ESG Broad-Based Indexes Poised to Outpace Non-ESG Peers

Investors looking to add exposure to broad-based indexes to a portfolio should consider the increasing number of ESG-conscious options. 

A common misconception is that there is a tradeoff between ESG impact and financial returns; however, the situation is much more complex and has often been disproved.

“I think what we’re finding is that anytime you can eliminate companies that are more prone to controversy, therefore, more risk long term, you should see performance benefits,” Rene Reyna, head of thematic & specialty product strategy, said.

In November, Invesco introduced an ESG version of its popular Invesco S&P 500 Equal Weight ETF (RSP), which has a nearly 20-year track record and $32.7 billion in assets under management.

The newer equal weight strategy, the Invesco ESG S&P 500 Equal Weight ETF (RSPE), is designed to measure the equal-weighted performance of securities included in the S&P 500 Equal Weight Index that meet specific ESG criteria.

Reyna said that investors who are getting broad-based exposure from an S&P 500 index fund with embedded ESG criteria benefit in many ways.

According to Reyna, from a factor perspective, the environmental lens will provide complementary portfolio exposure, taking quality, low vol, and pairing it with clean energy, which is more momentum-based.

RSPE has 183 holdings, 179 of which can also be found in RSP, consisting of 507 securities. The overlap by weight of RSPE and RSP is 36%. Both funds carry an expense ratio of 20 basis points.

Weighing Equal Weight Options

In deciding which companies are eligible for inclusion in the index that RSPE tracks, the S&P 500 Equal Weight ESG Leaders Select Index, each security is given an “ESG score” that seeks to identify companies well-equipped to recognize and respond to emerging sustainability opportunities and challenges in the global market. 

According to regulatory filings, industry-specific questionnaires are used to analyze companies’ custom industries derived from Global Industry Classification Standard (GICS S&P 500).

Companies provide up to 1,000 data points in response to the questionnaires, which are used to score each company’s performance in relation to each specific ESG subject. If a company chooses not to participate in the assessment actively, it may be assessed based on publicly available information. 

According to regulatory filings, companies are then ranked from highest to lowest according to their ESG scores, and the top 40% of constituents within each GICS S&P 500 industry group generally are included in the index.

The underlying index also employs negative screens to exclude securities of companies that engage in certain business activities. According to regulatory filings, companies classified as part of the GICS Oil & Gas Storage & Transportation Sub-Industry Code are excluded from the eligible universe.

Additional screens rely on information from Sustainalytics, an independent provider of ESG research, ratings, and data. 

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