Firm sees the growth potential and is working to educate advisors on the benefits of ESG mandates
In early October, Invesco Canada launched the Invesco S&P/TSX Composite ESG Index ETF (ESGC), a follow-up to a U.S. version launched earlier this year. Their goal was to bring a low-cost, core solution, with an ESG tilt tied to a well-known benchmark, to the Canadian marketplace. But that is just the beginning of what Invesco is working on to bring more ESG solutions to Canadian advisors and investors.
“From an advisor standpoint, embracing ESG is still relatively new but they are starting to look at different types of products coming to market because their clients are asking for it,” says Hussein Rashid, vice president, ETF strategy, Invesco Canada. “Advisors want to be prepared for five-10 years from now and a big area of growth in ESG mandates is with younger clients. They are more interested in these fundament factors.”
Rashid adds that generational wealth transfer is adding to the shift as younger generations are coming into money that they want to deploy in ESG mandates. “Financial advisors want to be ready for that change and show younger clients they have been doing ESG, or responsible investing, for years. They are looking for a low-cost strategy that won’t deviate from the product benchmark because they want returns and strategies that won’t underperform.”
That is exactly what Invesco looked to accomplish with ESGC. “We wanted to use the S&P benchmark for Canadian equities (S&P/TSX composite) and S&P were able to build us the ESG format of that particular benchmark. The biggest challenge was creating an ESG score for Canadian companies. That was readily available for US corporations within the S&P 500, but for the TSX, they had gaps to fill before they could get the index up and running.”
The reason for an ESG fund tied to the S&P/TSX composite benchmark was to address some concerns Invesco heard from clients regarding tracking error in ESG funds versus their benchmark. “The ETF has a similar risk/return profile to the broad benchmark,” added Rashid. “The methodology behind it was to take all the companies that scored of 75% or better, in all industries, then remove the worst ESG companies out of each industry’s index. For clients, it is an easy way to step into an ESG mandate without significant tracking error versus the benchmark.”
The tracking error is one of the challenges the space is trying to address, but Rashid adds there are others and that is why Invesco has a concerted effort to educate when it comes to ESG. “The definition or understanding of ESG is still not fully grasped by retail advisors in Canada. I think helping them understand the difference between ESG and socially responsible investing (SRI) is key.”
Rashid notes that because those lines get blurred, some advisors think an ESG fund is excluding a certain area or sector, which may not be true. What he does try to explain, especially to active managers, is that looking at a company’s ESG score, can provide insights into potential risks and opportunities in the future, which could lead to under or overperformance.
Another challenge Rashid says is getting advisors to look beyond the environmental factor. “A lot of advisors just focus on the environmental portion, the emissions of companies, and forget about the social and governance. Look at social, for example, it is big right now with the Black Lives Matter movement. Governance is huge too, I think COVID has given us an example of how companies are adapting to different issues coming about that effect social and governance. Clients are more aware of what they are investing in and they want to invest in companies that are positive in these factors. They understand that could lead to outperformance or the sustainability of these companies.”
Those are just some of the reasons why Invesco is making the space a priority, but ultimately it comes down to growth potential for Rashid. “ESG is in early stages of implementation. There is a lot of product coming out and a lot of growth with retail clients. Last year was the first year that we crossed $1 billion in passive sustainable investing AUM in Canada, according to RIA Canada. We are starting to see the growth from clients looking for ESG exposure. It was already being done on the institutional side, and we think there is a trickle-down effect to the retail landscape. Retail investors like low-cost options, such as an ETF, so from a growth standpoint it is important to have different ESG mandates.”
That is something Invesco is set to continue focusing on in the future. Rashid says they will continue to add ESG mandates to their lineup as they take input from clients and advisors. “We have given one layer but are there others, maybe we could see more thematics. That moves towards the SRI space but is also a massive area of growth and could be an area of potential.”