Sector & Thematic Strategy Briefing - Wednesday 29th March 2023 - The Berkeley, London Please join us for our annual sector and thematic investing event, featuring DWS Xtrackers, First Trust, MSCI, Redburn and Sprott Asset Management. Please register now if you would like to attend.
Invesco has broadened its environmental, social, and governance (ESG) offering with the launch of two new ETFs focussed on listed companies in Japan and the Pacific ex Japan region.
Invesco has expanded its ESG offering with a pair of Pacific-focussed ETFs that tilt towards companies with improving sustainability profiles.
The funds – Invesco MSCI Japan ESG Universal Screened UCITS ETF (ESGJ LN) and Invesco MSCI Pacific ex Japan ESG Universal Screened UCITS ETF (ESPJ LN) – have listed on the London Stock Exchange and track customized versions of indices that sit within MSCI‘s ‘ESG Universal’ index family.
Specifically, they track the MSCI Japan ESG Universal Select Business Screens Index and MSCI Pacific ex Japan ESG Universal Select Business Screens Index respectively, which, in turn, are derived from the parent MSCI Japan and MSCI Pacific ex Japan universes – the former of which comprises stocks listed in Japan while the latter comprises stocks across Australia, Hong Kong, New Zealand, and Singapore.
The indices aim to represent the performance of an investment strategy that, by adjusting the constituents’ free-float market capitalization weights based upon certain ESG metrics, seeks to increase overall exposure to those companies demonstrating both a robust ESG profile as well as a positive trend in improving that profile, relative to their parent benchmark.
Index methodology
The index construction methodology first applies a series of ESG exclusionary criteria to exclude from the respective parent index securities that: have not been assessed or rated by MSCI on the basis of the ESG metrics; have faced very severe controversies pertaining to ESG issues (including UN Global Compact violations) over the last three years; or are involved in controversial weapons, conventional weapons, nuclear weapons, oil sands, thermal coal, civilian firearms, recreational cannabis or tobacco; or have an MSCI ESG rating of CCC, this being the lowest ESG rating per the index provider’s ESG rating scale.
The securities that survive this screen are then each 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, 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%.
ESG improvement, comparable risk
The resultant Japan index comprises 286 constituents, compared to 301 for the regular MSCI Japan Index; while the Pacific ex Japan index comprises 114 constituents, compared to 129 for the regular MSCI Pacific ex Japan Index. Across both indices the utilities and energy sectors are notably underweighted relative to their parent benchmarks, but, otherwise, the sectors are broadly in keeping with their parent weights in terms of absolute exposure and relative order. The principal exception to this is the significant relative underweighting of materials in the Pacific ex Japan index caused by a weighty ESG downgrade of mining giant BHP Group.
Commenting on the new funds, Chris Mellor, Head of EMEA ETF Equity and Commodity Product Management at Invesco, said: “Different investors will often vary in their objectives, and this is most evident in the ESG space. Generally speaking, the more you exclude from an index, the more likely the performance will deviate from the base index. While that is acceptable for some investors, it’s not for others.
“Many want to reduce their portfolio’s carbon footprint and improve other ESG characteristics but at the same time maintain their overall risk and expected returns. We designed these ETFs to provide investors with materially significant ESG improvements for their core equity exposure.”
Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, added: “With 60% of all equity ETF flows last year going into funds with an ESG objective, demand is clearly strong. We believe ESG will be embedded even more broadly into portfolios with investors no longer needing to sacrifice their investment objectives to follow their principles. Our suite of MSCI ESG Universal ETFs offers investors low-cost tools to construct diversified equity portfolios. We will continue building out our ESG offering in response to market opportunities and driven by investor demand.”
The funds are each priced with a total expense ratio of 0.19%.