More than ever, people want to be fully informed about what they are eating — not only the calories, but whether it’s gluten-free, pesticide-free, organic or raised with growth hormones. They even want to know if the packaging is recyclable. Why? Because they’re seeking to avoid risks to their health and to the environment. In the same way, investors today are well aware that risk can come from a variety of places — and that’s helping to fuel an interest in environmental, social and governance (ESG) investing.
What is ESG?
Environmental and social issues include food, water and energy security; access to natural resources; climate change; human rights; and supply chain labor standards — and these can present material issues for businesses and the corporate world. Poor corporate governance practices — such as corruption, lack of board diversity or poorly designed executive compensation plans that are not aligned with investor interests — can also impact shareholder value.
While traditional investment analysis has historically paid fairly little attention to these nonfinancial sources of risk, investment professionals increasingly see ESG as a way to help manage investment risk. A survey conducted by the CFA Institute showed that the top consideration for using ESG data was risk management.
Why do you take ESG issues into consideration in your investment analysis/decisions?
Source: CFA Institute, Environmental, Social and Governance (ESG) Survey, 2017. Respondents could select multiple answers.
Strong ESG may enhance performance
So why do many investors still get apprehensive about considering an ESG investment? A common misconception is that in order to align investments with ESG, one must sacrifice investment performance. (Just as many consumers worry that healthy food won’t be flavorful.)
But history hasn’t shown this to be true. A research report from Bank of America Merrill Lynch concluded that companies with higher overall ESG ratings had lower earnings volatility and higher returns on equity than lesser rated companies.
Higher Sustainalytics ESG ratings signaled higher return on equity (ROE)
Median forward one-year ROE by quintile, based on Sustainalytics overall ESG score from August 2009 through December 2016 (with ROE through December 2017)
Source: Bank of America Merrill Lynch, “ESG: What every investor needs to know,” Sept. 13, 2018. Q1 includes companies with the highest ratings. Q5 includes companies with the lowest ratings.
Furthermore, 10 years of performance data shows that the MSCI USA ESG Select Index consistently has returns in-line with or above the S&P 500 Index.
ESG index performance has been in-line or above the broad market for the past 10 years
Source: FactSet Research Systems. Data from Sept. 30, 2008, to Sept. 30, 2018
ESG and Invesco Unit Trusts
At Invesco, ESG investing isn’t new. We offer a wide range of sustainability-themed products, including the ESG Opportunity Portfolio from Invesco Unit Trusts. This portfolio incorporates a “best-in-class” approach that seeks to include companies that are leaders relative to their industry peers. This approach doesn’t eliminate sectors or industries, like some ESG strategies do, but instead looks for the leaders within each area.
Today’s record-setting bull market has been tremendous for many stocks, but it has also masked the risks that companies face – after all, people tend to ask fewer questions when things are going well. But at Invesco Unit Trusts, we believe that failure to incorporate analysis of ESG characteristics as part of the investment process overlooks their potential effect on long-term investment performance.
Important information
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Return on equity (ROE) is a measure of profitability, calculated as net income as a percentage of shareholders’ equity. Forward one-year ROE is calculated using projections for the coming year.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
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.
Nathan Miller
Unit Trust Equity Portfolio ManagerNathan 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.
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.
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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.
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