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Invesco launches global sector ESG ETFs


Invesco is launching a range of global sector ETFs that, the firm says, aim to deliver meaningful improvements in their carbon emissions and overall environmental, social and corporate governance (ESG) profiles. 

The Invesco S&P World Sector ESG UCITS ETFs will track the performance of the S&P Developed Ex-Korea LargeMidCap ESG Enhanced Sector Indices, a new series of flagship benchmarks created by S&P Dow Jones Indices (S&P DJI) for sustainable sector investing.

The firm writes that the four Invesco ETFs offer exposure to some of the largest and most actively traded sectors:

Invesco S&P World Energy ESG UCITS ETF

Invesco S&P World Financials ESG UCITS ETF

Invesco S&P World Health Care ESG UCITS ETF

Invesco S&P World Information Technology ESG UCITS ETF

Sector ETFs can be effective tools for enabling investors to express their views on macroeconomic, demographic or other market drivers. However, ETFs that track standard sector indices might not be suitable for those investors who want to align their portfolios with their personal principles.

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, says: “The strength of flows into ESG strategies over the past few years is partly due to investors wanting to incorporate sustainability throughout their portfolios. Beyond core equity and fixed income holdings, we are now seeing many of these investors turn their attention towards more targeted exposures, such as sectors, and quite rightly demanding a similarly robust and thoughtful process for integrating ESG.”

S&P DJI recently published the report, “Applying Sustainability to Sector Indices”, in which the relevance of sector investing was examined. Invesco writes that the report found that a significant portion of a stock’s performance could be attributed to its sector and less to the overall market’s movements. Sector returns also vary widely from year to year, as macroeconomic factors affect specific sectors in different ways.

Jas Duhra, Global Head of Sustainability Indices at S&P DJI says: “We are very pleased that Invesco has licensed the S&P Developed Ex-Korea LargeMidCap ESG Enhanced Sector Indices for its new exchange-traded funds. As a pioneer in the development of sustainability-focused indices, S&P DJI continues to launch innovative indices for investors looking to integrate environmental, social and governance factors into their investing strategies. These broad Indices using advanced optimisation techniques offer diversification and seek to account for financial materiality in each sector.

Index methodology

Each index seeks to enhance its ESG profile and reduce its carbon footprint, while minimising country and stock deviations relative to the standard sector index. Securities are excluded based on:

·       Involvement in tobacco, controversial weapons, oil sands, small arms, military contracting or thermal coal;

·       Being classified as Non-Compliant according to the UN Global Compact principles;

·       Having an S&P DJI ESG Score that falls within the lowest 20 per cent of stocks in the standard index (or for not having an ESG Score);

·       Having carbon intensity levels that rank in the worst 10 per cent of companies in both their GICS Industry Group and the broader S&P Developed Ex-Korea LargeMidCap Index (or for not having carbon intensity data); or

·       Facing potential ESG risk incidents and/or controversial activities, as deemed by S&P DJI.

The remaining securities are then optimised and reweighted, with the aim of achieving both:

1.     An uplift in the S&P DJI ESG Score equivalent to a score that would be achieved if 25 per cent of the lowest ESG scoring stocks (by free-float market cap) from the GICS Industry Group were removed; and

2.     A 30 per cent decrease in carbon intensity relative to the standard index or, if lower, a carbon intensity reduction equivalent to the removal of securities that have carbon intensity levels ranked in the worst 25 per cent of companies in both the GICS Industry Group and the standard index.   

Chris Mellor, Head of EMEA Equity ETF Product Management at Invesco, says: “We believe that, in tracking these ESG Enhanced Sector Indices, our new ETFs have the potential to deliver meaningful and measurable improvements above and beyond what would be achieved through exclusions alone. The ETFs are also expected to achieve their sustainability objectives while avoiding the risk of having an outsized weight in a small number of stocks. That’s important because, in addition to ESG enhancements, we wanted to ensure our ETFs would be suitable for investors wanting the overall profiles to be similar to standard indices.”

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