Invesco has expanded its line-up of ESG-focused investment strategies with the launch of two new ETFs targeting stocks from the United Kingdom and developed Europe ex UK.

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco.

According to Invesco, the funds have been designed to satisfy the demands of investors looking for socially responsible substitutes for core portfolio positions.

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, said: “Flows into ETFs with an ESG objective continue to outpace those without one. As demand continues to broaden out, investors need a greater variety of exposures to tailor asset allocation and meet portfolio objectives.

“This year, we have started to see an upturn in demand for strategies with a similar profile to standard indices, but with a methodology that rewards companies’ demonstrating better ESG credentials and particularly regarding their impact on the environment.”

UK equity

The first of the launches, the Invesco FTSE All Share ESG Climate UCITS ETF (FASE LN), applies FTSE Russell’s ‘Target-Exposure’ approach to deliver a UK equity portfolio with significant improvements in environmental characteristics.

The underlying FTSE All-Share ex Investment Trusts ESG Climate Select Index is derived from the universe of large and mid-cap stocks, excluding investment trusts, which constitute the parent FTSE All-Share Index.

The index first excludes companies embroiled in severe ESG-related controversies, proven violators of UN Global Compact principles, and those involved in controversial business activities including arctic oil and gas exploration, adult entertainment, controversial weapons, small arms, gambling, military contracting, nuclear power, oil sands, thermal coal, recreational cannabis, and tobacco.

The Target-Exposure methodology then utilizes an optimization process to reweight the remaining constituents in order to target specific enhancements in ESG metrics relative to the parent universe. Specifically, the index delivers at least a 50% reduction in carbon intensity, a 50% reduction in fossil fuel reserves, a 50% increase in green revenues, and a 10% improvement in overall ESG ratings.

The optimization is also subject to industry and stock constraints that seek to limit the deviation in the index’s overall risk profile compared to the parent universe. The index is rebalanced on a quarterly basis.

Stéphane Degroote, Head of ETFs and Derivatives EMEA at FTSE Russell, said: “Now more than ever, investors recognize the risks and opportunities associated with the low-carbon transition and are incorporating a wider set of considerations including carbon, green revenues, and ESG assessment issues into their decision-making. We are delighted that Invesco has selected FTSE Russell as the index provider for their new ETF.”

Chris Mellor, Head of EMEA ETF Equity and Commodity Product Management at Invesco, added: “While excluding the most controversial businesses, we wanted to make sure that we include companies that are capable of improving their ESG profile, reducing their impact on the climate, and helping to solve the world’s environmental problems. Our position as an engaged and active owner of the stocks we hold in our portfolios, both passive and actively managed, allows us to encourage and promote positive change.”

The ETF comes with an expense ratio of 0.12% and has listed on London Stock Exchange in pound sterling. Income is distributed on a quarterly basis.

Europe ex-UK

The second fund launched by Invesco is the Invesco MSCI Europe ex UK ESG Universal Screened UCITS ETF.

This fund tracks the MSCI Europe ex UK ESG Universal Select Business Screens Index which represents the performance of large and mid-cap companies listed in European developed markets excluding the UK which have demonstrated both a robust ESG profile as well as a positive trend in improving that profile.

The construction methodology first excludes issuers from the parent MSCI Europe ex-UK Index that have faced severe ESG controversies (including UN Global Compact violations) over the last three years, as well as those involved in controversial weapons, conventional weapons, nuclear weapons, oil sands, thermal coal, civilian firearms, recreational cannabis, or tobacco. Companies that have an MSCI ESG rating of CCC, the lowest ESG rating per MSCI‘s ESG rating scale, are also removed from the selection pool.

The securities that survive this screen are then assigned ESG scores which reflect MSCI’s assessment of both the security’s current ESG rating, as well as the trend in that rating, defined as the change in the security’s ESG rating over time. This combined ESG score is then applied to re-weight the eligible securities from their free-float market cap weights in the parent index, subject to an individual security cap of 5%.

The ETF comes with an expense ratio of 0.16% and is also listed on LSE, in pound sterling. Income is capitalized within the portfolio.

Invesco offers five other ETFs that harness MSCI’s ‘ESG Momentum’ approach. The other funds in the suite target global developed, US, European, Japanese, and developed Asia Pacific ex-Japan equity markets. The ETFs come with expense ratios between 0.09% and 0.19% and collectively house $300 million in assets.