Invesco FTSE RAFI US 1000 ETF PRF Sustainability

Invesco FTSE RAFI US 1000 ETF is likely to concern sustainability-focused investors given certain substandard ESG attributes.

The ESG risk of Invesco FTSE RAFI US 1000 ETF's holdings is comparable to its peers in the US Equity Large Cap Value category, thus earning an average Morningstar Sustainability Rating of 3 globes. Funds in the same category rated 4 or 5 globes tend to hold securities less exposed to ESG risk. ESG risk provides investors with a signal that reflects to what degree their investments are exposed to risks related to material ESG issues, such as climate change and inequalities, that are not sufficiently managed. ESG risk differs from impact, which is about seeking positive environmental and social outcomes.

One potential issue for a sustainability-focused investor is that Invesco FTSE RAFI US 1000 ETF doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. The fund's current involvement in fossil fuels reaches 16.49%, surpassing 14.18% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.

Invesco FTSE RAFI US 1000 ETF's Carbon Risk Score of 11.12 is at the lower end of the medium carbon risk band. This score represents the asset-weighted carbon risk score of the portfolio's equity or corporate bond holdings, averaged over the trailing 12 months. This suggests the fund’s current holdings are moderately positioned to transition to a low-carbon economy. Such funds invest in companies that tend to operate in sectors less exposed to the transition (such as healthcare and IT) and/or companies in more carbon-intensive sectors (such as industrials and utilities) but that consider climate change in their business strategy and products, and therefore are positively aligned with the transition. The fund has a modest level of exposure (8.71%) to companies with high or severe controversies. Companies with high or severe controversies are involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company.

Invesco had a modest ESG effort in place for years, but it took an important step toward developing a robust ESG program in 2019 when it named Cathrine de Coninck-Lopez as global head of ESG. Bringing with her more than 12 years of experience in sustainability, De Coninck-Lopez leads a team of 13, while other personnel around the world also have certain ESG responsibilities in their region. The members of the ESG team are well-qualified, but the team’s size is not that substantial, considering that Invesco manages more than $1 trillion in both active and passive strategies. Besides the ESG-specific funds it already offers, Invesco’s goal is to incorporate ESG capability into every strategy in every asset class. It concedes that, while that process has already taken place with some investment teams, in others it will take longer, with 2023 targeted as the date the integration should be fully in place. That said, all fixed-income analysts are already expected to incorporate ESG ideas into their reports.

In evaluating companies, Invesco uses a variety of sources as well as its own internal research, and the result is an internal resource called ESGintel that provides detailed descriptions, analysis, and opinions of the ESG characteristics of all companies in Invesco’s investment universe. Invesco does not have a firmwide list of excluded companies, arguing that allowing a diversity of approaches to that topic among their many teams in different parts of the globe is more appropriate.

On the proxy-voting front, Invesco is moving from a decentralized approach that currently allows each investment team to make their own decisions. The firm is in the process of establishing more global directives, whereby teams that wish to vote differently from Invesco’s global guidance must then present compelling reasons for that decision. The new system should allow the firm’s votes to have more clout with companies.