Secure wealth with sustainable equity mutual funds

Sustainable equity mutual funds are increasingly becoming part of investment conversations with clients. These funds combine traditional equity investing with sustainability considerations, offering an option for clients who are seeking financial growth. The same is true for those who want to align their portfolios with values related to the environment, social responsibility, and corporate governance. 

In this article, Wealth Professional Canada will talk about sustainable equity mutual funds. We’ll discuss some of its features as well as the challenges that your clients might face when investing in them. We’ll also explore why sustainable investing matters. Is sustainable equity a good investment? Read on below for more. 

What are sustainable equity mutual funds? 

Sustainable equity mutual funds are mutual funds that invest in stocks of companies meeting specific environmental, social, and governance (ESG) criteria. These funds aim to generate long-term returns while also promoting sustainable business practices. 

Unlike traditional equity funds that focus solely on financial metrics, sustainable equity funds also evaluate companies based on how they impact people and the planet. The goal is to invest in companies that are not only financially sound but also ethical and forward-thinking. 

Learn more about ESG and sustainable investing when you watch this video: 

Investing in sustainable mutual funds and other ESG assets has grown exponentially since the COVID-19 pandemic. Between 2018 and 2020, the country has recorded the largest proportional gain in ESG assets. 

Features of sustainable equity mutual funds 

Sustainable equity mutual funds are characterized by a few essential attributes that distinguish them from conventional funds: 

• Stock-based portfolios: These funds primarily invest in publicly traded companies 
• ESG screening: Companies are selected based on their ESG performance. This might involve negative screening or positive screening 
• Active and passive management styles: Funds might be actively managed or track ESG-specific indices 
• Long-term focus: Sustainable equity mutual funds can often emphasize long-term performance over short-term gains 

Why sustainable investing matters to clients 

More clients are expressing interest in investing with purpose. Financial advisors are finding that these funds can satisfy client needs that go beyond financial returns: 

Growing demand for value-aligned investments 

Surveys consistently show that clients, especially younger generations, want their investments to reflect their personal values. Sustainable equity mutual funds can offer a way for investors to support these causes through their investments: 

• clean energy 
• ethical labor practices 
• gender equality 

Potential for long-term resilience 

Some research suggests that companies with strong ESG practices might be more resilient to certain risks such as regulatory fines, supply chain disruptions, or reputational damage. As such, sustainable equity mutual funds might help diversify risk in client portfolios. 

Attracting next-generation investors 

As wealth transfers from older to younger generations, sustainable investing is becoming a good strategy for engaging heirs and future clients. Offering sustainable equity mutual funds can allow you to connect with values-driven investors who are more likely to prioritize ESG criteria when making financial decisions. 

How ESG criteria are integrated into fund selection 

Fund managers use various strategies to include ESG in the investment process. Understanding these can help financial advisors explain the rationale behind fund performance and construction: 

• Exclusionary screening: This involves removing companies involved in controversial sectors like weapons, fossil fuels, or tobacco 

• Positive screening: This means prioritizing companies with strong ESG performance, such as low carbon emissions or inclusive workplace policies 

• Best-in-class selection: This is choosing the top ESG performers within each industry sector 

• Thematic investing: This is focused on specific sustainability themes like clean technology, renewable energy, or water conservation 

• Engagement and proxy voting: This can be done using shareholder influence to encourage companies to improve ESG practices 

Challenges of sustainable equity mutual funds 

Despite the benefits, sustainable equity mutual funds also come with a number of limitations that financial advisors should keep in mind: 

• inconsistent ESG standards 
• performance perception 
• greenwashing concerns 

Let's discuss them further below: 

Inconsistent ESG standards 

One major issue is the lack of uniform ESG rating methodologies. Different data providers can score the same company differently, which might lead to confusion when comparing funds. Financial advisors should review each fund’s ESG framework to understand how investments are evaluated. 

Performance perception 

Some clients might assume that sustainable funds underperform traditional funds. However, studies have shown that ESG-focused funds can perform similarly or better over the long term. Still, performance might vary depending on the fund’s approach and market conditions. 

Greenwashing concerns 

There is a risk that some funds might be marketed as sustainable without fully aligning with ESG principles. This is known as greenwashing. Financial advisors should conduct due diligence and examine fund holdings and third-party ratings to verify ESG claims. 

Watch this clip to learn how your clients can avoid greenwashing concerns: 

Here are 13 greenwashing questions that you can ask when assessing fund managers for your clients’ benefit. 

What financial advisors should consider when selecting funds 

When recommending sustainable equity mutual funds to clients, financial advisors should weigh several factors: 

• ESG methodology: Understand how the fund integrates ESG criteria (if it’s through exclusion, engagement, or thematic focus) 
• Fund manager expertise: Consider the manager’s experience and track record in sustainable investing 
• Fee structure: Compare management expense ratios (MERs) with similar funds 
• Performance history: Evaluate the fund’s returns over multiple market cycles 
• Transparency: Look for funds that clearly disclose their ESG approach and provide regular updates 

Sample sustainable equity fund categories to explore 

Here are some fund categories that financial advisors might find useful when matching client preferences: 

Low-carbon equity funds 

These invest in companies that produce lower greenhouse gas emissions. These companies might also develop products or services that support the transition to a low-carbon economy. Investors who are concerned about climate change might prefer these funds. 

Global sustainable equity funds 

These focus on companies from various countries that demonstrate strong ESG performance. These funds give your clients access to international markets while supporting responsible business practices across borders. 

Thematic innovation equity funds 

These target companies are involved in emerging sectors like clean technology and sustainable agriculture. These funds might appeal to those who are interested in innovation and environmental progress. 

Social impact equity funds 

These invest in companies that prioritize social outcomes. These outcomes might include affordable housing or community development initiatives. Investors who value social responsibility might find these funds aligned with their priorities. 

Each of these fund types combines the goal of financial returns with ESG considerations. Understanding the differences between them can help you recommend funds that reflect both your clients’ values and investment goals. 

Outlook for sustainable equity investing 

Sustainable equity mutual funds are no longer niche products. As public awareness of ESG issues increases in Canada and regulatory frameworks strengthen, demand is likely to continue growing. 

Technology is also driving change. Artificial intelligence and machine learning are improving ESG analysis, allowing fund managers to make more precise decisions. This could lead to better fund performance and more customized offerings for different client profiles. 

More institutional investors are adopting ESG mandates, which increases pressure on companies to disclose and improve their sustainability metrics. As this shift accelerates, sustainable equity mutual funds might become a standard component in many portfolios. 

Check out this video to know more about the outlook for sustainable investing and sustainability as a whole in Canada. There’s also a short discussion on which Canadian stocks to avoid in light of steep tariffs imposed by the US: 

Is sustainable equity a good investment? 

Sustainable equity can be a good investment when selected carefully. Many of these companies are well-managed, financially stable, and aware of long-term risks. Because they tend to avoid harmful practices, they might also avoid costly fines, lawsuits, or regulatory issues. 

Sustainable equity mutual funds also help align clients’ investments with their values. Those who care about climate change and fair labour often prefer funds that reflect those concerns. The same is true for clients who value ethical corporate behaviour. This alignment can improve client satisfaction and trust. 

Financial performance varies by fund, just like with any other investment. Some sustainable equity funds have matched or even outperformed traditional equity funds. However, results depend on a lot of factors such as the fund manager’s strategy as well as the sectors included. 

Do sustainable funds perform better? 

Sustainable mutual funds do not always perform better, but many perform just as well as traditional funds over time. Performance depends on several considerations, including: 

• fund strategy 
• economic trends 
• market volatility 
• chosen sectors 

In some cases, sustainable funds have outperformed during periods of market stress. Companies with strong ESG practices often manage risk better and show more resilience. 

For example, companies that reduce environmental harm might avoid future regulatory costs. Firms with good governance might also be less likely to face scandals or financial fraud. This can help preserve value during downturns. 

Positive yields are not guaranteed 

Sustainable funds are not guaranteed to outperform. Some might avoid entire sectors like oil and gas, which can affect returns when those sectors perform well. Others might be highly concentrated in technology or renewables, which can increase volatility. 

While sustainable funds can perform competitively, it’s vital for financial advisors to compare performance over multiple years and market cycles. They should be evaluated like any other investment: on risk, return, and suitability. 

Why consider recommending sustainable equity 

For wealth professionals, sustainable equity mutual funds present a valuable opportunity to guide clients to invest in a way that reflects both their financial goals and their values. With the right knowledge and due diligence, financial advisors can add value by helping clients pursue performance with purpose. 

Sustainable equity mutual funds don’t just offer competitive returns and long-term value; they can also help your clients invest their money in line with their principles. 

Learn about sustainable equity mutual funds and more on our dedicated page for mutual funds.