Are ESG investment strategies, which focus on environment, social, and governance factors, truly socially responsible? While the recent increase in ESG products is a well-intentioned move to make investors consider the social and environmental repercussions of their portfolio, investors might be disappointed by how many ESG strategies fall short of owning truly socially responsible companies.

While hardly a new phenomenon – Canada’s first fund marketed as socially responsible debuted in 1986 – a number of factors, including greater acceptance of the dangers of climate change, are increasing Canadian investor interest in the ESG space. In fact, according to the Responsible Investment Association’s Investor Opinion Survey, 66 per cent of respondents want a portion of their portfolio invested in companies providing solutions to climate change and environmental challenges.

Naturally, fund providers are introducing more ESG Funds looking to capture market share, particularly among two demographics with attractive, long-term growth potential: women, and investors under 40. Unfortunately, however, there is a chance that some of these investments might not align with investors’ own expectations of what is socially responsible. In many cases, ESG can be claimed even with a minimum responsible investing standard — more of a marketing undertaking than a real attempt to build a socially responsible portfolio.

Here, we explain how the ESG system works, and how Horizons ETFs is trying to build more transparency with the Global Sustainability Leaders Index ETF.

ESG Saturation

According to Investor Economics, since 2008, over 86 ESG funds have launched in Canada. Of that, 66 per cent were launched in the last five years. It’s apparent that ETF and mutual fund providers are looking to capitalize on this groundswell investing phenomenon.

Figure 1: ESG Fund Launches in Canada

  Mutual Fund ETF Total     Mutual Fund ETF Total
2008 9 0 9   2014 0 0 0
2009 12 0 12   2015 1 0 1
2010 4 0 4   2016 9 0 9
2011 3 0 3   2017 9 2 11
2012 0 0 0   2018 6 9 15
2013 1 0 1   2019 10 11 21

Canadian ESG Funds


Source: Investor Economics, as at September 30, 2019

Of the overall Responsible Investment trend, ESG integration is the most prominent strategy with the lion’s share of assets: ~$1.9 trillion*. In Canada, most of the growth in assets under management (AUM) in ethical investing mandates has been driven by institutions, which have accounted for 75 per cent of the Canadian responsible investment industry’s growth over the past two years. Many of Canada’s large pension funds—including Ontario Teachers’ Pension Plan and OMERS Ventures—have mandates to invest with SRI (“Socially Responsible Investing”)/ESG principles as part of their portfolio strategies.

To paraphrase a popular adage, if everything is ESG, then nothing is—or at least, perhaps not as socially responsible as they contend to be.
*Source: 2018 RI Trends Report, Responsible Investment Association, October 2018

The Soup Analogy

Let’s put this in a soup analogy. We can think of traditional, major index funds as your economical staple soup variety: a widely-available product with a comparatively affordable price. It may contain non-organic ingredients that some consumers might not be happy about, but there aren’t any claims to the contrary.

Then, there are the premium soups. With a higher price and the way these soups are marketed and labelled, people might assume they are healthier with more organic ingredients. But if you take a closer look at the ingredient list, you might notice a lot of the same non-organic ingredients you thought you were avoiding by choosing the premium option.


Similarly, you might purchase an ESG-labelled fund at a higher cost compared to a similar index fund, thinking you’ll get a truly ethical portfolio. However, if you inspect the fund’s holdings, you may be surprised to learn that it holds major fossil fuel emitters, firearm manufacturers and other possibly unsavoury constituents.

While you might feel it’s misleading, the truth is there is nothing fraudulent about these ESG claims because ESG can often be claimed by meeting minimum responsible investing standards, which can leave room for investments in companies connected to those outside the ESG category. This includes funds and indices that are just factoring in broad environmental, social and governance data into the selection process without applying any positive or negative screens.


Negative Screening Positive Screening

• The systematic exclusion of specific companies, industries or sectors from the investible universe based on ethical considerations or negative ESG characteristics.
• For example, not allowing fossil fuel companies in the fund’s portfolio

• Investors allocate capital to companies or projects selected from a defined universe for their positive ESG performance relative to industry peers.
• For example, selecting companies with the lowest carbon footprint, relative to their industries


Source: 2018 RI Trends Report, Responsible Investment Association, October 2018

With no set of uniform regulations to govern which funds are truly ESG vs. products that are focused on just one element of responsible investing, becoming an informed responsible investor and navigating the ethical investing landscape can be complex and time-consuming. It’s one of the reasons why mutual funds and ETFs have become a popular way to invest responsibly, since they’re predesigned portfolios meant to make it easier for investors to do so. Yet, a number of purported ESG funds have attracted scrutiny for questionable inclusions, including companies related to firearm manufacturers. It makes you wonder, who watches the watchmen? For now, that burden falls on the investor. But that doesn’t mean you have to compromise—meet the Horizons Global Sustainability Leaders Index ETF (ETHI).

Horizons Global Sustainability Leaders Index ETF (ETHI)

In the search for a truly ethical fund, ETHI’s Index goes further by applying positive and negative screens that result in a portfolio geared towards companies with leading sustainability practices (relative to their industries) without compromising on other responsible investing principles.


You can see the composition of ETHI’s Index the Nasdaq Future Global Sustainability Leaders Index ("NQFGSLTD") is quite different than the composition of the MSCI ESG World Index. Compared to the MSCI World ESG Leaders Index ("TGSINU"), the NASDAQ Future Global Sustainability Leaders Index has nearly double the weighting in technology and health care, and no allocation to energy companies—all of which fail the carbon screens used by the Index.

Information Technology 16.99% 31.20%   Real Estate 3.34% 3.71%
Health Care 12.76% 22.03%   Consumer Staples 8.33% 1.49%
Financials 15.58% 13.90%   Materials 4.77% 1.07%
Consumer Discretionary 10.51% 14.38%   Energy 4.27% 0.00%
Industrials 11.07% 7.77%   Utilities 3.55% 0.00%
Communication Services 8.82% 4.46%        

When we look at common holdings, we can see that the common holdings account for nearly 70 per cent of the NQFGSLTD Index, while only accounting for 18 per cent of the MSCI World ESG Leaders Index. Adjusting for the difference in depth, we can see that both indices hold the components roughly in equal proportions to their overall allocation. The NQFGSLTD Index has about 100 names, compared to 800 for the MSCI.

Sector Industry
HD UN Equity HomeDepot Inc/The 1.20% 4.44% 6.58% 6.52% Consumer
Specialty Retail
MA UN Equity Mastercard Inc 1.17% 4.27% 6.42% 6.27% Information
IT Services
V UN Equity Visa Inc 1.45% 4.16% 7.93% 6.11% Information
IT Services
ROG SE Equity Roche Holding AG 0.98% 3.96% 5.39% 5.82% Health Care Pharmaceuticals
ADBE UW Equity Adobe Inc 0.63% 2.23% 3.46% 3.28% Information
NVDA UW Equity NVIDIA Corp 0.54% 1.98% 2.97% 2.91% Information
Semiconductors &
Semiconductor Equipment
NFLX UW Equity Netflix Inc 0.59% 1.89% 3.21% 2.77% Communication
NKE UN Equity NIKE Inc 0.52% 1.88% 2.87% 2.76% Consumer
Textiles, Apparel &
Luxury Goods
ASML NA Equity ASML Holding NV 0.52% 1.82% 2.84% 2.67% Information
Semiconductors &
Semiconductor Equipment
SBUX UW Equity Starbucks Corp 0.48% 1.73% 2.61% 2.54% Consumer
Hotels, Restaurants &

Source: Bloomberg, NASDAQ as at October 31, 2019

Horizons Global Sustainability Leaders Index ETF (ETHI) Performance

  1 Mo 3 Mo 6 Mo YTD 1 Yr SIR
Horizons Global Sustainability Leaders Index ETF 4.37% 3.71% 6.28% 23.14% 16.95% 16.95%

Source: Bloomberg, as at October 31, 2019

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the Horizons Exchange Traded Product or returns on investment in the Horizons Exchange Traded Product.

One of the persistent myths about socially responsible investing and ESG funds is that there’s a trade-off: greater ethics for weaker performance. As RIA CEO Dustyn Lanz explains, that’s not necessarily the case.

Further evidence of that is ETHI’s one-year performance. For the one-year period ending October 31, 2019,, ETHI returned 16.95% on a total return basis, which goes to show that you can feel good about your investments while achieving a strong return.

This is mostly because the sectors that have done well from a performance basis over the last five years—predominantly technology stocks—have a lower carbon footprint. ETHI’s Index tends to overweight the technology sectors relative to their weights in the broader indices.

Profit from Your Principles

We launched ETHI to give Canadians the chance to invest in a basket of companies that are leading the way today and for a better future. The Index’s screening methodology ensures that our ETF only includes those companies that meet stringent social responsible criteria. With a one-year performance of 16.95%, ETHI has thus far proven that investors don’t have to sacrifice returns in order to align their portfolio with their values.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

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Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs (Horizons Nasdaq-100 ® Index ETF and Horizons US Large Cap Index ETF) use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF use cash accounts and do not track an index but rather a compounding rate of interest paid on the cash deposits that can change over time.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.