How Have Canadian Sustainable Funds Fared?

Canadian sustainable funds delivered a mixed bag of returns in 2024. Overall, sustainable funds lagged their conventional peers slightly, with only 49% of sustainable funds landing in the top half of their respective Morningstar Categories. That’s down from 55% in 2023. An equal percentage of equity funds—28— landed in the top and bottom quartiles. US equity was the only category that did not have any fund in the bottom quartile.

Sustainable fixed-income funds’ rankings fell the most from 2023. Only 43% of fixed-income funds beat their conventional peers, down from 70% in 2023. A quarter of allocation funds landed in the top quartile but more finished in the bottom fourth than in 2023, and sustainable Canadian balanced funds did worse than their global balanced counterparts.

This article is adapted from the recent report published by Morningstar Manager Research. The Canada Sustainable Funds Landscape is available to download for free.

Since 2023, the Canadian sustainable funds universe has included funds whose investment objectives meet at least one of the Canadian Investment Funds Standard Committee’s (CIFSC) six responsible investment approaches. The CIFSC made revisions in 2024 and eliminated “ESG Integration and Evaluation” as an identifiable Responsible Investment approach under its framework. The impact of the change was muted and resulted in only five funds being removed from the list.

Canadian investors have ample choice when it comes to sustainable open-end and exchange-traded funds, but the pace of growth has slowed substantially. The universe more than tripled over the last five years but changed little between 2023 and 2024. Canadian sustainable funds shed more than CAD 2.5 billion in 2024, the first annual outflows in six years. A CAD 1.9 billion outflow from the BMO MSCI USA ESG Leaders ETF in the second quarter accounted for more than 74.1% of those annual outflows. Also of note, active funds had outflows for the first time—CAD 1.6 billion. Passive funds accounted for 37.8% of 2024’s net outflows.

As sustainable funds plummeted, their conventional peers returned to inflows after their own annual outflows in 2023. Canadian open-end and ETFs experienced CAD 62.4 billion of inflows in 2024. It was the highest combined sustainable and conventional Canadian flow level since 2021’s CAD 98 billion.

Market appreciation offset annual outflows and helped sustainable funds grow by more than CAD 11 billion in 2024, hitting a new high of more than CAD 56 billion. That represented a 23.4% increase from 2023 and a 178.8% increase since 2020. Most of the growth came in the first quarter when positive flows buoyed assets by CAD 8 billion. Significant second-quarter outflows resulted in a slight downturn in assets but did not hinder the segment’s overall growth.

Actively managed funds continue to dominate, representing 80% of sustainable assets, while low-cost passive funds have lost market share. Overall, Canadian sustainable assets more than doubled from 2021 to 2024 due to demand, strategy launches, and market appreciation. But there have been signs of slower growth of late.

After hitting all-time highs in 2023 with 78 new funds, sustainable fund launches stalled in 2024 with only 18 new funds. Fourteen of those were brand new while four had been repurposed or assigned CIFSC identifiers 2024. Two Canadian fixed income, one North American equity, and an alternative fund make up the list of funds identified as incorporating a responsible investing approach after their initial fund launches. More than two thirds of 2024’s new sustainable funds earned their responsible investment identifier in the first half of the year.

2024 was the lowest number of launches, and the only year without any passive introductions since 2019. Additionally, it was the second consecutive year in which there were no new high-yield or multisector fixed-income funds, and the first time there were no new Canadian or sector equity funds.

Get more robust commentary and analysis about how 2024 turned out for Canadian sustainable funds by downloading the free report: Canada Sustainable Funds Landscape.

Additional topics covered include:

• Investment Performance
• How Sustainable are Canadian Sustainable Funds?
• Fees
• Regulatory Developments

You can scan the complete picture of the Canadian sustainable fund market with your own free trial of Morningstar Direct.