Canada’s federal budget has recently been released, and Finance Minister Chrystia Freeland has highlighted her priorities, which include investing heavily in a “clean economy.” This investment will involve transitioning to clean energy, and the government’s increased funding for clean tech is a clear indication of its commitment to this goal.
With the recent report from the United Nations Intergovernmental Panel on Climate Change stating that the world has reached a critical point in terms of action required to avoid catastrophic outcomes, investors are starting to think about how their investments might stand to benefit or lose from the transition to a clean economy.
Index investors who hold Canadian stocks in their portfolios are likely to have a heavy exposure to the energy sector, which will play a crucial role in the transition but may result in unclear outcomes for investors, given the proposed trajectory of the Canadian economy.
Investing in the Green Transition
However, investors can choose to invest specifically in the transition to a greener economy by investing in funds that focus on climate action.
To identify such funds, Morningstar’s Sustainable Attributes Framework was used to screen the database for ETFs and D-class mutual funds that invest in companies or projects that contribute to the transition to a low-carbon economy.
These companies may include those focused on green infrastructure, energy storage, and energy sources like wind, solar, hydro, tidal, and geothermal power. The selected funds are listed in a table that includes their tickers, MERs, categories, ratings, and returns.
It is important to note that the table includes two distinct ratings: the Morningstar Rating for Funds, which provides an objective look back at a fund’s after-fee risk-adjusted performance against its category, and the Morningstar Quantitative Rating, which assesses a fund’s ability to produce above-average returns in the future, based on an analysis of people, parent, and process.
Investing in Climate Action
According to Morningstar’s data, the 11 identified funds that focus on climate action have a total asset value of nearly CAD $4B, which is small compared to the CAD $2T total fund and ETF market.
However, the funds are rapidly growing, with most of the assets sitting in equity funds. Investors who want to contribute to the transition to a cleaner economy can consider investing in these funds, which are focused on climate action, and make a positive impact on the environment while potentially benefiting financially.
Investors are looking at ways to benefit from Canada’s move to a cleaner economy post the federal budget announcement. Investing in funds specifically dedicated to climate action is a proactive choice to contribute to a greener economy while potentially gaining financial returns. Morningstar’s framework helps identify such funds for environmentally conscious investors.