Invesco has launched Europe’s first ETF providing Nasdaq 100 exposure while incorporating environmental, social, and governance (ESG) criteria.
Anna Paglia, Global Head of ETFs and Indexed Strategies at Invesco.
The Invesco Nasdaq 100 ESG UCITS ETF has been listed on London Stock Exchange in US dollars (Ticker: NESG LN) and pound sterling (NESP LN), and on Deutsche Börse Xetra (N1ES GY) and Borsa Italiana (NESG IM) in euros.
A listing on SIX Swiss Exchange, in US dollars, is expected in the near future.
Commenting on the launch, Anna Paglia, Global Head of ETFs and Indexed Strategies at Invesco, said: “Invesco has been fortunate to work in lockstep with Nasdaq for over two decades, finding beneficial ways to bring investors all over the globe access to Nasdaq-listed companies.
“Today’s launch celebrates 15 years since we began working with Nasdaq on ESG products. We are confident that the new Invesco NESG will bridge innovation and ESG to help investors meet their investment outcomes.”
Widely perceived as a proxy for innovative growth stocks, the Nasdaq 100 consists of 100 of the largest US and international non-financial companies by market capitalization listed on Nasdaq, subject to various diversification requirements.
The index reflects companies across major industry groups including computer hardware and software, communications, retail/wholesale trade, and biotechnology, among others.
The new ETF provides ESG-enhanced exposure to this index by tracking the Nasdaq 100 ESG Index which filters the Nasdaq 100 universe using business activity and controversy screens before re-weighting the remaining constituents in favour of those better managing their ESG risks.
The methodology first excludes violators of UN Global Compact principles, companies embroiled in severe ESG-related controversies, and firms deriving revenue from business activities linked to adult entertainment, alcohol, arctic oil and gas exploration, recreational cannabis, controversial weapons, gambling, military weapons, nuclear power, oil and gas, oil sands, riot control, shale energy, small arms, thermal coal, or tobacco.
The index then harnesses the capabilities of ESG data analytics specialist Sustainalytics which assigns each remaining stock an ‘ESG Risk Rating’. The ESG Risk Rating reflects an organization’s unmanaged ESG risk and is composed of three components: corporate governance, financially material ESG issues (factors that could reasonably impact a company’s economic value), and idiosyncratic issues (black swan risks that could be detrimental to economic value). Companies with ESG Risk Ratings above 40 (considered severe) are removed.
Finally, the constituents that are remaining after these two processes are assigned a provisional weight using a combination of their market capitalization and an ESG score, which broadly reflects the inverse of that company’s ESG Risk Rating. To arrive at the final index weights, several concentration constraints are applied. These include a weight cap of 14% on the largest constituent, an aggregate cap of 40% on the five largest companies, and an individual cap of 4.5% on any company outside of the top five. Reconstitution and rebalancing occur on a quarterly basis.
The complete process presently results in the exclusion of six stocks, namely Honeywell, Analog Devices, Exelon, American Electric Power, Xcel Energy and Peloton. According to Invesco, the absence of these stocks, combined with the adjusted weightings, results in a 10% improvement to the portfolio’s ESG Risk Rating and a reduction in its carbon intensity.
Compared to the regular index, the Nasdaq 100 ESG Index has increased exposure to the technology sector (63.1% vs 48.4%) and reduced exposure to the consumer discretionary (16.1% vs 17.3%) and communication services (6.2% vs 19.3%) sectors. Notable positions include Microsoft (13.9%), Apple (13.1%), Alphabet (7.0%), Nvidia (5.3%), Amazon (3.7%), Adobe (3.0%), Paypal (2.7%), Cisco Systems (2.5%), and Facebook (2.4%). (Data as of September month-end).
The ETF comes with an expense ratio of 0.25% and is classified as an Article 8 product under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
Chris Mellor, Head of EMEA ETF Equity and Commodity Product Management at Invesco, commented: “One common thread running through Nasdaq-listed companies is higher spending on research and development compared to many of their peers. For this reason, Nasdaq companies are well-positioned to capitalize on transformative, long-term themes in the marketplace. NESG continues to offer that innovative exposure but with ethical guardrails and meaningful ESG improvement.”
Lauren Dillard, Executive Vice President and Head of Investment Intelligence at Nasdaq, added: “The interest in integrating ESG considerations into investment portfolios is on the rise globally. We are pleased to work with Invesco to introduce a refined and ESG-friendly version of one of the world’s most preeminent benchmarks.”