11 Best ESG Stocks In Canada to Invest in December 2023

If you’re an investor looking to make a positive impact with your portfolio, you may want to consider investing in ESG stocks.

Not many people realize how much power they hold as consumers. With enough people spending their money on businesses that share their social and environmental values, it can trigger massive changes.

With the best ESG stocks in Canada, you can engage in more socially and environmentally conscious investing that’s good for your conscience and for your nest egg.

Understanding ESG Investing

ESG stands for Environmental, Social, and Governance, and these three elements form a criterion for measuring the sustainability and ethical impact of an investment in a company or business. They are used to evaluate the long-term effect of a company’s operations on society and the world as a whole.

It’s important to understand the difference between green stocks and ESG stocks. While green stocks focus solely on environmental impact, ESG stocks consider a company’s overall commitment to these three elements:

1. Environmental (E):
   • Climate Change Impact: Measures a company’s contribution to climate change, including its greenhouse gas emissions and resource use.
   • Waste Management: Looks at how the company handles waste, including recycling and hazardous waste disposal.
   • Water Use and Pollution: Considers water conservation, water pollution, and the general treatment of environmental resources.
   • Energy Efficiency: Addresses how the company uses energy, including its use of renewable energy sources.
   • Biodiversity Impact: Examines how a company’s activities might impact the natural habitats and biodiversity in its operational areas.
2. Social (S):
   • Employee Relations and Welfare: Includes factors like wages, benefits, diversity, inclusion, and working conditions.
   • Community Relations: Assesses the company’s relationship with the communities in which it operates, including philanthropy and community engagement.
   • Product Responsibility: Looks at the social implications of a company’s products and services, including their safety, quality, and accessibility.
   • Supply Chain Management: Examines how the company manages relationships with suppliers, particularly in areas like human rights and labor practices.
   • Customer Treatment: Considers how the company treats its customers, focusing on areas like privacy, security, and overall satisfaction.
3. Governance (G):
   • Corporate Governance: Focuses on how a company is governed, including board structure, executive compensation, and shareholder rights.
   • Ethical Compliance: Looks at the company’s adherence to laws and regulations, as well as its commitment to ethical business practices.
   • Transparency and Reporting: Examines the transparency of the company’s operations, including its financial reporting and disclosure of relevant information.
   • Risk Management: Assesses how the company manages financial and non-financial risks, including those related to environmental and social issues.

Best ESG Stocks In Canada

For this list, I have chosen the stocks with the best ESG scores (according to Sustainalytics and Refinitiv) that also offer a decent return potential.

To ensure a relatively diverse representation, I’ve tried to keep the number of stocks per industry to a minimum. But keep in mind that some industries have a much higher concentration of good ESG stocks than others.

• Brookfield Renewable Partners (BEP-UN.TO)
• Franco-Nevada (FNV.TO)
• Thomson Reuters (TRI.TO)
• Canadian National Railway (CNR.TO)
• Telus (T.TO)
• National Bank of Canada (NA.TO)
• Brookfield Asset Management (INE.TO)
• Open Text (OTEX.TO)
• Enbridge (ENB.TO)
• FirstService (FSV.TO)

1) Brookfield Renewable Partners Stock

Brookfield Renewable gets major points when it comes to the environmental aspects of its ESG profile/rating, thanks to the nature of its operations.

The company focuses on one of the most emission-heavy elements in the market, power generation, and has created a powerful renewable energy portfolio (mostly hydro, solar, and wind) spanning four continents.

The company has a power generation capacity of over 20 GW in North America alone.

The long-term return potential of the stock is quite impressive, and it’s also a financially healthy dividend payer. The company has a decent ESG score, which is adequately high in environmental and governance aspects but slightly lower in the social one.

2) Franco-Nevada Stock

A high ESG score for a mining company is a relative rarity.

Most mining companies are at odds with the locals and are considered responsible for damaging the natural ecosystem and environment, but Franco-Nevada ranks quite high in the ESG scores, especially by Sustainalytics, which ranks it second among the precious metal companies around the world when it comes to low ESG risk.

It also gained exceptional ratings from MSCI and ISS ESG. The company has focused on reducing its waste, resource usage, and emissions and achieved great results.

The return potential is also quite impressive, especially when it comes to capital appreciation. It’s a dividend aristocrat as well, but the yield hasn’t been above 2% in the last ten years.

3) Thomson Reuters Stock

It’s relatively easy for professional services companies to get a high environmental score; there are no operational sites, no major supply chain links, and limited (controllable) mobility, which affords them a smaller carbon footprint by default.

The power usage of Thomson Reuters is from 100% renewable sources already.

But the company gets a great score thanks to its social impact as well. In 2020, the company offered free legal services to NGOs and other social enterprises that would have cost them $32 million in fees. Its employees also logged 84,000 social work hours.

Thomson has a diverse business, and thanks to its pedigree and reaches in media and information, the company can propagate a much more comprehensive ESG impact beyond its boundaries as well.

Its long-term return potential is promising, and it’s a highly stable business.

4) Canadian National Railway Stock

Out of the two railway giants in the country, Canadian National Railway has a better ESG profile.

Its environmental score is quite high, which is impressive for a transportation company that doesn’t just have its own emissions to contain but is also tied to the supply-chain-based emissions of other businesses.

The company has reduced the intensity of its GHG emissions by 40% over the last three decades, which indicates that net zero might actually be possible for CNR by 2050.

It gets a lot of social points for its indigenous relationships, education, and donation. Its governance seems rock-solid as well.

All this culminates in an impressive ESG score for a stock that can also boost the growth potential of your portfolio quite a bit. Thanks to the leadership position of the company in its industry, it offers financial stability alongside sustainability.

5) Telus Stock

Telus is one of the three largest telecom companies in Canada with an impressive national footprint with 16 million connections.

It’s also one of the most responsible companies in the sector. In 2020, the company made community investments worth about $85.1 million.

It also keeps a tight grip on its employees, resulting in a healthy number of correctional/discipline cases for a company its size. It also made great strides in its environmental impact and has reduced its net emissions (domestic and international) by about 40% since 2010.

The company does well for its investors as well. It offers a healthy combination of a generous yield and long-term capital appreciation potential.

6) National Bank of Canada Stock

The National Bank of Canada is arguably the best banking stock in Canada. As a bank, the core of its ESG profile is helping the community via the right financing solutions, and it’s an area where the bank excels.

It’s working on an SME fund that will help small businesses secure $200 million worth of financing. In 2020, the bank invested $25 million in the community, and its employees logged over 49,000 hours of community service in 2019 (2020 was significantly lower due to pandemics).

It also boasts gender diversity with its 55% female workforce and has reduced by 22% GHG since 2018.

The stock is also the best growth stock among the big six. The yield is usually quite healthy, but you can make it even more alluring by buying the dip.

7) Brookfield Asset Management Stock

Brookfield Asset Management is massive and has multiple diversified businesses under its umbrella, including infrastructure, real estate, and renewable power.

With $650 billion worth of assets under management in 30 countries, the company covers a lot of ground, which makes its ESG ratings even more impressive.

All of its core office buildings are green, and it issued about $7 billion to sustainability-related finance. At the social level, the company boasts equality and health and safety training for its employees.

But the governance section seems like the heavyweight in its ESG profile, with its anti-bribery policies and implementation spearheading good governance.

The return potential leans more heavily towards capital appreciation than dividends, as the yield rarely exceeds 2%. But the growth potential makes up for it.

8) Innergex Renewable Energy Stock

Innergex has the best ESG scores compared to Algonquin, Northland Power, Boralex, Transalta Renewables, and even Ballard. And even then, its scores are relatively lower compared to many others on this list.

This distinction between green stocks and ESG stocks is important to understand. Its environmental impact mostly comes from the fact that it produces 100% renewable energy, mostly hydro.

It powers over a million households with its 3.8 GW of clean power. The board is quite inclusive, with about one-third being women, and the company donated about $2.7 million.

Its potential as a stock comes from more than just its modest growth rate. It has a well-diversified portfolio of renewable power generation assets in multiple countries, and a spike in demand can accelerate its growth.

9) Open Text Stock

Open Text has one of the best ESG scores in the tech sector. This apparently unassuming tech company has a massive consumer base, with about 75,000 enterprise-level B2B customers and 470,000 small business customers.

It boasts a diverse workforce and focuses on an ethical supply chain. The company is working on reducing 5% energy and carbon emissions (per dollar revenue) in about one and a half years. And it’s quite transparent about its governance.

This tech stock balances ESG with profitability quite well. It’s one of the few dividend stocks in the tech sector and offers a modest but not negligible yield. And its growth pace is sustainable for the long term.

The company is usually fairly or undervalued compared to most other tech stocks.

10) Enbridge Stock

This energy entry might come as a surprise, but the largest energy company in Canada is also one of the best ESG stocks in the sector. And even more surprising is that most of its ESG rating weight is carried by environmental practices of the company.

Enbridge aims to achieve net zero by 2050 and has made great strides towards that goal. It has seen a decent reduction in its scope 1 and a significant reduction in its scope 2 and 3 emissions.

Its social impact is enormous on indigenous communities (with which the company is usually at odds), and has spent almost $480 million with indigenous businesses.

The board is both diverse and independent (10 out of 11), boasting its social and governance profile.

The return potential of Enbridge is reflected in its dividends, not capital appreciation. It’s one of the most generous dividend aristocrats, which almost always offers a great yield and grows its payouts even during very harsh market conditions.

11) FirstService Stock

This company is on the list primarily because of its stellar Sustainalysis rating. It is the largest property manager in North America and oversees 1.7 million residential units.

It’s also one of the largest players in the essential service industry associated with real estate.

The company is quite active in social and community work. It’s also focusing on turning its property portfolio green at a decent pace. Its growth potential is quite phenomenal.

Related Reading: 10 Best ESG ETFs In Canada

Honourable Mentions

A few companies with decent ESG scores that couldn’t make the cut either due to the industry repetition or growth potential are at least worth knowing.

• Celestica: Stellar ESG scores, but minimal growth prospects and no dividends.
• Metalla Royalty & Streaming: A smaller gold royalty and streaming company with powerful but unpredictable growth.
• IGM Financial Inc.: Good ESG scores and yield, almost non-existent capital growth potential.
• Allied Properties: Good ESG scores, especially compared to most other REITs.

Impact of ESG on Financial Performance

The impact of ESG factors on financial performance is an area of growing interest for investors, businesses, and regulators. There are several ways in which ESG factors can influence a company’s financial outcomes:

1. Risk Management:
   • Regulatory Risks: Companies that fail to comply with environmental or social regulations may face fines and legal liabilities.
   • Reputational Risks: Poor ESG practices can damage a company’s reputation, leading to a loss of customer trust and potential declines in sales.
   • Operational Risks: Environmental disasters, social unrest, or governance scandals can disrupt operations and create financial losses.
2. Cost Savings and Efficiency:
   • Resource Efficiency: Implementing environmentally friendly practices can lead to cost savings through energy efficiency, waste reduction, and optimized resource usage.
   • Employee Satisfaction: Positive social practices may lead to increased employee satisfaction and retention, reducing recruitment and training costs.
3. Revenue Growth Opportunities:
   • New Markets: ESG-oriented products and services can open new market opportunities, especially among consumers who prioritize sustainability.
   • Customer Loyalty: Positive ESG practices can increase brand loyalty and create a competitive edge, potentially leading to higher sales and market share.
4. Access to Capital:
   • Investor Attraction: There is a growing pool of investors specifically interested in companies with strong ESG performance. Access to this capital can lower financing costs.
   • Credit Ratings: Better ESG practices may lead to more favourable credit ratings, reducing borrowing costs.
5. Long-term Value Creation:
   • Sustainable Growth: By considering long-term environmental and social trends, companies may position themselves for sustainable growth and reduce exposure to future risks.
   • Innovation: ESG-driven innovation can lead to the development of new products, services, or business models that create long-term value.
6. Possible Negative Impact:
   • Short-term Costs: Implementing ESG initiatives might lead to short-term costs, which could impact financial performance in the near term.

The relationship between ESG factors and financial performance is not always straightforward. Studies have shown mixed results, with some finding a positive correlation between ESG and financial performance, while others show no significant relationship or even negative correlations in certain contexts.

Challenges in ESG Investing

ESG investing does present certain challenges and complexities:

Lack of Standardization

One of the major challenges in ESG investing is the lack of consistent metrics and definitions. There’s no universally accepted standard for measuring ESG performance, leading to inconsistent evaluations. For Canadian stocks, there are four major names when it comes to an ESG rating: Sustainalytics (by Morningstar), Refinitiv, spglobal, and MSCI. The ESG ratings from the four companies can be quite different across industries.

Data Availability and Quality

ESG investing is often hindered by issues related to data availability and quality. Incomplete data and the varying quality and accuracy of reported ESG information can significantly affect the assessment of true performance.

Integration with Traditional Analysis

The integration of ESG factors with traditional financial analysis can be complex and time-consuming. This complexity often stems from the need for new skills and methodologies and the tension between focusing on long-term value through ESG factors versus short-term gains in traditional analysis.

Regulatory and Policy Uncertainty

The evolving regulatory landscape for ESG creates uncertainties that can affect investment strategies. Aligning investments with governmental policies on topics like climate change and social issues can be challenging due to political uncertainties.

Investor Expectations and Pressure

Balancing ethical alignment with financial performance expectations can create tension in ESG investing. Investors may also face pressures from various stakeholders to adopt specific ESG strategies, leading to potential conflicts of interest.

Greenwashing

Misleading claims about ESG credentials, known as greenwashing, pose a significant challenge. Some companies may exaggerate or misrepresent their ESG performance, requiring in-depth analysis and expertise to detect and avoid misallocation of investments.

Fiduciary Duties and Ethical Considerations

Investors must carefully balance ESG considerations with their legal obligations to maximize financial returns. The subjectivity of ethical choices also adds complexity, as different investors may have varying ethical priorities and perspectives.

Scale and Resource Constraints

Smaller investors may struggle with the resources required for comprehensive ESG analysis. ESG investing often demands significant resources for research, data collection, and ongoing monitoring, which can be especially challenging on a smaller scale.

What Is The Best Performing ESG ETF?

Desjardins RI USA – Low CO2 Index Units ETF (Ticker:DRMU) is one of the oldest and best-performing ESG ETFs currently trading on the TSX. However, it leans heavily towards an environmental aspect of ESG. A more holistic, best-performing ESG ETF would be iShares ESG Aware MSCI USA Index ETF (Ticker:XSUS).

How To Buy ESG Stocks In Canada

The cheapest way to buy stocks is from discount brokers. My top choices in Canada are:

To learn more, check out my full breakdown of the best trading platforms in Canada here.

Conclusion

As a pragmatic investor, responsible investing should be a part of your investment strategy, not the entirety of your investment approach.

You can also take a broad-spectrum approach to ESG investing and balance the overall ESG profile of your portfolio by balancing a powerful but low ESG rating asset with a modestly profitable high ESG rating one.

This holistic approach will ensure your portfolio meets your financial goals as well, not just responsible investing ones.

And if you are more focused on the environment than ESG as a whole, TSX’s renewable energy companies might be worth a look.