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Sustainable Investing 101

Find your answers by clicking on each block for more details.

Sustainable and/or ESG investing can generally be characterized as investing that takes into account a more holistic view of a company's performance, incorporating not only traditional financial metrics but, importantly, non-financial metrics and characteristics that may be indicators or drivers of risks and opportunities associated with a particular company or investment.

Taking into account non-financial metrics has become increasingly relevant as economies and companies have moved towards being knowledge-based, such that a firm's value is increasingly comprised of intangible assets that are not traditionally accounted for in financial statements (such as intellectual property, brand, a skilled workforce, etc.). ESG or sustainable investing therefore looks to identify and quantify these intangible, non-financial features as drivers of risk and/or return for a particular company or investment.

ESG can also include investing that is based on values. In this case, investors are seeking to align their investments with their personal or organizational values. Value-based investing can take two forms: investing in companies, asset classes or sectors that provide outcomes aligned with one's values (ranging from renewable energy and positive social impacts to environmental protection or restoration); or divesting from certain companies or asset classes or sectors. Typical examples include tobacco, arms manufacturing, alcohol, coal mining, etc.

"ESG" stands for Environmental, Social and Governance. These factors are used to evaluate companies and countries, based on how they comply with sustainability principles.

Environmental factors include the contribution a company makes to climate change through greenhouse gas emissions, along with waste management and energy efficiency.

Social factors include human rights, labour standards in the supply chain, any exposure to illegal child labour, and more routine issues such as adherence to workplace health and safety rules.

Governance factors refer to a set of rules defining rights, responsibilities and expectations among the various stakeholders in corporations. A well-defined corporate governance system can be used to support a company's long-term strategy.

Proper and transparent corporate governance can help avoid conflicts of interest between the company's stakeholders as well as potential litigation.

Environmental Conservation of the natural world
  • Climate change
  • Carbon emissions
  • Air and water pollution
  • Biodiversity
  • Deforestation
  • Energy efficiency
  • Waste management
  • Water scarcity
Social Consideration for people & relationships
  • Customer satisfaction
  • Data protection and privacy
  • Gender and diversity
  • Employee engagement
  • Community relations
  • Human rights
  • Labour standards
Governance Standards for running a company
  • Board composition
  • Audit committee structure
  • Bribery and corruption
  • Executive compensation
  • Lobbying
  • Political contributions
  • Whistleblower schemes

The following items detail some of the benefits from sustainable investing:

Financial performance: There is growing evidence that sustainable investing can lead to outperformance, particularly over the longer term, versus investments that do not specifically look at ESG factors. This is most evident when ESG indices are compared with non-ESG benchmark indices.

Improve risk management: Because financial statements do not traditionally capture intangible risk/reward factors, incorporating analyses of non-financial risk/reward considerations can help improve risk management.

Alignment with investing values: The ability to align investment objectives with values is another key feature of sustainable investing. While traditionally seen as important to millennial investors, this ability to create value and values alignment is now gaining traction with Generation X and Baby Boomer investors.

  • Requires a smaller initial outlay compared to buying the underlying stock (greater cost efficiency)
  • Offers buyers predefined maximum risks and returns
  • Enables investors to generate income on existing portfolios

An investor reads about ABC Inc. increasing R&D expenditures to help protect the environment and create a greener future. The company's actions align with the investor's beliefs, and he or she wishes to invest in ABC Inc. using call options.

The investor buys calls as a way to profit from a positive outlook on the underlying stock's price, without the risk and upfront capital outlay of outright stock ownership.

The smaller initial outlay also gives the buyer a chance to achieve larger percentage gains (i.e., greater leverage).

Maximum gain: The profit potential is theoretically unlimited. If the stock price rises as expected, the investor could either sell the option at a profit, or exercise it and purchase stock at the strike price.

Maximum loss: The maximum loss is limited and will be incurred if the investor is still holding the call at expiration and the stock is trading below the strike price. In this case the option will expire worthless, and the investor's loss will be the price paid for the call option.

Long Call

If an investor is holding a stock that is exposed to ESG risk, put options can be used to help offset that risk. To establish the hedge, one will need to calculate the magnitude of the impact of the ESG risk on the share price.

A put option added to a long stock position insures the stock's value. This strategy is called a "protective put." It establishes a "floor" price under which the value of the investor's stock cannot fall. If the stock price keeps rising, the investor benefits from the upside gains. Yet no matter how low the stock might fall, the investor can exercise the put to liquidate the stock at the strike price. If the stock falls below the strike, as originally feared, the investor has several choices:

  • Exercise the put, which triggers the sale of the stock. The strike price sets the minimum exit price. If the long-term outlook has turned bearish, this could be the most prudent move.
  • If the worst seems to be over, the investor can hold on to the stock and sell the put. The sale of the put option should recoup some of the original premium paid, and may even result in a profit. If so, it in effect lowers the stock's cost basis.

Maximum loss: The maximum loss is limited. The worst that can happen is for the stock to drop below the strike price. It does not matter how far it goes below; the put caps the loss at the strike price.

Maximum gain: In theory, the potential gains on this strategy are unlimited. The best that can happen to this position is for the stock price to rise to infinity. If the stock price rises sharply, it does not matter that the put expires worthless.

The put option can provide protection against a downturn during the term of the option. The drawback of this strategy is its cost, which raises the stock's cost basis.

Protective Put

This can be achieved by aligning your values with your investment decisions and improving your risk management.

The use of options can provide investors with a customizable and sustainable investment solution that aligns their financial goals with their environmental, social and governance values.

Company-specific ESG factors can be used in option pricing models.

By leveraging the benefits found in options, investors can now easily obtain or modify their exposure to a particular security or ETF that resonates with their ESG values. Or they can even purchase specific stocks or ETF insurance on the ESG factors that the investor believes the particular security is exposed to.

Regardless of whether an investor has a bullish or bearish outlook, there will be an option strategy that will allow them to integrate sustainable metrics into their investment objectives. To see all the options available and listed by the Exchange, click here.

The Montreal Exchange offers a wide range of educational content and trading tools on options. To learn more about options, visit: m-x.ca/education.

Sustainable Indices

Through our partnership with Standard & Poor's Index Services we administer, calculate or publish eight sustainable finance indices. The index may have more names, but the tables below display the top 10 constituents that have options and futures available. Click on each block for more details.

Data is based on end-of-day values

Constituent Name Symbol Options Symbol Futures Symbol
5N Plus Inc. VNP
Algonquin Power & Utilities Corp. AQN AQN FQN
Ballard Power Systems Inc. BLDP BLDP
Boralex Inc. Class A Shares BLX BLX
Brookfield Renewable Partners L.P. BEP.UN BEP
Cascades Inc. CAS CAS
Clearwater Seafoods Incorporated CLR
DIRTT Environmental Solutions Ltd. DRT DRT
EcoSynthetix Inc. ECO
Innergex Renewable Energy Inc. INE INE
NFI Group Inc. NFI NFI
Northland Power Inc. NPI NPI
Pinnacle Renewable Energy Inc. PL
Polaris Infrastructure Inc. PIF
SunOpta Inc. SOY SOY
TransAlta Renewables Inc. RNW RNW
Village Farms International Inc. VFF VFF FFQ
Westport Fuel Systems Inc. WPRT WPRT

Data is based on end-of-day values.

Constituent Name Symbol Options Symbol Futures Symbol
Bank of Montreal BMO BMO FBO
Bank of Nova Scotia (The) BNS BNS FNS
Barrick Gold Corporation ABX ABX FBA
Canadian National Railway Company CNR CNR FCN
Enbridge Inc. ENB ENB FEB
Royal Bank of Canada RY RY FRY
Shopify Inc. Class A Subordinate Voting Shares SHOP SHOP FSH
TC Energy Corporation TRP TRP FRP
TELUS Corporation T T FTC
Toronto-Dominion Bank (The) TD TD FTD
Constituent Name Symbol Options Symbol Futures Symbol
Bank of Montreal BMO BMO FBO
Bank of Nova Scotia (The) BNS BNS FNS
BCE Inc. BCE BCE FBC
Brookfield Asset Management Inc. Class A Limited Voting Shares BAM.A BAM FBM
Canadian National Railway Company CNR CNR FCN
Canadian Pacific Railway Limited CP CP FCP
Enbridge Inc. ENB ENB FEB
Royal Bank of Canada RY RY FRY
Shopify Inc. Class A Subordinate Voting Shares SHOP SHOP FSH
Toronto-Dominion Bank (The) TD TD FTD

Data is based on end-of-day values.

Constituent Name Symbol Options Symbol Futures Symbol
Bank of Nova Scotia (The) BNS BNS FNS
Barrick Gold Corporation ABX ABX FBA
Brookfield Asset Management Inc. Class A Limited Voting Shares BAM.A BAM FBM
Canadian National Railway Company CNR CNR FCN
Canadian Pacific Railway Limited CP CP FCP
Enbridge Inc. ENB ENB FEB
Royal Bank of Canada RY RY FRY
Shopify Inc. Class A Subordinate Voting Shares SHOP SHOP FSH
TC Energy Corporation TRP TRP FRP
Toronto-Dominion Bank TD TD FTD

Data is based on end-of-day values.

Constituent Name Symbol Options Symbol Futures Symbol
Bank of Nova Scotia (The) BNS BNS FNS
Barrick Gold Corporation ABX ABX FBA
Canadian National Railway Company CNR CNR FCN
Canadian Pacific Railway Limited CP CP FCP
Enbridge Inc. ENB ENB FEB
Franco-Nevada Corporation FNV FNV FFV
Royal Bank of Canada RY RY FRY
Shopify Inc. Class A Subordinate Voting Shares SHOP SHOP FSH
Toronto-Dominion Bank (The) TD TD FTD
Wheaton Precious Metals Corp. WPM WPM FPM

Data is based on end-of-day values.

Constituent Name Symbol Options Symbol Futures Symbol
Bank of Nova Scotia (The) BNS BNS FNS
Barrick Gold Corporation ABX ABX FBA
BCE Inc. BCE BCE FBC
Brookfield Asset Management Inc. BAM.A BAM FBM
Canadian National Railway Company CNR CNR FCN
Enbridge Inc. ENB ENB FEB
Royal Bank of Canada RY RY FRY
Shopify Inc. SHOP SHOP FSH
TC Energy Corporation TRP TRP FRP
Toronto-Dominion Bank TD TD FTD

Data is based on end-of-day values.

Constituent Name Symbol Options Symbol Futures Symbol
Bank of Montreal BMO BMO FBO
Bank of Nova Scotia (The) BNS BNS FNS
BCE Inc. BCE BCE FBC
Brookfield Asset Management Inc. BAM.A BAM FBM
Canadian National Railway Company CNR CNR FCN
Canadian Pacific Railway Limited CP CP FCP
Enbridge Inc. ENB ENB FEB
Royal Bank of Canada RY RY FRY
Shopify Inc. Class A Subordinate Voting Shares SHOP SHOP FSH
Toronto-Dominion Bank (The) TD TD FTD

Data is based on end-of-day values.

Constituent Name Symbol Options Symbol Futures Symbol
Bank of Nova Scotia (The) BNS BNS FNS
Barrick Gold Corp. ABX ABX FBA
BCE Inc. BCE BCE FBC
Canadian National Railway Company CNR CNR FCN
Enbridge Inc. ENB ENB FEB
Franco-Nevada Corporation FNV FNV FFV
Royal Bank of Canada RY RY FRY
Shopify Inc. Class A Subordinate Voting Shares SHOP SHOP FSH
Toronto-Dominion Bank (The) TD TD FTD
Wheaton Precious Metals Corp. WPM WPM FPM

* The above list of index constituents are the top 10 by index weight that have derivatives available on the Montréal Exchange.

S&P/TSX ESG & Environmental Indices
Articles
Through the Turbulence, a New Breed of ESG Indices Delivers
Reid Steadman
S&P DOW JONES INDICES - March 25, 2020
Read more
An Evolution in ESG Indexing
Sarah Kjellberg, Tanvi Pradhan, Thomas Kuh
Read more

Sustainable ETFs Listed on TSX

There are over 30 Sustainable ETFs listed on the TSX representing over $1 billion of assets under management.

Name Symbol
iShares Jantzi Social Index ETF XEN
iShares ESG Canadian Aggregate Bond Index ETF XSAB
iShares ESG Canadian Short Term Bond Index ETF XSTB
iShares ESG Aware MSCI Canada Index ETF XESG
iShares ESG Aware MSCI EAFE Index ETF XSEA
iShares ESG Aware MSCI Emerging Markets Index ETF XSEM
iShares ESG Aware MSCI USA Index ETF XSUS
iShares ESG Advanced MSCI Canada Index ETF XCSR
iShares ESG Advanced MSCI USA Index ETF XUSR
iShares ESG Advanced MSCI EAFE Index ETF XDSR
iShares ESG Balanced ETF GBAL
iShares ESG Conservative Balanced ETF GCNS
iShares ESG Equity ETF GEQT
iShares ESG Growth ETF GGRO
Name Symbol
BMO Balanced ESG ETF ZESG
BMO ESG Corporate Bond Index ETF ESGB
BMO ESG US Corporate Bond Hedged to CAD Index ETF ESGF
BMO MSCI Canada ESG Leaders Index ETF ESGA
BMO MSCI EAFE ESG Leaders Index ETF ESGE
BMO MSCI Global ESG Leaders Index ETF ESGG
BMO MSCI USA ESG Leaders Index ETF ESGY
BMO Women in Leadership Fund WOMN
Name Symbol
Desjardins RI Canada - Low CO2 Index ETF DRMC
Desjardins RI Canada Multifactor - Low CO2 ETF DRFC
Desjardins RI Developed ex-USA ex-Canada Multifactor - Low CO2 ETF DRFD
Desjardins RI USA - Low CO2 Index ETF DRMU
Desjardins RI USA Multifactor - Low CO2 ETF DRFU
Desjardins RI Active Canadian Bond - Low CO2 ETF DRCU
Desjardins RI Emerging Markets Multifactor - Low CO2 ETF DRFE
Desjardins RI Global Multifactor - Fossil Fuel Reserves Free ETF DRFG
Desjardins RI Developed ex-USA ex-Canada - Low CO2 Index ETF DRMD
Name Symbol
Horizons Global Sustainability Leaders Index ETF ETHI
Name Symbol
Invesco S&P 500 ESG ETF ESG
Invesco S&P/TSX Composite ESG Index ETF ESGC
Name Symbol
NBI Sustainable Canadian Bond ETF NSCB
NBI Sustainable Canadian Equity ETF NSCE
NBI Sustainable Global Equity ETF NSGE
Name Symbol
Wealthsimple Developed Markets ex North America Socially Responsible Index ETF WSRD
Wealthsimple North America Socially Responsible Index ETF WSRI

Sustainable Bonds

What is a Sustainable Bond?

Sustainable Bonds are similar to traditional bonds in that they are issued for a fixed period of time, pay an interest rate coupon to the owner and are backed by the issuing entity's credit rating. Sustainable bonds differ from traditional bonds in that the proceeds of the bond issuance, the management of the proceeds and the reporting on the usage of proceeds are made transparent. Additionally, sustainable bonds, such as those made available for trading by the TSX, are all required to have a second opinion performed by a recognized 3rd party firm.

Articles
Canadian Sustainable Bond Market Update
The Climate Bonds Initiative
Read more
Sustainability Bond Guidelines (SBG)
International Capital Markets Association
Read more

Transition Finance

Transition finance is a rapidly emerging theme in Canada and globally. Transition finance broadly refers to investments and/or investing in companies, projects and activities that enable energy intensive companies/industries to lower their GHG emissions profile. Companies and/or projects that are seeking transition financing would typically not qualify for traditional forms of green finance, such as green bonds, as the underlying activity would still produce emissions, albeit a lower amount.

Some companies have already made public commitments to embark on a transition pathway by announcing their intent to achieve net-carbon neutrality. The following is a list of companies that have made such a commitment, and a list of their associated derivative instruments that are available to trade on the Montréal Exchange.

Net-Carbon Neutral Committed Companies Options Futures
Maple Leaf Foods Inc. MFI
Cenovus Energy Inc. CVE FVE
MEG Energy Corp. MEG
Teck Resources Limited TECK FTK
Wheaton PM Corp. WPM FPM
Enbridge Inc. ENB FEB
Aritzia Inc. ATZ

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