A clear-eyed guide to ESG investing in Canada — what the labels mean, which ETFs are worth owning, and how to spot greenwashing.
The terms get used interchangeably, but they describe different approaches. Understanding the differences helps you evaluate what you're actually buying:
Most ESG ETFs available to Canadian retail investors use a combination of negative screening and ESG scoring. They are not impact investing vehicles. Buying XESG doesn't directly fund clean energy companies — it reweights a portfolio toward higher-ESG-scoring companies.
| ETF | Issuer | MER | Focus | Screening Type | Verdict |
|---|---|---|---|---|---|
| XESG | iShares | 0.20% | Global equity, ESG tilted | ESG scoring + exclusions | Best single-fund global ESG option |
| ESGA | Avantis/AGF | 0.25% | Global equity, ESG + factor | ESG + value/profitability | Factor tilt adds interesting angle |
| XCSR | iShares | 0.17% | Canadian equity, ESG | ESG scoring | Canada-only; limited diversification |
| SUSR | iShares | 0.17% | US equity, ESG | ESG scoring + exclusions | USD-hedged; good US ESG option |
| CLMT | BMO | 0.20% | Global low carbon | Carbon intensity screening | Specific climate focus; concentrated |
| NEI Canadian ESG Leaders | NEI Investments | 1.90% | Canadian equity, ESG | Engagement + exclusions | Expensive; engagement is genuine but fee drag hurts |
| Desjardins SocieTerra | Desjardins | 1.75% | Balanced, ESG | Exclusions + best-in-class | Quebec market; high MER but genuine SRI history |
XESG for most ESG investors: At 0.20% MER, XESG provides global equity exposure with ESG screening at a fraction of the cost of most ESG mutual funds. It excludes weapons manufacturers, tobacco companies, thermal coal, and oil sands, while tilting toward higher ESG-scoring companies.
This is the question most ESG investors face, and the honest answer is: it depends on the time period, the fund, and what you're comparing against.
Multiple academic studies and industry analyses have found that ESG funds have performed broadly in line with conventional benchmarks over the past decade, with some periods of outperformance (notably 2019–2020 when tech outperformed energy) and some underperformance (2022 when energy stocks surged and ESG-screened portfolios missed those gains).
The 2022 underperformance was significant: Russian energy sanctions sent oil prices soaring, while most ESG funds excluded or underweighted oil sands and conventional energy. ESG funds that excluded energy underperformed conventional benchmarks by 5–10% in that year.
If you exclude entire sectors (like tobacco, weapons, or fossil fuels), you're accepting a concentrated portfolio relative to the market. Concentration risk goes both ways — you can outperform when excluded sectors lag, and underperform when they lead.
The Canadian market problem: The TSX is heavily weighted toward financials (~33%) and energy (~18%). An ESG fund that screens out oil sands, conventional energy, and fossil fuel companies has a significantly different sector exposure than the TSX. This is not inherently bad — but it means your returns will diverge from the benchmark, sometimes meaningfully.
ESG mutual funds in Canada typically charge 1.5–2.0% MERs. The ESG tilt may improve or worsen performance by a percent or two over a given decade. The fee difference between a 1.8% MER ESG mutual fund and a 0.20% MER ESG ETF like XESG will cost you roughly 1.6%/year for decades. That's a near-certain drag versus a speculative ESG premium.
The practical conclusion: if you want ESG exposure, use a low-cost ETF like XESG or ESGA. Don't pay 1.8% for ESG exposure you can get at 0.20%.
Greenwashing — presenting a fund as more environmentally or socially responsible than it actually is — is a real problem in the Canadian market. Here's what to watch for:
Red flags for greenwashing:
1. No methodology disclosure: A fund that claims to be "ESG" but doesn't disclose what its screening criteria are, which data provider it uses, or what percentage of the portfolio passes screening.
2. Best-in-class with no exclusions: Owning "the best ESG oil company" may be the right approach for some investors, but it shouldn't be marketed as green investing. If the fund holds oil companies, it should say so.
3. High ESG score for a fund that owns oil majors: This reflects how ESG rating agencies work — governance and disclosure quality affect scores independently of the actual business. A well-run oil company can have a high ESG score. Know what you're buying.
4. MER over 1.5% with "ESG" in the name: ESG screening is largely algorithmic. There's no reason it should cost more than 0.25–0.40% for a passive strategy. High fees on an ESG fund are generally not justified by the ESG work.
Not all ESG is greenwashing. These approaches represent genuine commitments:
ESG ETFs are available on all major Canadian brokerage platforms (Questrade, Wealthsimple, TD Direct, RBC Direct, etc.) and can be held in any registered account. There's no special account type needed for SRI — you hold ESG ETFs the same way you'd hold XEQT or VBAL.
Wealthsimple specifically offers a "Socially Responsible Investing" portfolio option in their robo-advisor product, which invests using ESG-screened ETFs at slightly higher fees than their conventional portfolios (0.20% vs their standard ETF MERs, plus their management fee). For investors who want ESG without picking individual funds, this is a reasonable option.
A simple ESG portfolio for a Canadian investor could be:
For those wanting more Canadian equity and explicit oil sands exclusion:
For Quebec investors specifically: The Desjardins SocieTerra funds, while expensive, have deep roots in the province's cooperative economy. If you're banking with Desjardins and want SRI mutual funds accessible at a branch, these are the most established option. For self-directed investors, XESG remains the cost-efficient choice.
ESG investing is a legitimate choice that aligns financial decisions with personal values. The evidence doesn't clearly show that ESG investing systematically hurts or helps returns — it's roughly neutral over long periods, with meaningful variation year to year.
What is clear: fees matter enormously. If ESG is important to you, the right approach is XESG or a similar low-cost ETF — not a 1.8% MER mutual fund with "sustainable" in its name. The genuine ESG benefit from the low-cost ETF is similar; the fee drag from the expensive mutual fund is certain.
If you want to actually influence corporate behaviour, shareholder engagement (NEI's model) or direct investment in clean energy infrastructure is more impactful than buying a screened index fund. But screened index funds are still better than the conventional alternative from a values-alignment standpoint.
This page is for educational purposes only and does not constitute financial or investment advice. ESG ratings and fund methodologies change frequently. Verify current holdings and screening criteria directly with fund providers before investing. Consult a registered financial advisor for personalized advice.