ESG dividends / Lemon_tm

This article appears in the April 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

The investing public’s growing appetite for ESG screening has been met with a proliferation of ETFs in several asset classes. ESG-compliant funds can be found in all major equity, fixed income and balanced categories. Among the latest in ESG-themed ETF investing is a suite of dividend income strategies launched in late February by Toronto-based Invesco Canada Ltd.

They are the Invesco S&P/TSX Canadian Dividend Aristocrats ESG Index ETF; Invesco S&P US Dividend Aristocrats ESG Index ETF; and Invesco S&P International Developed Dividend Aristocrats ESG Index ETF.

“There’s a lot of interest from advisors and investors in some high-quality, resilient strategies for this market environment that we’re in right now,” said Marcus Berry, vice-president and ETF specialist with Invesco in Vancouver. The S&P Dividend Aristocrats indexes have a strong track record “and we felt adding the ESG screen really enhanced the overall value proposition.”

The total number of new Invesco listings is five, as the U.S. and international ETFs each have Canadian-dollar-hedged and unhedged units. All the new ETFs are based on indexes licensed from New York-based S&P Dow Jones Indices LLC (S&P DJI). Management fees, not including expenses, range from 20 basis points (bps) for Canadian equity to 30 bps and 35 bps, respectively, for the U.S. and international ETFs.

Invesco joins Toronto-based NEI Investments in offering ESG dividend products for retail investors. NEI’s lineup includes Canadian, U.S. and global dividend mutual funds. NEI was involved in the design of Invesco’s dividend ETFs and provides ongoing advice and recommendations on ESG.

To meet S&P DJI’s income criteria for its Dividend Aristocrats indexes, constituent companies must show consistency and growth in their dividend payouts. For Invesco’s Canadian ETF, the requirement is dividend increases in four of the past five years, with no dividend cuts.

Invesco’s U.S. ETF includes companies that have increased total dividends per share every year for at least 20 consecutive years. The international ETF screens for companies that have increased or maintained dividends for at least 10 consecutive years.

What sets Invesco’s lineup apart from other dividend-oriented ETFs is the ESG overlay, which is a combination of company rankings and specific industry exclusions. Companies must have an S&P DJI ESG score that exceeds a minimum threshold and be deemed sufficiently compliant with the United Nations Global Compact principles concerning human rights.

The S&P DJI methodology excludes oilsands, thermal coal, tobacco products and both civilian and military weapons. However, since no industries are totally excluded, there’s a fairly high correlation with the market cap-weighted Aristocrats indexes that do not employ an ESG screen.

“A lot of ESG strategies might have a zero energy weighting. That’s not the case with ours,” Berry said, noting that the recent energy weighting in Invesco’s Canadian Aristocrats ESG product was about 13%.

But because of the exclusion of oilsands producers, Invesco’s energy holdings have less direct commodity exposure. Three of the four holdings in the Canadian equity ETF are pipeline stocks. Berry said some producers, such as Suncor Energy Inc., wouldn’t have met the dividend consistency criteria even if they’d been otherwise eligible.

Dividend yields for Invesco’s new ESG ETFs are slightly lower than for some competing dividend strategies, which Berry attributes to more intensive screening for quality. “There are a lot of dividend strategies available that target high yield, whereas we’re focusing on dividend growth and dividend consistency,” he said. “What that tends to mean is that our yields aren’t the highest out there, but [that’s] reflected in the higher quality of the companies.”

Within the ETF universe in Canada, the closest competitor to Invesco’s new ETFs is the $920-million iShares S&P/TSX Canadian Dividend Aristocrats Index ETF, which has been offered since 2006 and has a below-average Morningstar Rating of two stars within its Canadian dividend peer group.

However, the iShares and Invesco ETFs aren’t directly comparable. Because of a key difference in their methodologies, there are stark differences in their holdings.

Unlike the market cap-based Invesco ETF, the iShares Dividend Aristocrats strategy overweights stocks with the highest dividend yields. As a result, the top holdings in the iShares ETF include companies such as Aecon Group Inc., Fiera Capital Corp. and Chartwell Retirement Residences REIT.

While these iShares ETF holdings have strong track records as dividend payers, they’re much smaller companies than the Invesco ETF’s top holdings, which include two major banks, Enbridge Inc. and Canadian National Railway Co. Invesco’s market-cap weightings are subject to caps on the holdings of any one company.

In designing the Invesco ETFs, Berry said, the firm knew its market cap-based approach would result in slightly lower yields, “but we were OK with that because we wanted to tilt it toward that higher quality.”

Viewed more broadly, Invesco’s latest product launch continues a growing emphasis on ESG mandates. The company is terminating 14 of its smaller ETFs in mid-April, none of which employ ESG screens.

The terminations will leave Invesco with ESG-related strategies making up about half of the ETFs it offers, although far less than half of its $5 billion in assets under management.

“We know that ESG isn’t for everybody, but we think that there’s a growing number of investors who are looking to align their values with their investments,” Berry said. “Ultimately, our goal is to be the No. 1 ETF ESG provider in Canada.”