Invesco Unit Trusts uses two common ESG approaches in its new portfolio

In the past, investing according to your values, or anything other than financial fundamentals, was seen as a potential detriment to performance. Over time, however, investors have learned that non-financial metrics can help them better understand the risks a company faces, and may even impact that company’s stock price. Look no further than recent headlines to see how real-life examples of accounting scandals, environmental disasters or allegations of unfair labor practices can impact a company. At Invesco Unit Trusts, we believe that by avoiding companies that don’t have proper oversight or that place undue emphasis on short-term results, investors may reduce risks without having to sacrifice returns.

Environmental, social and corporate governance characteristics (ESG) are some of the most commonly cited attributes that portfolio managers may consider when evaluating the non-financial characteristics of a company. Below, we see that the MSCI USA ESG Select Index has closely tracked the S&P 500 Index over the last decade.

What to consider in an ESG strategy

ESG has been one of the biggest global investment trends in the past decade, with more than $22 trillion dollars of assets having been the subject of some form of ESG analysis as part of the investment process.1 ESG investing, in the simplest form, is about taking into account relevant environmental, social and corporate governance factors in the investment selection process. The specifics of how ESG is defined and implemented vary among investors and asset managers — Invesco Unit Trusts believes there are several relevant variables to consider when incorporating ESG factors into the investment process.

1. Know your data. There are numerous firms dedicated to helping investors understand how a company stacks up on an environmental, social and corporate governance basis. Based on the multitude of data points in each of those three categories, which are often buried within public filings and proxy materials, we think it’s valuable to utilize the expertise that these research firms provide. It’s also important to determine how a company is scored or rated from an ESG perspective — quantitatively, qualitatively, relative to peers, etc. Many data providers will evaluate companies across all three groups so you can see how they are doing from an environmental, social and governance standpoint, rather than just an average. They may also include “flags” to help quickly identify any controversial criteria (gambling, alcohol, weapons, etc.)

2. Understand different ESG investment methods. Some approaches look for ESG leaders, while others seek to screen out companies that don’t meet certain criteria. Here are a few common approaches:

  • Impact investing. This method typically looks for companies that may be trying to solve environmental or social problems, such as those related to clean drinking water, sustainable agriculture and clean energy. In the early/mid 2000s, this was often called “green investing.”
  • Negative screening. This approach seeks to avoid companies involved in certain business activities that are considered unacceptable to certain investors (for example, gambling, weapons manufacturing or alcoholic beverages). This can often result in a concentrated portfolio.
  • Best-in-class. The best-in-class approach seeks to include companies that are leaders relative to their industry peers. This approach doesn’t eliminate sectors or industries like negative screening, but instead looks for the leaders within each sector/industry.
  • ESG integration. Finally, there is ESG integration, which systematically incorporates ESG factors into a fundamental investment process. This approach has been rapidly growing in adoption as individual and institutional investors seek to reduce risk and improve returns.

The Invesco Unit Trusts approach

Invesco Unit Trusts recently launched the ESG Opportunity Portfolio, which includes two of the above styles in the strategy’s investment process: best-in-class and ESG integration. Our best-in-class approach helps define our selectable universe. But, rather than just including companies that are “above average” from an overall ESG rating/score, Invesco Unit Trusts seeks companies that demonstrate highly favorable environmental, social and corporate governance practices. The strategy seeks to identify leaders, rather than companies that excel in one or two areas while ignoring other areas that could leave them open to controversy.

Invesco Unit Trusts also believes in the value of ESG integration within the fundamental investment framework. We’ve used this method to build a portfolio that incorporates ESG data with fundamental financial analysis. We believe that combining these approaches allows for a diversified portfolio with broader sector representation.

Learn more about Invesco’s view of ESG investing.

1 Source: 2016 Global Sustainable Investment Review, data as of year-end 2016

Nathan Miller
Unit Trust Equity Portfolio Manager
Nathan Miller is a Unit Trust Equity Portfolio Manager and is responsible for research and security selection for equity unit trusts.

Mr. Miller has been with Invesco since 2015. He entered the industry in 2004 and has held roles in research, product development, product management and sales. Prior to joining Invesco, Mr. Miller served as a credit analyst with First Trust and as an assistant vice president of unit investment trusts with Guggenheim.

Mr. Miller earned a BS degree in finance from the University of Illinois at Chicago. He holds the Series 7 and 63 registrations and is a Chartered Financial Analyst® (CFA) charterholder.

Important information

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The MSCI USA ESG Select Index is designed to maximize exposure to positive environmental, social and governance (ESG) factors while exhibiting risk and return characteristics similar to those of the MSCI USA Index. The Index is sector-diversified and targets high ESG ratings in each sector. Relative to the MSCI USA Index, the MSCI USA ESG Select Index tends to overweight companies with higher ESG ratings and under-weight companies with lower ratings. Tobacco companies are not eligible for inclusion into the Index.

There is no assurance the trust will achieve its investment objective. An investment in this unit investment trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and that the value of trust units may therefore be less than what you paid for them. This trust is unmanaged and its portfolio is not intended to change during the trust’s life except in limited circumstances. Accordingly, you can lose money investing in this trust. The trust should be considered as part of a long-term investment strategy and you should consider your ability to pursue it by investing in successive trusts, if available. You will realize tax consequences associated with investing from one series to the next.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors and the amount of any dividend may vary over time. There can be no guarantee or assurance that companies will declare dividends in the future or that if declared, they will remain at current levels or increase over time.

The financial condition of an issuer may worsen or its credit ratings may drop, resulting in a reduction in the value of your Units. This may occur at any point in time, including during the initial offering period.

You could experience dilution of your investment if the size of the Portfolio is increased as Units are sold. There is no assurance that your investment will maintain its proportionate share in the Portfolio’s profits and losses.

This particular series of the Portfolio may be concentrated in certain sectors or geographic regions, and to the extent that it is, your investment in units of the trust would be subject to the risks associated with such concentrations. Please refer to the prospectus associated with the applicable trust.

Stocks of foreign companies in the Portfolio present risks beyond those of US issuers. These risks may include market and political factors related to the company’s foreign market, international trade conditions, less regulation, smaller or less liquid markets, increased volatility, differing accounting practices and changes in the value of foreign currencies.

The Portfolio invests in securities of companies demonstrating favorable ESG practices. The companies may not have applied favorable ESG practices in the past and there is no guarantee that the companies will continue to apply favorable ESG practices over the life of the Portfolio.

Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/FundProspectus for a prospectus/summary prospectus.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC, investment adviser. Invesco PowerShares Capital Management LLC (PowerShares) and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.

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Finding opportunities in the ESG space by Invesco