Canadian investors reward top-rated sustainable funds with higher inflows: ISF research

Despite growing public debate and scrutiny surrounding sustainable investing, new research published by the Institute for Sustainable Finance (ISF) shows that Canadian investors actively favour mutual funds that demonstrate strong sustainability credentials. The findings suggest that investors are particularly selective, directing more capital toward top-rated funds rather than broadly rewarding funds with above-average ratings.

The research, by ISF Research Fellow Fabio Moneta, a Professor of Finance at the University of Ottawa, and PhD candidate Xiaoyu Sun, highlights the following findings and developments with important implications for Canada’s sustainable finance ecosystem:

• According to Morningstar, Canadian sustainable fund assets reached a record $67 billion in 2025, up 18% from the previous year.
• The researchers looked at whether Morningstar Sustainability Ratings on Environmental, Social and Governance risk factors affect investor flows into Canadian mutual funds over the period 2016-2025. They find that funds receiving Morningstar's highest sustainability rating, “five-globe funds”, attract significantly greater inflows than comparable funds with lower ratings.
• Funds with one-, two-, three-, and four-globe ratings receive similar levels of investor flows, suggesting that investors place particular value on identifying sustainability leaders.
• Canadian investors appear to respond differently from their U.S. counterparts, who tended to both reward highly rated funds and penalize poorly rated funds following the introduction of Morningstar Sustainability Ratings in 2016.
• The researchers also find that the relationship between sustainability ratings and investor flows is strongest among growth-oriented funds.
• A follow-up report will examine whether and how fund managers respond to these incentives.

“By directing capital toward highly rated funds, investors can create incentives for asset managers to improve the sustainability characteristics of their portfolios,” said Dr. Moneta. “However, sustainability ratings are not a direct measure of environmental or social impact. Continued efforts to improve sustainability-related disclosures and rating methodologies are important to ensure that these incentives support meaningful sustainability outcomes.”

“Until now we really haven’t had an idea of how these popular ESG ratings are actually influencing capital allocation decisions in Canada,” said ISF Director of Research Yrjö Koskinen. “This kind of innovative academic work is absolutely necessary for understanding sustainable investing in this country.”

Download and read the report, “Do sustainability ratings influence investor capital allocation? Evidence from Canadian mutual funds.”