I have always been intrigued with the notion of “voting with your money.”
Not many people realize how much power they hold as consumers, and with enough people spending their money on products and services that come from businesses that share their social and environmental values, they can trigger massive changes.
Thanks to the internet and business transparency (whether volunteered or regulatorily enforced), more people are becoming knowledgeable about the impact of their spending, and it is expanding towards investing as well.
With the best ESG stocks in Canada, you can engage in more socially and environmentally conscious investing that’s good for conscience and for your nest egg.
ESG Stocks – What Do You Need To Know Before Investing
Technically, all stocks are ESG stocks because almost all major companies have an ESG rating (more on it later), and the difference comes from good and bad ESG stocks. But first, let’s take a look at what ESG is:
What Does ESG Mean (When Referring To A Business/Investment)?
ESG is made up of three elements.
Environmental: This indicates a business’s relationship with and attitude towards environmental elements.
That includes things like their power usage (how much and where it’s coming from), their waste disposal, how green their facilities are, what are their overall emissions like, whether they source their raw material from environmentally friendly sources or not, etc.
The environmental impact of some businesses is highlighted more than others, in both a positive and negative light. Energy (fossil fuel) and transportation (due to emissions) businesses usually face more environmental challenges than other businesses and more scrutiny.
Green power and some tech companies are considered more environmentally friendly.
Social: Social impact of a business refers to its interaction with its community and society at large.
Companies that undertake meaningful social initiatives like preferring local producers over cheaper foreign imports, donating for different causes, and positively engaging the community they operate in to get a higher social score.
Employee condition, happiness, compensation, and mental health are also taken into account for a company’s “social” score.
Governance: How the company operates and how open, transparent, and honest a company is about its accounting, financials, and goals are usually taken under consideration for the governance element of ESG. It also includes the political affiliations and influence of businesses.
An ESG Rating
Based on how well a company performs in these three areas, they are assigned a rating by financial research companies. And that’s where one main problem with ESG stocks lies: Lack of standardization.
Different finance companies have different methods of evaluating and determining the ESG rating of a company. 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 of the four companies can be quite different for different industries. However, the ratings for certain industries, like healthcare, telecom, insurance, etc., might have consensus.
The rating categorization is different as well. For example, Sustainalytics offer an ESG risk rating, not an ESG rating, and the lower this rating, the better the ESG profile of the company is, which is the opposite of a more conventional risk rating.
Many companies publish sustainability reports as well, which are becoming more and more transparent and reliable.
What Are ESG Stocks?
In the context of an ESG rating, an ESG stock can be considered the stock of a company that focuses on its environmental, social, and governance practices and lands a good ESG score.
And a focus on ESG doesn’t necessarily mean more spending/expenses or compromising profits which impacts the performance and return potential of a stock. In fact, many ESG stocks are performing slightly better than their sector peers.
Taking the ESG score of a company before you invest in it into account before you make a decision is pragmatic as well, not just environmentally and socially conscious.
Governments, trading partners, and regulatory bodies are creating regulations and laws regarding the environmental impact of a business. And these laws can have significant financial and operational repercussions, with unintended consequences for the stocks.
Similarly, negative/poor social scores might indicate a social media scandal waiting to happen, which would feed the negative perception regarding a company.
A poor governance score can be a sign of a company that might get in trouble with authorities or has legal complications in the future.
To ensure that your ESG investing or a heavy concentration of ESG stocks in your portfolio doesn’t derail your financial goals, make sure you take the return potential of your ESG stocks into account.
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).
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.
Unless otherwise specified, all the stocks on this list trade on the TSX.
1) Brookfield Renewable Partners Stock
Industry: Renewable power assets
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
Industry: Gold royalties
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
Industry: Professional services
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 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
Industry: Asset Management/Alternative investment management
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 finance related to sustainability. At the social level, the company boasts equality and health and safety training for its employees.
But the governance section seems 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
Industry: Independent power generation
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 clean power. The board is quite inclusive, with about one-third women, and the company donated about $2.7 million.
Its potential as 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 offer a great yield and grows its payouts even during very harsh market conditions.
11) FirstService Stock
Industry: Real Estate (Property Management and Essential Services)
10-Year CAGR: N/A (5-year CAGR: 26%)
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.
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.
How To Buy ESG Stocks In Canada
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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.