Invesco is an independent investment management firm headquartered in Atlanta, GA. The firm manages over $1.4 trillion in assets as of March 2021 and is the 4th largest provider of ETFs in the US. The Invesco MSCI Sustainable Future ETF is more sustainable than other ESG labeled funds, but change among industry ESG investment criteria must improve for funds to be fully sustainable. This ETF is on track to be sustainable, and I would recommend this fund over several other ESG funds.
Invesco’s MSCI Sustainable Future fund is composed of 130 holdings with the top ten holdings constituting 39.49% of the ETF. The ERTH fund is focused on companies that offer products and services that lead to a more sustainable economy. The companies work on making more efficient use of global resources. This fund covers a broad range of industries but the most represented is Industrials at 32.69% and Real Estate at 21.48%. Right at the start, this was interesting to me because several of the other ETFs I reviewed were mainly focused on Information Technology. I have hardly seen Industrials and Real Estate be among the top 4 most represented sectors.
The top holding is Digital Realty Trust at 6.07%. Digital Realty is a real estate investment trust that invests in carrier-neutral data centers. Their company seems very transparent about its sustainability initiatives. In their 2019 ESG report, they listed their sustainability objectives and explained which UN SDG each goal connects to. Data centers require high amounts of energy and water consumption, but to show they are working on reducing their impact, they provide all their data openly on the website. I was impressed by their graphs, and charts explaining their energy and water consumption. They still have a lot of work to reduce their dependence on fossil fuels, but they do seem to be actively trying.
The second-largest holding is Vestas Wind Systems at 5.28%. I was really impressed by this company. They are the largest installer of wind turbines and have implemented over 66,000 worldwide. What impressed me was their sustainability initiatives. Wind energy is a great alternative to non-renewable energy, however, there are still issues due to the recyclability and the materials needed to produce the blades. Vestas acknowledges this issue and plans to create zero-waste turbines by 2040. In early 2020, they launched their commitment to being carbon neutral by 2030 (without the use of carbon offsets). By 2021, they already reduced their carbon footprint by 33% which I thought was impressive because it shows they are actively pursuing their goal.
Tesla is the third highest holding at 4.75%. Tesla manufactures and sells electric vehicles and other clean energy solutions. They are typically the first company that comes to mind when you think of sustainability or renewable energy; however, I found it odd that I couldn’t even find a section on sustainability on their main website. Usually, a company will have sections on their sustainability and DEI initiatives, but I couldn’t find any of this. The latest impact report I could find was from 2019. I think Tesla has good intentions but I’m surprised their information isn’t more accessible. With being a leader in this industry, they should be presenting all their sustainability and impact strategies to the public.
Unfortunately, the ERTH fund is not rated on its ESG risk, but Invesco is. Sustainalytics gives them a 24.7 rating which equates to medium risk towards ESG ideas and practices. Overall, looking at the companies held in this fund, I am more impressed with them than other ETFs. I think this ETF is on a better track to being sustainable than other ESG labeled funds.
For an ETF to be classified as ESG focused, it must meet certain criteria as set by the entity preparing the fund. The two philosophies Invesco has for ESG integration are materiality and ESG momentum and engagement. Materiality is the consideration of ESG issues on a risk-adjusted basis. Momentum is the idea that companies must be improving their ESG practices to be financially favorable in the future. I like their idea of momentum because it shows they want the companies they are investing in to be improving their ESG practices. I do think the idea of materiality and a company’s risk towards ESG strategies is worrisome because a company could be a low risk towards environmental practices and social issues, but it doesn’t mean they are helping resolve these problems. In the future, I would like there to be a standard across the financial industry. I think low-risk in respect to ESG metrics should also mean the holdings are actively fighting sustainability issues. I think this would make all funds more sustainable in the long run. Ensuring all ETFs are graded on the same ESG criteria would help investors understand how sustainable the fund actually is. Because each firm sets its own criteria right now, all ESG labeled funds have different aspects of sustainability.
The ERTH fund, in particular, tracks the MSCI Global Environment Select Index. The index is developed to maximize exposure to 6 environmental impact themes: 1) alternative energy, 2) energy efficiency, 3) green building, 4) sustainable water, 5) pollution prevention and control, and 6) sustainable agriculture. Based on the holdings in this portfolio, I think many of the companies are meeting these various themes. Overall, I think this fund was made more sustainable than others because it has a targeted theme of choosing holdings that offer products and services that lead to a more sustainable economy.
Invesco didn’t have a lot of information about their DEI initiatives, but they do emphasize they are focused on being a diverse and inclusive place to work. They have a 4 pillar approach to DEI strategies: 1) Purpose & Priorities, 2) Talent, 3) Belonging, and 4) Client & Community. They want DEI to be a priority in who they are and how they operate, they are focused on recruiting diverse people, ensuring a safe and inclusive work environment, and improving DEI efforts in the industry. Like many other companies, they have several employee networks to help foster an inclusive workplace. They are pushing to increase their senior management female representation to 35%-40% by 2022. Currently, they are at 33% and have an overall female population of 39%. I hope they continue to push this statistic and get closer to 50% female representation in the company. Invesco also provides well-being, education, and development programs for their employees. Some of these include unconscious bias training, a Women in Leadership development program, and an Annual LGBTQ+ Ally and Trans Ally training. All employees must complete the unconscious bias training by the end of 2021. Overall, they provide about the same workplace benefits as other companies. I would say they are meeting employee needs but there is room for improvement.