ESG investing with Invesco ETFs

This has been an area of increased focus, with some studies suggesting a positive relationship between a company’s financial and ESG performances. Moreover, some ESG indices have recently outperformed their parent (non-ESG) indices, which is partly due to the sector biases that occur naturally from exclusions, e.g. reduced weighting in energy, but could also be attributed to investors’ placing a “premium” on companies that are successfully managing ESG risks.

Whether or not ESG on its own can drive performance, investors can now find ETFs that have both ESG and financial objectives. You can choose between ESG ETFs that aim for similar returns as the parent index (with meaningful ESG improvement) or that have a greater tolerance for tracking error (with much more ESG improvement).

With environment one of the three ESG pillars, most ESG ETFs will include climate considerations either implicitly or explicitly in the index methodology. Some of our Invesco ESG ETFs go a step further by having specific climate-related goals, such as the Paris-aligned benchmark, reducing overall carbon intensity and/or increasing the amount of green revenues in the portfolio. We also offer thematic ETFs for focused exposure to climate solutions such as clean energy and solar power.

The simple answer is that any ETF that physically holds shares in a company can exercise its rights. All but one of our ESG ETFs replicate their indices by physically holding the shares. Our passive equity ETFs will vote in line with the largest active position held by Invesco, or with our ESG guidelines if no active position is held. Our global ESG team and investment managers engage with companies on key ESG issues, which includes many of those held by our passive ESG ETFs.

We’ve been helping investors incorporate their ESG objectives for the past 35 years and aim to include ESG considerations across all our investment strategies where possible. 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. We are also committed to being a good corporate citizen and are signatories to key industry initiatives especially in the fight against climate change.

As ESG continues to grow globally, different regions have made efforts to introduce regulatory standards. Regulation will be a key factor in ensuring that efforts to integrate ESG have a tangible impact. It’ll also help to drive the standardisation of measuring and reporting.

The EU has introduced green taxonomy, Sustainable Finance Disclosure Regulation (SFDR) and most recently, the Sustainable Finance Strategy to provide rules and structure to the way businesses report on their ESG activities.

Greenwashing is when companies portray a public image of sustainability but aren’t taking sufficient or tangible action behind the scenes or undertake other questionable business activities. It could be a global drinks company committing to using 100% recycled plastic but setting no actual target, or a fast fashion brand using sustainable materials but with questionable manufacturing processes. 

In the investment industry, it could be excluding obvious companies like tobacco manufacturers from a portfolio but not applying ESG analysis to the rest of it. Greater regulation and efforts to standardise measuring and reporting should help reduce the effects of greenwashing, as well as wider education.