5 min read
A Comeback with Caveats for Canadian Sustainable Funds
Record assets and positive flows, but widening gaps beneath the surface.
Key Takeaways
- Canadian sustainable fund assets reached a record CAD 67 billion in 2025 (+18% YoY).
- Flows were highly concentrated: the top ten funds brought in CAD 4 billion, while the rest lost CAD 2.9 billion.
- Exclusionary screening was the most common sustainable investing approach.
The Canadian sustainable funds universe comprises mutual funds and ETFs that apply at least one recognized responsible investing approach, including:
- ESG Exclusions: Funds that exclude specific sectors, industries, materials, geographic regions, or companies based on ESG criteria.
- ESG Best-in-Class: Funds that use positive screening to invest in securities that meet specified qualitative or quantitative ESG criteria.
- ESG Thematic Investing: Funds that select investments aligned with an ESG-related theme, such as climate change.
- ESG-Related Engagement and Stewardship: Funds that use ownership rights to influence companies toward decisions intended to improve ESG outcomes.
- Impact Investing: Funds that invest in companies or projects intended to generate a measurable positive environmental and/or social impact alongside a financial return.
Flows: Back in Positive Territory, but Uneven
After a difficult 2024, flows turned positive in 2025, with CAD 1.1 billion in net inflows. That’s a meaningful shift—but still well below the highs of 2021–22.
The rebound was driven largely by fixed income, which brought in CAD 1.3 billion. Other asset classes lagged: allocation and equity funds both saw modest outflows.
Canada also stood out globally. While Canadian funds saw inflows, sustainable funds worldwide experienced heavy outflows, led by the US and UK.
Canadian Sustainable Fund Net Flows by Asset Class
Source: Morningstar Direct. Data as of Dec. 31, 2025. Excludes fund-of-funds.
Strong headline numbers masked a split market
Headline inflows masked uneven fund-level demand. Nearly half of sustainable funds (47%) saw outflows, and equity funds were especially challenged.
At the same time, outcomes varied widely:
- Some funds saw inflows exceeding 50% of starting assets
- Others experienced similarly steep outflows
In short: demand returned, but it was selective.
A small group captured most of the demand
Inflows were highly concentrated. The ten largest funds by inflows drew in CAD 4 billion, while the rest of the universe collectively lost CAD 2.9 billion.
A few standout strategies drove much of the growth:
- Desjardins Sustainable International Equity Fund led overall inflows
- Fixed income demand focused on a handful of funds: NEI Global Total Return Bond Fund and the Desjardins Sustainable Canadian Bond Fund
Largest Net Inflows Among Sustainable Funds (2025)
Source: Morningstar Direct. Data as of Dec. 31, 2025. Includes fund-of-funds.
Flagship strategies drove firm inflows
Invesco attracted the most manager-level 2025 inflows–CAD 578 million (excluding fund-of-funds). Its ESG NASDAQ 100 ETF accounted for 92% of those inflows.
BlackRock’s iShares also benefited from demand for passive equity, with the iShares ESG Aware MSCI Emerging Markets Index ETF driving 84% of firm-level inflows.
Assets Reached a Record High in 2025
Canadian sustainable fund assets reached a record CAD 67 billion in 2025, up 18% from year-end 2024. Growth over the longer term remains strong, with assets expanding at a 29% annualized rate since 2019, supported by both market gains and investor inflows.
Equities remained the largest asset class, representing 57% of gross sustainable fund assets. Sustainable alternatives remained a niche segment, at less than 1% of assets.
Growth of Canadian Sustainable Fund Assets
Source: Morningstar Direct. Data as of Dec. 31, 2025.
Northwest & Ethical Investments (NEI) remained Canada’s largest sustainable fund manager by assets, both including fund-of-funds (CAD 22.4 billion) and excluding them (CAD 13.6 billion). NEI has held the top position since at least 2019, when Morningstar began tracking Canadian sustainable fund assets.
Active leads, but passive is gaining momentum
Active strategies still account for the bulk of assets (82%). Despite their smaller asset base, passive strategies drove growth in 2025, attracting CAD 1.6 billion in net inflows, while active strategies recorded CAD 490 million in net outflows.
Share of Sustainable Fund Assets: Active vs. Passive
Source: Morningstar Direct. Data as of Dec. 31, 2025. Excludes fund-of-funds.
Sustainable Fund Count Fell in 2025
Investors have fewer sustainable funds to choose from than they did one year ago. The universe ended the year with 305 funds, a net decline of 21 from 2024. Slower launch activity since 2023 suggests product development is normalizing after the rapid buildout of the early 2020s, when managers expanded offerings in response to strong demand.
Closures outpaced new launches
The decline was driven by:
- Fund closures and mergers
- Strategy reclassifications away from ESG
- A sharp drop in new launches (just 2 in 2025, down from 18 in 2024)
Performance: A More Challenging Year
Fewer sustainable funds beat peers
In 2025, fewer than half of sustainable funds (44%) ranked above their category median, down from prior years. This was the second-worst year for relative performance since Morningstar began tracking Canadian sustainable funds in 2019.
Notably, fees do not explain the performance gap. Sustainable funds were slightly cheaper on average.
Allocation funds weighed on results
Allocation funds drove the aggregate 2025 underperformance among sustainable funds. Only 21% of sustainable allocation funds outperformed their category median, and 58% ranked in the bottom quartile.
Sustainability Approaches
Exclusions remain dominant
Ninety percent of sustainable funds apply at least one exclusion, and 79% are formally classified by the Canadian Investment Funds Standards Committee (CIFSC) as following an exclusions-based approach.
Other responsible investment approaches are less common. Positive screening, defined by CIFSC as a Best-in-Class approach, is used by 42% of funds, while 39% employ engagement, using ownership rights to influence corporate ESG practices. Thematic investing is used by 30% of funds and is most prevalent among alternatives.
Impact investing remains the least common approach. Just 14% of sustainable funds pursue measurable environmental and/or social outcomes alongside financial returns.
Common exclusions
About three-fourths of sustainable funds excluded controversial weapons and tobacco exposures from their portfolios. The two most common exclusions don't exclude much, though. They impact less than 1% of the investment universe each, according to category averages.
More impactful (and more debated) is nuclear energy, which about 40% of funds exclude—reflecting evolving views on its role in the energy transition.
Most Common Sustainable Fund Exclusions
Source: Morningstar Direct. Data as of Dec. 31, 2025.
