Here, Investment Week hears from Dr Christopher Mellor, CFA, head of ETF equity and commodity product management at Invesco, about what the ETF can offer investors, the methodology behind the fund and communicating effectively with clients.
What is innovative about the ETF and what are you trying to achieve for investors?
Our ETF is the only one in Europe tracking this modified version of the MSCI ESG Universal Index, with several additional exclusions that investors told us were important for them. It also includes “ESG Momentum” in the methodology, which is an innovative way to reward companies that are demonstrating improvements in the results of their sustainability efforts.
We designed the ETF for investors who want to reduce their portfolio’s carbon footprint and improve other ESG characteristics but at the same time maintain their overall risk and potential returns. It provides investors a low-cost and transparent way to gain materially significant ESG improvements for their core US equity exposure.
Now two years old, the ETF has over $1.1bn in AUM and remains one of the lowest-cost ESG ETFs in the European market, with an annual management fee of just 9 basis points. (Source: Invesco, Bloomberg as at 3 September 2021.
Can you give an overview of the methodology behind the ETF’s construction and your review process?
The ETF aims to track the MSCI USA ESG Universal Select Business Screens Index, which is constructed from the MSCI USA Index by excluding securities that: 1) have faced very severe controversies pertaining to ESG issues over the last three years; 2) have a MSCI ESG Rating of CCC; or 3) are involved in controversial weapons, conventional weapons, nuclear weapons, civilian firearms, oil sands, thermal coal, tobacco or recreational cannabis; or 4) have not been assessed or rated by MSCI on the basis of their ESG credentials.
Each of the eligible component securities is assigned a combined ESG score, which reflects MSCI’s assessment of both the security’s current ESG rating, as well as the trend in that rating (“ESG Trend Momentum”), defined as the change in its ESG rating over time. This combined ESG score is then applied to re-weight the eligible securities in the index.
We regularly monitor the index and our ETF in terms of performance and tracking error and more formally on the index’s quarterly review and semi-annual rebalancing schedule. We will alert MSCI immediately in the unlikely event of any irregularities.
What is your engagement policy with companies?
As a firm, we believe engagement is one of the most effective mechanisms to reduce risks, maximise returns and have a positive impact on society and the environment. Our global ESG team engages with companies on issues most relevant to their industries, ensuring the time available is used effectively to focus on areas that will have the most significant impact.
We have a patented, proprietary voting portal that allows us to build upon our institutional base of knowledge and provides a global platform for active internal due diligence. Our passive ETFs will vote in line with the majority holder of the active-equity shares held by Invesco. This process ensures that our passive strategies benefit from the engagement and deep dialogue of our active investors. In the absence of an active holder, we will vote in line with internally developed ESG voting guidelines and may supplement our internal research with information from independent third parties.
How do you measure the impact of your ETF and communicate this effectively to investors?
We publish various data on our website, demonstrating our ETF’s ESG characteristics in absolute terms as well as a comparison to its parent index. This shows investors the improvement they are achieving versus the relevant non-ESG benchmark. The information is up-to-date and clearly explained.
Data sourced from MSCI ESG Research includes overall ESG rating (for reference, our ETF has an AA rating versus A rating of the parent index, as of 3 September 2021), Carbon Intensity (82.48 versus 124.05) and ESG Quality (7.15 versus 5.82, on a scale of 0 to 10). We also show the weighting in the parent index of the controversial business areas that have been removed for our ETF.
We also publish an in-depth stewardship report that demonstrates our engagement policies and activities during the period. This highlights overall voting records and key engagement areas per each of the three ESG pillars.