Invesco has expanded its suite of environmental, social, and governance (ESG) ETFs in Europe with the launch of the Invesco S&P 500 ESG UCITS ETF (SPXE LN) on the London Stock Exchange.

Gary Buxton, Head of EMEA ETFs at Invesco.

The fund provides risk and return characteristics similar to that of the bellwether S&P 500 Index but with a significantly improved ESG profile.

Gary Buxton, Head of EMEA ETFs at Invesco, commented, “The more we speak with different investors about ESG, the more we appreciate the extent to which their objectives may vary.

“As ESG becomes more mainstream, we believe that finding appropriate solutions is going to be increasingly relevant, for example for trustees and other investors who have a fiduciary responsibility for delivering performance.”

Reid Steadman, Global Head of ESG Indices at S&P Dow Jones Indices, added, “We’re excited to join forces with Invesco in Europe on the launch of the Invesco S&P 500 ESG UCITS ETF. As more mainstream investors incorporate ESG into their core portfolios, S&P Dow Jones Indices is committed to offering global market participants innovative ESG indices, data and analytics to better align investors’ investments with their values.”

Methodology

The ETF tracks the S&P 500 ESG Index using indirect (or swap-based) replication. The index uses data from Sustainalytics to screen out firms from the S&P 500 with significant business activities linked to the tobacco and controversial weapons industries. Companies with weak adherence to the UN Global Compact Principles are also excluded.

The remaining constituents are then assigned an ESG score based on SAM’s (formerly RobecoSAM) ‘Corporate Sustainability Assessment’. This score is either calculated directly by a company completing a comprehensive assessment (together with supporting documents), or – in the absence of this – by using publicly available information.

Those firms with the lowest ESG scores are removed, whilst aiming to maintain 75% of the float-adjusted market capitalization of each Global Industry Classification Standard (GICS) Industry Group within the S&P 500. The result is an index that currently includes 311 constituents considered to be ESG leaders within the US large-cap market.

The index is weighted by float-adjusted market cap. Reconstitution and rebalancing occur annually in April.

According to S&P Dow Jones Indices, the methodology provides an index that is aligned with socially responsible investing values while maintaining a risk-and-return profile comparable to the parent index. Based on back-tested performance, the index has displayed a tracking error of 0.87% relative to the S&P 500 over the past five years.

The ETF comes with a management fee of 0.09% and a swap fee of 0.11%. It has been listed in US dollars, and income is accumulated within the portfolio.

According to Invesco, by using synthetic replication to track the index, the fund aims to generate distinct benefits compared to rival funds that pursue direct physical replication. These include being able to more precisely track the underlying index as well as delivering superior after-tax performance.

Chris Mellor, Head of ETF Equity and Commodity Product Management at Invesco, explains, “Our ETF structure offers efficiency and transparency, and the replication method being used offers the same potential performance advantage investors in our standard S&P 500 UCITS ETF enjoy.

“Using swaps to gain exposure to certain US large-cap equity indices – including this one – enables the ETF to capture gross dividends, with no withholding tax. This offers a clear advantage over physically replicating ETFs, which are subject to as much as 30% withholding tax on dividends.”

Invesco is not the only firm to offer ESG-screened exposure to the S&P 500. UBS offers an ETF that tracks the same index but uses direct physical replication. The UBS ETF S&P 500 ESG UCITS ETF (S5SD LN) launched in April 2019 and currently houses $360m in AUM with an expense ratio of 0.12%.

Meanwhile, State Street Global Advisors launched the SPDR S&P 500 ESG Screened UCITS ETF (SPPY GY) in December 2019. The fund tracks the S&P 500 ESG Exclusions II Index, also using physical replication. This index also removes companies based on participation in non-ESG sectors but does not exclude firms based on ESG scores. The market-cap-weighted index currently consists of 481 constituents. The fund houses $55m and comes with an expense ratio of 0.10%.