Socially Responsible Investing (ESG) in Canada 2025

Updated March 2025 · 12 min read

Socially responsible investing (SRI) — also called ESG investing (Environmental, Social, and Governance) — allows Canadians to build wealth while aligning their investment portfolio with their personal values. Rather than simply maximizing returns, ESG investors consider the broader impact of the companies they own. Canadian investors have a growing range of ESG ETFs, robo-advisor portfolios, and other tools to implement this approach.

What Is ESG Investing?

ESG stands for Environmental, Social, and Governance — three broad categories used to evaluate a company's impact and behavior beyond its financial performance:

• Environmental: Carbon emissions, climate risk management, water usage, waste management, renewable energy adoption, deforestation exposure
• Social: Labor practices, employee safety, diversity and inclusion, supply chain standards, community relations, data privacy
• Governance: Board independence, executive compensation, anti-corruption policies, shareholder rights, transparency and disclosure

ESG ratings are assigned by specialized research firms (MSCI, Sustainalytics, ISS) that evaluate companies on hundreds of data points across these three pillars. ETF providers use these ratings to construct ESG-screened index funds.

Types of ESG Investing Approaches

Negative Screening (Exclusionary)

The most common approach. Excludes companies in specific industries considered harmful: tobacco, weapons manufacturers, fossil fuel extraction, gambling, adult entertainment. A fund using negative screening holds most of the market but filters out targeted sectors. Most Canadian ESG ETFs use some form of negative screening.

Positive Screening (Best-in-Class)

Selects companies with the highest ESG scores within each sector, rather than excluding whole sectors. This approach keeps sector diversification intact while tilting toward stronger ESG performers. Proponents argue this rewards improving companies and maintains better diversification than exclusionary approaches.

ESG Integration

ESG data is incorporated into the investment analysis process alongside traditional financial metrics. Not a strict screen — companies aren't automatically excluded — but ESG risks are factored into valuations and portfolio construction.

Impact Investing

Directs capital specifically toward companies, projects, or funds generating measurable positive social or environmental outcomes alongside financial returns. Green bonds, social impact bonds, and community development financial institutions fall into this category. Harder to access for retail investors through standard brokerage accounts.

Shareholder Activism

Using shareholder votes to push companies toward better ESG practices. Major Canadian institutional investors (CPPIB, OTPP, Caisse) engage in active ESG stewardship as part of their mandates. Individual retail investors can also vote on ESG-related shareholder resolutions through proxy voting.

Best ESG ETFs for Canadians in 2025

Canadian ESG ETFs

• XESG — iShares ESG Aware MSCI Canada ETF. Tracks Canadian companies with strong ESG profiles. MER: 0.17%. Excludes tobacco, controversial weapons, thermal coal.
• ESGA — Mackenzie Global Leadership Impact ETF. Focuses on companies with strong gender diversity and leadership practices. MER: 0.60%.
• CGRN — iShares Clean Energy ETF (CAD-listed). Focuses on global clean energy companies. More concentrated and higher volatility than broad ESG funds. MER: 0.47%.

Global ESG ETFs (CAD-listed)

• XSWD — iShares ESG MSCI World ETF. Broad global ESG equity exposure across developed markets. MER: 0.20%.
• MSUS — Mackenzie US ESG ETF. US equity with ESG screening. MER: 0.35%.
• ZESG — BMO MSCI Global ESG Leaders ETF. Global equities with ESG leaders focus. MER: 0.25%.

Wealthsimple's SRI Portfolios

Wealthsimple Invest offers dedicated Socially Responsible Investing portfolios within their robo-advisor service. These portfolios use ESG-screened ETFs from iShares and other providers, excluding fossil fuels, tobacco, and weapons. Available across all risk levels (conservative to growth). Management fee: 0.40–0.50% plus underlying ETF MERs (~0.20–0.35%), totalling approximately 0.60–0.85% all-in. The simplest way for Canadians to get a fully managed ESG portfolio.

ESG Investing Performance: Does It Cost You Returns?

A major concern for many investors is whether ESG screening reduces returns. The evidence is mixed but increasingly favorable for ESG investors:

• Over the 2010–2020 decade, ESG equity funds generally matched or exceeded conventional index funds, largely because tech companies (which score well on ESG metrics) significantly outperformed energy companies (which score poorly).
• During the 2021–2023 energy boom, ESG funds that excluded oil and gas underperformed conventional funds.
• Long-term academic evidence suggests ESG integration does not systematically hurt returns, and may improve risk-adjusted performance by reducing exposure to regulatory, reputational, and stranded-asset risks.

The honest answer: ESG investing involves modest trade-offs. You get meaningful exclusions (less exposure to fossil fuels, tobacco, weapons), slightly higher MERs than pure index funds, and return outcomes that vary by market cycle. Over full market cycles, the performance gap versus conventional index investing has been small.

ESG Investing in Registered Accounts

ESG ETFs can be held in any Canadian account type — TFSA, RRSP, FHSA, RESP, or non-registered. The same account-placement principles apply: hold growth-oriented ESG equity ETFs in your TFSA (tax-free gains), US equity ESG ETFs in your RRSP (treaty withholding tax benefit), and consider dividend-focused ESG ETFs in non-registered accounts where the dividend tax credit applies to eligible Canadian dividends.

Greenwashing: A Growing Concern

Not all ESG funds are equally rigorous in their screening. Some funds labeled "ESG" or "sustainable" make only superficial exclusions while holding many of the same companies as conventional funds. Before investing in any ESG product, review:

• What sectors are explicitly excluded?
• What ESG rating methodology is used?
• What percentage of the fund overlaps with a conventional index fund?
• Does the fund publish its holdings and screening methodology transparently?

Canadian securities regulators (CSA) have published guidance on ESG-related fund disclosure to address greenwashing concerns, requiring greater specificity in how ESG claims are substantiated in fund documents.

Halal Investing for Canadian Muslims

A related but distinct approach, halal (Shariah-compliant) investing prohibits interest (riba), excessive uncertainty (gharar), and investment in businesses dealing with alcohol, pork, tobacco, weapons, and conventional financial services. Wealthsimple Invest offers a dedicated halal portfolio for Muslim Canadian investors. Several ETF providers are also developing Shariah-screened equity funds for the Canadian market.