fund "ESG" or "sustainable." Fund companies can and do market products as ESG even when the changes from a conventional fund are cosmetic. The Canadian Securities Administrators (CSA) has issued guidance on ESG disclosure, but enforcement is light. Reading the fund's actual methodology — not just the marketing brochure — matters.
There are several distinct methodologies, and most ESG funds combine more than one approach.
The most common and transparent approach. The fund defines a list of excluded sectors or activities and removes any company with material revenues from those areas. Common exclusions in Canadian ESG funds include:
Fossil fuel exclusions vary significantly. Some funds exclude only coal. Others exclude all oil sands companies. Some exclude any company with fossil fuel extraction as a primary business. A fund may still hold pipeline companies or oil refining companies while claiming to "screen for climate risk." Read the methodology carefully.
Rather than excluding sectors, the fund selects the highest-rated ESG companies within each sector. This means an energy company might be included in a "best-in-class" ESG fund if it has better emissions practices than its peers, even though the sector as a whole is high-carbon. If you specifically want to avoid all fossil fuel exposure, best-in-class screening won't give you that.
The broadest and least defined category. Fund managers incorporate ESG data into their standard financial analysis — not as a separate screen but as an additional input. A company's governance score might affect the risk premium the manager assigns. ESG integration says little about what the portfolio actually contains, and many "ESG integrated" funds look nearly identical to conventional funds.
Some funds hold positions in companies specifically to engage on ESG issues — voting proxies, filing shareholder resolutions, and pressuring management on climate or governance matters. NEI Investments (a Canadian ESG fund manager) is well known for this approach. The impact is real but harder to measure than exclusion.
Canada's ESG fund market has grown substantially since 2019. Here are the most significant options.
| ETF | Issuer | MER | Approach | AUM (approx.) |
|---|---|---|---|---|
| XESG | iShares (BlackRock) | 0.20% | MSCI ESG screened; global equity | ~$450M |
| ESGG | Desjardins | 0.25% | Low-carbon global equity; significant fossil fuel exclusions | ~$350M |
| RESI | RBC iShares | 0.22% | MSCI ESG; Canadian and global mix | ~$200M |
| MCLM | Mackenzie | 0.25% | Climate-focused; significant energy exclusions | ~$150M |
| Fund | Manager | MER | Known For |
|---|---|---|---|
| NEI Select Balanced Portfolio | NEI Investments | 1.85% | Strong engagement; Canada's longest-running SRI firm |
| Desjardins SocieTerra Balanced | Desjardins | 1.72% | Comprehensive exclusions; Desjardins cooperative roots |
| RBC Vision Balanced Fund | RBC Global Asset Mgmt | 2.10% | ESG integration; widely available at RBC branches |
| IA Clarington Inhance SRI Balanced | IA Clarington | 2.15% | Faith-based screen option; Canadian-first |
| Parnassus Core Equity (Cdn series) | Parnassus | 1.15% | US-origin; rigorous exclusions; strong long-term track record |
On NEI Investments: NEI is Canada's most established dedicated SRI firm and is genuinely committed to responsible investing beyond marketing. Their engagement work on Canadian banks, oil sands, and governance is substantive. The trade-off is a higher MER than ESG ETFs. If you value active engagement and are comfortable with advisor-sold mutual funds, NEI is the most credible Canadian option in the category.
The honest answer: the evidence is mixed, and anyone who tells you otherwise with certainty is overreading the data.
From roughly 2015 to 2021, many ESG funds outperformed their conventional benchmarks. A large part of this was structural: ESG funds tend to underweight energy and overweight technology. During those years, energy underperformed and tech boomed. The outperformance was sector exposure, not ESG magic.
2022 reversed the trend sharply. Energy stocks surged on commodity prices and the war in Ukraine. ESG funds — especially those with heavy fossil fuel exclusions — underperformed meaningfully. An iShares MSCI World ESG fund trailed the standard MSCI World index by roughly 3–4 percentage points in 2022. That's a large gap in a single year.
Across longer study periods, most academic research finds that ESG funds deliver returns similar to conventional funds after fees, with the caveat that ESG funds typically charge higher MERs. That higher fee is a genuine and persistent drag on returns. An ESG fund at 0.25% MER and a conventional fund at 0.20% MER might deliver the same pre-fee returns, but the ESG fund will trail after fees.
By excluding entire sectors, ESG funds are less diversified than market-cap-weighted conventional funds. In Canada, this matters because the TSX is heavily weighted in financials, energy, and materials — three sectors that many ESG screens touch. A heavily screened ESG fund on the Canadian market might look quite different from the TSX and carry meaningful tracking error versus Canadian market returns.
| Period | MSCI World ESG vs MSCI World | Driver |
|---|---|---|
| 2018–2021 | ESG outperformed ~1–2%/yr | Tech overweight, energy underweight |
| 2022 | ESG underperformed ~3–4% | Energy surge, tech selloff |
| 2023–2025 | Similar performance | Sector effects roughly balanced |
| Long-run (10+ yr) | Within 0.5% either way | No consistent systematic advantage |
The practical takeaway: investing in ESG funds is unlikely to significantly help or hurt your long-run returns compared to a conventional index fund, especially at similar fee levels. The decision to invest in ESG funds comes down to values alignment and what you want your capital to signal — not a reliable performance edge.
Look at XESG or ESGG — both are under 0.30% MER and offer broad global equity exposure with genuine ESG screening. ESGG (Desjardins) is particularly notable for its fossil fuel reduction methodology, which is more stringent than the MSCI ESG framework used by XESG. Both are available at Questrade and Wealthsimple Trade.
NEI Investments remains the benchmark for Canadian dedicated SRI mutual funds. You'll pay a higher MER, and you'll typically need to access them through an advisor or a self-directed brokerage that carries no-load NEI funds (Qtrade and NBDB both carry NEI). The trade-off is genuine engagement work on Canadian companies that pure index funds don't do.
Be explicit about what you want: exclusion of extraction (oil sands, coal mining), exclusion of all fossil fuels including pipelines and refining, or just "fossil fuel alignment" (which might mean tilting away from high-carbon companies without full exclusion). Different funds draw the line differently. Request the fund's methodology document, not just the fact sheet.
Some investors hold an ESG equity fund alongside a conventional bond fund — capturing values alignment on the equity side while keeping bond costs low. There are fewer compelling reasons to hold an ESG bond fund specifically; bond fund ESG screening is less standardized and the fee premium is harder to justify.
Tax considerations: ESG funds held in a TFSA or RRSP have no additional tax complexity. In a non-registered account, ESG funds often generate similar distributions to conventional funds. The key is still MER first — a 1.85% MER ESG mutual fund in a non-registered account costs more than an 0.25% MER ESG ETF, with no evidence it achieves better real-world outcomes.
Start with fee-efficient ESG ETFs — then look at engagement-focused options if that matters to you.
See Top Canadian ETFs Understand MERsThis page is for educational purposes only and does not constitute financial advice. ESG fund methodologies and holdings change over time. Past performance does not predict future returns. MERs are approximate and subject to change. Consult a registered financial advisor before making investment decisions.