Climate Risk and XEQT: What Environmental Change Means for Long-Term Canadian Investors

Last summer, wildfire smoke rolled into my city for the third year in a row. The sky turned that eerie orange-grey, the air quality index spiked into the “hazardous” range, and my group chat exploded – not with weather complaints, but with investing questions.

“Should I be buying clean energy stocks?”

“Is oil dead? Should I sell everything Canadian?”

“My buddy just put his whole TFSA into a solar ETF. Am I missing out?”

I sat on my back porch, wearing an N95 mask in July, and thought about how to answer. Because the questions were real. Climate change is not some abstract future scenario anymore. It is showing up in our insurance bills, our grocery prices, and yes, our portfolios.

But here is the thing I told every single one of those friends: you probably do not need to change anything about your XEQT strategy. And by the end of this post, you will understand exactly why.

This is not an environmental activism post. I am not going to tell you to divest from fossil fuels to save the planet. What I am going to do is walk you through climate change as a portfolio risk factor – the same way you would think about interest rates, inflation, or geopolitical conflict – and explain why a simple, globally diversified index fund like XEQT is already your best defence.

1. Climate Change Is an Investment Risk – Not Just an Environmental Issue

Let us get something straight before we go any further. You do not need to “believe in” climate change the way you believe in a sports team. Climate change is a financial reality that is already repricing assets around the world.

Insurance companies are raising premiums. Governments are imposing carbon taxes. Banks are stress-testing loan portfolios for climate scenarios. The Bank of Canada has published reports on climate-related financial risks. The International Monetary Fund estimates that climate change could reduce global GDP by up to 10% by 2100 under severe warming scenarios.

This is not fringe stuff. The world’s largest asset managers – BlackRock, Vanguard, State Street – all factor climate risk into their analysis. These are the same firms that build the index funds inside XEQT’s holdings.

So when I talk about climate risk as an investor, I am talking about the same thing a pension fund manager or a central banker talks about. It is about money. It is about returns. And it is about making sure your portfolio can handle what is coming over the next 20, 30, or 40 years.

2. The Three Climate Risks Every Investor Should Understand

Climate risk is not one big blob of “bad stuff happening.” Analysts break it down into three distinct categories, and each one affects your portfolio differently.

a) Physical Risk

This is the one you can see and feel. Wildfires, floods, hurricanes, droughts, heat waves. Physical risk is about direct damage to assets, property, and supply chains.

Some examples that hit close to home for Canadians:

• The 2016 Fort McMurray wildfire caused nearly $4 billion in insured losses
• The 2024 Jasper wildfire destroyed a third of the town’s structures
• Flooding in British Columbia in 2021 severed supply chains and caused billions in damage
• Rising insurance costs – home insurance premiums in wildfire and flood zones have jumped 20-50% in some provinces

For investors, physical risk means companies with significant real estate, infrastructure, or agricultural exposure could face unexpected losses. Think utilities with power lines in fire zones, real estate companies in flood plains, or food companies dependent on stable growing seasons.

b) Transition Risk

This is the economic disruption that comes from shifting away from fossil fuels. Governments impose carbon taxes. Regulations tighten. Consumer preferences change. New technologies make old ones obsolete.

Transition risk is what keeps oil company executives up at night. Here is what it looks like:

• Carbon pricing – Canada’s carbon tax is already over $80 per tonne and rising
• Stranded assets – oil reserves that may never be extracted because they are too expensive relative to alternatives
• Regulatory pressure – vehicle emission standards, building codes, methane regulations
• Capital flight – major investors and banks reducing fossil fuel financing

The key insight about transition risk is that it does not happen overnight. It is a slow, grinding repricing of assets. Companies that adapt survive. Companies that do not slowly lose market value.

c) Opportunity Risk

This is the one most people forget about: the risk of missing out on the industries that benefit from the energy transition.

The clean energy sector, electric vehicles, battery technology, green metals (lithium, copper, cobalt), grid modernization, energy storage, carbon capture – these are all growing industries. If your portfolio has zero exposure to these sectors, you might miss one of the biggest economic transformations in history.

Some numbers to put this in perspective:

• Global clean energy investment surpassed $1.7 trillion annually as of 2024
• Electric vehicle sales have grown from 2% of global auto sales in 2019 to over 20% by 2025
• Solar and wind are now the cheapest sources of new electricity generation in most of the world
• Green metal demand is projected to grow 5-10x over the next two decades

Here is the good news: if you own XEQT, you already have exposure to all of this. But we will get to that in a moment.

3. Why XEQT Naturally Handles the Climate Transition

This is the core argument of this post, and it is one of the most elegant features of index investing that nobody talks about enough.

XEQT does not need to predict which companies will win or lose from climate change. The market does that work for you.

Here is how.

Market-Cap Weighting Is a Built-In Adaptation Mechanism

XEQT holds over 12,000 stocks across 49 countries, weighted by market capitalization. That means the bigger a company gets, the more of it you own. The smaller it gets, the less of it you own.

Think about what that means in the context of climate change:

• If Tesla becomes a $5 trillion company, your XEQT automatically holds more Tesla
• If a major oil company slowly declines, your XEQT automatically holds less of it
• If a clean energy startup grows into a mega-cap, it enters the index and grows in your portfolio
• If a coal company goes bankrupt, it drops out of the index entirely

You do not need to make a single trade. You do not need to predict which technology wins. You do not need to time the energy transition. The index rebalances itself to reflect reality.

This is not some theoretical argument. We have already seen it happen. Ten years ago, the top holdings in global indices were dominated by energy and financial companies. Today, the top holdings are technology companies – Apple, Microsoft, NVIDIA, Amazon – many of which are investing heavily in renewable energy and AI-driven efficiency.

The index adapted. Your XEQT adapted with it.

Energy Is Already a Small Slice of the Pie

One of the biggest misconceptions I encounter is that switching to XEQT means you are “heavily invested in oil.” You are not.

As of mid-2026, the energy sector makes up roughly 4-5% of global market capitalization. That is it. Look at XEQT’s sector breakdown:

• Technology: ~25%
• Financial Services: ~16%
• Healthcare: ~11%
• Consumer Discretionary: ~10%
• Industrials: ~10%
• Energy: ~4-5%

Even in a worst-case scenario where every single energy company went to zero tomorrow (they will not), your XEQT portfolio would lose about 4-5%. That is a bad month, not a catastrophe.

Compare that to someone who holds a concentrated Canadian portfolio. The S&P/TSX Composite has roughly 16-18% in energy. That is a very different risk profile.

Clean Energy Winners Are Already in the Index

Here is something people miss when they think about “green investing”: you already own the clean energy winners inside XEQT.

Tesla, NextEra Energy, First Solar, BYD, Schneider Electric, Brookfield Renewable Partners – they are all in there. Plus, XEQT holds the major technology companies that are investing tens of billions into renewable energy: Microsoft, Google, Amazon, and Apple are all among the world’s largest corporate buyers of clean power.

You do not need a specialty ETF to get exposure to these companies. You already own them.

4. XEQT vs. ESG ETFs vs. Clean Energy ETFs: The Comparison You Need

Let us put the three main approaches side by side so you can see the trade-offs clearly.

Note: Return figures are approximate ranges based on historical performance through mid-2026 and will vary depending on exact measurement period. Past performance does not guarantee future results.

Let me break down each alternative.

ESG ETFs: Good Intentions, Mixed Results

ESG (Environmental, Social, and Governance) ETFs screen out companies that score poorly on sustainability metrics. They typically exclude or underweight fossil fuels, weapons manufacturers, tobacco, and other “sin stocks.”

The appeal is obvious: you get to invest in line with your values. And for many people, that matters – I respect that.

But from a pure portfolio construction standpoint, ESG ETFs have some drawbacks:

• Higher fees – you are paying extra for the screening process
• Less diversification – fewer holdings means more concentration risk
• Inconsistent screening – different ESG providers rate the same companies very differently. Tesla has been both included and excluded from major ESG indices
• Performance drag – historically, excluding sectors has slightly underperformed broad market indices over long periods, though this varies by time period
• You might miss value – “dirty” companies trading at deep discounts can deliver strong returns if they successfully transition

I have written more about this in my XEQT vs ESG ETFs comparison.

If your primary goal is aligning your investments with your values, ESG ETFs might be right for you. If your primary goal is maximizing long-term risk-adjusted returns, broad market indexing through XEQT has a stronger track record.

Clean Energy ETFs: The Cautionary Tale

This one deserves its own section because the story is so instructive.

5. The Clean Energy ETF Crash: A Lesson in Thematic Investing

In 2020 and 2021, clean energy ETFs were the hottest thing in investing. The iShares Global Clean Energy ETF (ICLN) more than doubled. The Invesco Solar ETF (TAN) nearly tripled. Money poured in. Everyone was talking about the “green revolution.”

Here is what happened next:

• ICLN peaked in January 2021 and then proceeded to lose over 50% of its value over the following two years
• TAN lost roughly 60% from its peak
• Many individual clean energy stocks dropped 70-80%

Why? Several reasons:

1. Valuations got absurd. Companies with minimal revenue were trading at 100x+ price-to-earnings ratios
2. Rising interest rates hit growth stocks hardest, and clean energy companies are capital-intensive businesses that rely on cheap financing
3. Supply chain problems drove up costs for solar panels, wind turbines, and batteries
4. Government policy uncertainty created doubt about future subsidies
5. Competition increased as more players entered the market, squeezing margins

The investors who bought ICLN or TAN at the peak in early 2021 were still underwater years later – even as the underlying industry continued to grow.

This is the fundamental problem with thematic ETFs. The industry can be right, but the investment can still be wrong. You are concentrating your portfolio in a narrow slice of the market and betting that the stocks in that slice are priced correctly.

Meanwhile, an XEQT investor who held through the same period captured the broad market rally – including the gains from clean energy winners that grew large enough to meaningfully impact the index, without the devastating losses from overhyped smaller companies.

The index does not care about narratives. It cares about market capitalization. And that is exactly the feature you want.

6. Canada-Specific Climate Considerations for XEQT Investors

Living in Canada adds some unique dimensions to the climate-and-investing conversation. Let us walk through the big ones.

The Oil Sands Question

About 25% of XEQT is allocated to Canadian equities through its underlying iShares Core S&P/TSX Capped Composite Index ETF (XIC). And Canada’s stock market is heavily tilted toward energy – roughly 16-18% of the TSX.

That means your XEQT portfolio has approximately 4-5% exposure to Canadian energy companies, many of which are oil sands producers.

Is that a problem? Honestly, probably not, for a few reasons:

1. It is a small position. Even if Canadian oil companies face long-term decline, the impact on your total portfolio is manageable
2. Oil demand is not going to zero overnight. Even the most aggressive climate scenarios project decades of continued oil demand during the transition
3. Canadian energy companies are not standing still. Many are investing in carbon capture, LNG, and emissions reduction
4. If the sector does decline, market-cap weighting will naturally reduce your exposure over time

Carbon Tax Impact

Canada has one of the most aggressive carbon pricing systems in the world. The federal carbon tax affects Canadian businesses across the economy – transportation, manufacturing, agriculture, heating.

For XEQT investors, this is mostly a wash:

• Some Canadian companies face higher costs from carbon pricing
• But some benefit – companies in clean technology, energy efficiency, and carbon capture gain a competitive advantage
• The Canadian economy adapts – businesses that manage carbon costs well gain market share from those that do not

This is market-cap weighting doing its thing again. The companies that handle the carbon tax well grow. The ones that do not shrink.

Insurance Costs and Real Estate

If you own a home in Canada, you have probably noticed insurance premiums climbing – up 20-50% in wildfire and flood zones across B.C., Alberta, Quebec, and Ontario.

This does not directly affect your XEQT holdings, but it is worth noting that your biggest financial asset (your home) might be more climate-exposed than your portfolio. All the more reason to keep your investments diversified globally through XEQT rather than concentrating in Canadian real estate.

The Green Metals Opportunity

Here is one that works in Canada’s favour. The energy transition requires enormous amounts of lithium, copper, cobalt, nickel, uranium, and rare earth elements. Canada is one of the world’s largest producers of many of these metals.

Canadian mining companies stand to benefit enormously from the green transition. And since mining is about 11-12% of the TSX, your XEQT’s Canadian allocation naturally captures this upside.

This is a great example of why blanket “divest from Canada because of oil” logic is flawed. Canada’s economy is more complex than just oil sands. The same country that produces crude also produces the metals that make electric vehicles and solar panels possible.

7. What Should You Actually Do as an XEQT Investor?

Let us get practical. Here is what I recommend.

Keep Doing Exactly What You Are Doing

If you are already buying XEQT regularly – monthly, biweekly, whatever your schedule – keep doing it. The index will adapt to climate-driven economic changes without any intervention from you.

Seriously. That is the main message of this entire post. The beauty of broad market indexing is that you do not need to have an opinion on which energy source will dominate in 2045. The market will figure it out, and your index fund will reflect the answer.

Do Not Panic-Sell During Climate Events

When wildfire smoke fills the sky, or a hurricane hits, or a major climate report makes headlines, do not make emotional trades. Markets have already priced in a significant amount of climate risk. The stocks you own reflect the collective judgment of millions of investors and analysts who are thinking about these issues constantly.

Do Not Chase Clean Energy Hype

When the next “green revolution” narrative takes off (and it will), remember the 2021 clean energy crash. Thematic investing sounds great in theory but has a brutal track record. The companies that truly benefit from the energy transition will grow into the index on their own.

Consider Your Total Financial Picture

Climate risk affects more than your portfolio. If your home is in a flood or wildfire zone, if your career is tied to fossil fuels, or if extreme weather could strain your emergency fund – having your investments in a globally diversified fund like XEQT provides important diversification for your total financial life, not just your portfolio.

If You Really Want to Tilt Green

I understand that some people want to do more. If reducing fossil fuel exposure matters to you personally, here is a reasonable approach: keep XEQT as your core position (80-90%) and add a small satellite position in an ESG or clean energy ETF (10-20%). Accept the trade-offs – higher fees, less diversification, more volatility – and rebalance periodically.

I have written more about this core-satellite approach in my posts on thematic ETFs and ESG investing.

But for most people? XEQT alone is enough.

8. The Index IS the Climate Adaptation Strategy

Let me bring this all back together.

Climate change is real. It is affecting the economy. It is affecting asset prices. And it is reasonable to wonder whether your portfolio is prepared for it.

But the answer is not to try to predict which companies, sectors, or technologies will win the energy transition. The answer is not to load up on solar stocks or dump all your oil and gas holdings. The answer is not to pay higher fees for an ESG label that might not even deliver better returns.

The answer is to own the entire market and let it sort itself out.

That is what XEQT does. It owns everything – the old energy companies that may decline, the new energy companies that may soar, the technology companies building the future, the financial companies financing the transition, and the mining companies providing the raw materials.

When the world changes, the index changes with it. You do not need to be right about climate change to be right about your portfolio. You just need to be diversified, keep your costs low, and stay invested for the long term.

Twenty years from now, the global economy will look very different. Some of today’s biggest companies will be gone. New giants will have emerged. The energy mix will have shifted dramatically. And your XEQT will have adapted to all of it – automatically, quietly, without a single trade on your part.

Just buy XEQT. The index adapts. And so does your portfolio.

Related Reading

• What Is XEQT? A Complete Guide – everything you need to know about Canada’s favourite all-in-one ETF
• XEQT Holdings: What You Actually Own – a deep dive into the 12,000+ stocks inside XEQT
• XEQT vs ESG ETFs in Canada – a detailed comparison of broad indexing vs values-based investing
• XEQT vs Thematic ETFs – why thematic bets usually underperform the index
• XEQT Sector Breakdown – see exactly how much of each sector you own
• Why Your Money Spans 49 Countries – the power of global diversification

Disclaimer: This post is for informational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Climate risk projections involve significant uncertainty and actual outcomes may differ from scenarios described. The author holds XEQT. Wealthsimple referral links provide a bonus to both the referrer and the new account holder. Always do your own research and consider consulting a qualified financial advisor before making investment decisions.