Invesco has announced the launch of a new UCITS ETF, designed to provide investors with broad commodity exposure that incorporates climate considerations.
The Invesco Bloomberg Commodity Carbon Tilted UCITS ETF is designed to track an index that adjusts the weight of individual commodities based on the greenhouse gas (“GHG”) emissions associated with their production lifecycle. By balancing these weight adjustments within each commodity group (e.g., precious metals, grains), the index matches the group-level weightings of the standard Bloomberg Commodity Index, but targets a 20 per cent reduction in the implied GHG emissions per unit of production. The Invesco ETF is the first broad commodity ETF classified as an Article 8 fund under the EU’s Sustainable Finance Disclosures Regulation (SFDR) framework.
Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, says: “Demand for sustainable investments has been a persistent theme, particularly in respect to climate issues. We have seen investors increasingly using ETFs as an efficient, low-cost way to express their views, with many investors having integrated environmental, social and governance strategies into core equity and fixed income components. We are now speaking to investors who want to improve sustainability in the rest of their portfolio. Our new ETF provides broad commodity exposure, with an index methodology that accounts for environmental impacts, and carries the SFDR Article 8 classifications many ESG-conscious investors look for.”
Invesco writes that the Bloomberg Commodity Carbon Tilted Index comprises futures on the same 24 commodities as the parent Bloomberg Commodity Index (BCOM) but incorporates into their weighting a measure of the environmental costs associated with the production of the commodities underlying each futures contract. The BCOM Carbon Tilted Index groups commodities with comparable production processes into seven groups: industrial metals, precious metals, agriculture derived, agriculture ex-derived, livestock, primary energy, and distillates.
The index accounts for the greenhouse gas (GHG) emissions associated with the production of the underlying commodity and applies tilting such that the lower GHG emitting commodities relative to their group are overweighted, and the higher GHG emitting commodities are underweighted, when compared to the standard BCOM index. The application of tilting allows each commodity group to contribute to the aggregate GHG reduction, with the contribution based on the emissions profile of each commodity group, and the degree of variation among individual commodities within it. The Index is rebalanced on an annual basis.
The commodity weight adjustments are applied via a group-specific tilting factor which is derived from a Life Cycle Assessment (LCA) of the underlying commodity conducted by Sphera, a leading provider of ESG performance and risk management software. Emissions are estimated from more than 100 environmental impacts within the LCA models and calculated through the different stages of the production process. Incorporating these inputs to the weighting methodology, the index targets a 20% reduction in the implied GHG emissions per unit of production versus the standard BCOM.
Paul Syms, Head of EMEA Fixed Income and Commodity ETF Product Management at Invesco, says: “Commodities can play several roles, such as a portfolio diversifier, a hedge against inflation or a means to gain access to potential growth opportunities. The transition to a low-carbon economy will touch every commodity in the index, including those that are playing an important part in the development of new green technologies. We believe this new ETF offers investors the ability to diversify and align their portfolios more closely with their environmental objectives.”
The ETF will hold a portfolio of US Treasury Bills and will achieve its investment objective by using unfunded swaps, which are agreements with an approved counterparty to exchange one stream of cash flows against another stream. The performance of the Index is swapped to the ETF in exchange for an agreed rate of return reflective of US Treasury Bill market rates.