A Wealth DFM interview with Dr. Chris Mellor CFA, Head of EMEA ETF Equity & Commodity Product Management at Invesco
Wealth DFM: Chris, could you start by explaining how Invesco approaches ESG
Chris Mellor: Invesco has a very long history of responsible investing. Some of our investment teams started running the first sustainable mandates back in the 1980s. That’s almost 40 years of history. We take a serious approach to this, as you expect from a large investment manager like ourselves with a significant ESG team of specialists, as well as a clear proxy voting and engagement programme.
Invesco is a $1.4TN asset manager with around about a quarter of our assets passively managed in both exchange traded funds (ETFs) and index portfolios. The engagement policy and the proxy voting policy applies to those passive portfolios just as it does to actively managed portfolios.
In this respect, you could say that you get the best of both worlds with Invesco. A client’s portfolio may be invested in passively managed ETFs, for example, that part of the business that I work in. However, we’re benefiting from the broader reach of the Invesco analyst teams for engagement and assessment that come with being part of a larger asset management business.
Wealth DFM: How are investors approaching ESG within the ETF space?
Chris Mellor: When you look at ESG developments in ETFs, it is the strongest growing area of the ETF market. Recently it has seen in excess of $40BN of net new assets, which makes up around about half of all EMEA ETF flows this year.
If we look back to last year, about 40% percent of all new inflows into ETFs in Europe went into ESG. And where we are today is around about $150 billion of assets under management, which makes up around about 10% of the total assets in the European domiciled ETF space.
To put that into context by looking at the scale of growth, that’s up from only about 4% of ETF assets at the end of 2019. It’s been incredible growth.
In terms of the growth in ESG ETFs there’s a wide range of investment options. The number of ESG ETFs has risen from less than 100 only a couple of years ago to 250 or more today. If we look at the development process, the earliest ESG ETFs were very much dark green, very specifically focussed SRI-type of ETF. They had very broad exclusions based on ethical grounds, as well as excluding stocks or selecting stocks with very tight parameters based on ESG scoring or ESG performance.
When we look at the market today, that is evolving. Today, less than half of all ESG ETF assets are actually in those darker green strategies. The growth is happening not only in dark green, but also in the lighter green ESG approaches. An example of this is the Invesco World ESG Universal Screened ETF range that we’ve launched over the last few years, which has been designed as a core beta replacement strategy.
They apply key ESG exclusions on an ethical basis and they also weight towards the stocks with better ESG credentials. They’re not excluding nearly as much of the starting universe. The result of this is a meaningful improvement in the ESG scores but also a meaningful reduction in important areas such as carbon intensity. At the same time, with much lower tracking overseas, the standard on non EU benchmarks than you’d get with the sort of darker green approach, we’ve certainly seen a lot of appetite for that sort of investment from newer investors in the space.
The other area is that much more recently, we’ve seen a significant number of launches in the more climate conscious ETFs. This includes both specific thematic ESG products, like the clean energy, but also things like the broader Paris-aligned benchmark products, which we could describe as the next step in ESG. They still give broad market exposure, but are selecting stocks based on their commitments to reducing carbon emissions in order to meet the Paris-aligned goals of zero carbon emissions by 2050.
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