ESG investing has surged in popularity in recent years, but the lack of government oversight in the U.S. means that ESG can mean something completely different between investment products.
“There is no SEC “rating” or “score” of E, S, and G that can be applied across a broad range of companies, and while many different private ratings based on different ESG factors exist, they often differ significantly from each other,” according to the SEC.
ESG practices can include strategies that select companies based on their stated commitment to one or more ESG factors and screening out companies in certain sectors or that, in the view of the fund manager, have shown poor performance concerning the management of ESG risks and opportunities.
Furthermore, some fund managers may focus on companies they view as having room for improvement on ESG matters to help those companies improve by actively engaging with the companies through proxy voting and other means.
Combining Methods
The Invesco ESG NASDAQ100 ETF (QQMG) and the Invesco ESG NASDAQNext Gen 100 ETF (QQJG) combine different criteria in developing their ESG methodology.
For both QQMG and QQJG, companies are evaluated for inclusion in the underlying index based on the index provider’s ESG criteria, which considers a company’s business activities, business controversy levels and ESG risk ratings, and adherence to the principles of the United Nations Global Compact, according to regulatory filings.
In addition, the underlying index utilizes negative screens to exclude securities of companies with business activities that do not meet the eligibility criteria, relying on information from Sustainalytics, an independent provider of ESG research, ratings, and data, according to regulatory filings.
Business activities that are prohibited from inclusion in the underlying indexes for QQMG and QQJG include:
- Arctic oil and gas exploration
- Cannabis development or cultivation
- Controversial weapons
- Military weapon manufacturing
- Oil sands extraction
- Riot protection equipment and riot control weapon manufacturing
- Shale energy exploration or production
- Assault weapons and small arms manufacturing
- Tobacco product manufacturing
Categories that are permitted if they typically derive less than 5% of revenues from the engagement in the following activities:
- Adult entertainment
- Alcoholic beverage production, distribution, or sale
- Cannabis distribution
- Gambling
- Nuclear power production
- Oil and gas exploration, production, refining, transportation, or storage
- Extracting or generating electricity from thermal coal
- Tobacco product distribution
According to regulatory filings, the indexes also consider issuers’ business controversy levels and ESG Risk Rating Score, as determined by Sustainalytics.
Eligible issuers must also be deemed compliant with the principles of the UN Global Compact, which is an arrangement by which companies voluntarily and publicly commit to a set of values the UN believes responsible business should incorporate to meet fundamental responsibilities in the areas of human rights, labor, the environment, and anti-corruption.
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