Sustainable, Responsible &/or ESG Policy:

The Fund has both a financial and a non-financial objective; these are: i) to provide income and growth; and ii) to support the transition to a low carbon economy.

In order to achieve these two objectives, the investment team employs a five-stage investment process which incorporates a traditional financial and credit research-based methodology alongside a climate-based framework to select corporate and government bond issuers.

The traditional financial and credit research process emphasises active fund management based on in-depth macroeconomic and credit research.

The climate-based framework combines sector exclusions, sector-specific parameters and the selection of issuers with stronger climate characteristics compared to their sector peers. ‘Climate characteristics’ means a range of data which reveals how carbon intensive companies are, how quickly they are decarbonising and other factors such as management’s approach to climate risk in their business planning. The Fund seeks to achieve its objective of supporting the transition to a low carbon economy through investing in bonds of issuer’s who meet one or more of the following five key criteria:

• Companies that have a low carbon footprint, or are making significant progress in reducing their carbon footprint
• Companies that have carbon reducing projects financed via green bonds, transition bonds and sustainability-linked bonds
• Green companies (those directly involved with activities that result in a low carbon economy which do not issue green bonds)
• Companies that have made commitments, and are, or are expected to be, on a Net Zero pathway
• Governments that have demonstrated strong environmental and social credentials

The fund strategically invests across the fixed interest credit risk spectrum depending on investment opportunities. The Fund is actively managed and is measured against the 75% ICE BofA Global Corporate Bond Index (GBP Hedged) and 25% ICE BofA Global High Yield Index (GBP Hedged) for performance purposes.

Process:

The investment team employs a five-stage investment process, combining a traditional investment research (financial and credit) alongside a climate focused selection process.
 

• Macroeconomic assessment
  • Top down macroeconomic assessment, conducted by the team’s economist macro specialists
  • Fund managers develop their views on the general direction of yields and credit spreads
• Identify issuers with strong climate characteristics
  • Non-sustainable exclusions applied
  • ‘Climate Comparator’ output
  • Fundamental climate analysis
• Credit analysis
  • Bottom up credit research conducted by the team’s 11 dedicated corporate credit analysts
  • Absolute and relative value analysis incorporated
  • Green bond assessment
• Portfolio construction and risk management
  • Fund manager responsibility – not tied to an index
  • Risk continuously managed according to market conditions
  • Strong risk monitoring infrastructure
• Climate monitoring and Invesco’s Global ESG team oversight
  • Portfolio measured and compared against the Climate Comparator using a range of indicators
  • Periodic reviews with Invesco’s ESG team

Please note: In the Macroeconomic assessment stage, ‘credit spread’ refers to the extra yield earned from a corporate bond, over a government bond of the same maturity.

Stage 1. Macroeconomic assessment

The starting point for the investment team’s work is an appreciation of the key macroeconomic inputs that influence government and corporate bond markets.

There is no ‘house view’ to which the team must adhere and the fund managers form their own opinions about key macroeconomic trends as they remain ultimately responsible for the fund’s risk profile and performance.

Specifically, the aim of the team’s macroeconomic work is for the team’s fund managers to develop a view of the general direction and structure of interest rates and future trends in the general pricing of credit risk, rather than make point estimates of specific economic variables. To a large extent these broader views help influence the fund managers’ overall appetite for credit and interest rate risk.

To assist the fund managers, the team has a dedicated economist and several macroeconomic analysts who produce and share research and facilitate team discussions. Team members assess a range of primary data sources, as well as engaging with independent economic research providers and investment bank economists. The team also benefits from the research produced by Invesco’s Group Chief Economist’s department.

High frequency economic and survey data are assessed continuously either informally or more formally at the team’s daily morning meetings. In addition, more in-depth economic research is produced and discussed at dedicated meetings or more formally at the monthly investment department meeting or the fixed income team’s asset allocation group meeting.

Stage 2. Identify issuers with strong climate characteristics​

The identification of companies with strong climate characteristics is what gives this strategy its unique characteristic. The team considers those companies and governments that are leading the way towards a low carbon world through a combination of public policies and strategies designed to encourage or compel decarbonising activities, or by providing low carbon energy, goods and services.

• Exclusions

The fund’s ethos results in certain minimum standards both in terms of climate and general sustainable activities. Therefore, the first step is to screen the universe of global corporate bonds based on the exclusions outlined below.

Climate-based exclusions and their revenue thresholds for exclusion:

• Thermal coal extraction >=5% of revenue
• Thermal coal power generation >=10% of revenue
• Arctic oil & gas exploitation, oil sands extraction, shale energy extraction Each >=5% of revenue
• Oil & gas exploration, production, refining, transportation and/or storage >=25% of revenue

Non-climate-based exclusions and their revenue thresholds for exclusion:

• Controversial weapons >=0% of revenue
• Tobacco – products production >=5% of revenue
• Tobacco related products and services >=5% of revenue
• U.N. Global Compact Status, Companies not compliant with the Ten Principles of the UN Global Compact Initiative
• The manufacturer and sale of nuclear weapons to countries that have not signed the Nuclear Non-Proliferation Treaty >=0% of revenue
• Recreational cannabis >=5% of revenue

The climate-based exclusions have been applied with reference to each fossil fuel’s climate warming potential, set against the practical reliance that we still have on fossil fuels in the medium term.

• Fossil fuel type and their Kg CO2 emitted per million British thermal units (Btu)
• Coal 93-103 (depending on variety)
• Diesel 73
• Gasoline 71
• Propane Gas 63
• Natural Gas 53

The team believes that supporting the transition to a low carbon economy necessitates the almost total exclusion of thermal coal. Thermal coal is not only the most polluting of fossil fuels, but in addition, the global economy in aggregate is no longer dependent on it as other forms of energy have become more prevalent.

The revenue threshold for thermal coal is set at 5% rather than 0% to allow companies with very modest legacy coal assets to be eligible. For example, a number of mining and steel companies have legacy thermal coal operations but play an important role in climate transition through the supply of raw materials required for electrification. As a result, their inclusion in the fund is supportive of the transition objective. Furthermore, the fund has no restrictions on coking coal which is used for steel production.

The oil and gas sector is more nuanced. On the one hand, oil and gas represent the overwhelming majority of CO2 emissions. According to the US Energy Information Administration, in 2018 fossil fuel combustion was responsible for 93% of all anthropogenic CO2 emissions in the US. However, both are cleaner fuels than coal (natural gas produces 43% less CO2) and both are deeply embedded in the global energy supply chain. For example, oil and gas still accounts for 75% of the UK’s primary energy (power, transport and heating). The team believes that in the medium term, gas in particular is a vital and relatively clean component of global energy supplies.

Nonetheless, the team acknowledges that it would be inappropriate for a climate fund to have no restrictions on funding the major sources of CO2 emissions and as a result, the team places a 25% revenue threshold for mainstream oil and gas production. This rule effectively excludes companies whose core activities are oil and gas related. The reason for permitting up to 25% of revenue from oil and gas operations, rather than a complete exclusion, is because whilst the team doesn’t wish to finance major sources of carbon emissions, the team thinks it should be able to finance diversified energy companies and support their efforts to increase clean energy production.

The team also recognises that whilst oil and gas companies are major sources of emissions, there are increasing efforts amongst many of these companies to diversify into renewable energy. Critically, many of the global oil and gas energy groups have the financial and technical resources necessary to make that shift. As a result, the fund also permits investment in companies whose revenues from oil and gas activities are greater than 25% in cases where it can finance specific green energy projects via green bonds.

Another important sector in a climate context is utilities, given the extent of emissions created during power generation. Here, rather than the fund adopting specific exclusions based on thermal coal, we analyse the amount of CO2 emissions per unit of energy generated, ensuring that only the least carbon intensive generators are selected.

The issue of nuclear energy is also sensitive. On the one hand, nuclear energy remains controversial with the challenge of waste and the environmental risk that it poses a genuine concern. Yet the team recognises that nuclear power also provides consistent, reliable, and importantly for a climate-oriented fund, zero-carbon energy. As a result, the team believes that permitting nuclear power is on balance appropriate for a sustainable product of this type.

The fund also adopts a number of baseline exclusions (shown in the table above as “Non-climate based exclusions”) determined by Invesco, based in part on its assessment of the market’s expectation of what constitutes unsustainable activities.

The exclusion filter uses Sustainalytics data on company revenues attributed to particular activities such as tobacco or thermal coal which is then fed into Invesco’s pre-trade compliance system.

To ensure a minimum standard of governance amongst investee companies, the fund will avoid investing in those that have a governance score of 5 as measured by Invesco’s proprietary ESG scoring tool, which scores companies 1-5 (with 1 being the best) against 18 governance-specific indicators.

The fund is also permitted to have up to 30% of its assets (such as cash) and long exposure to derivatives (such as index CDS), which do not conform to the climate methodology.

The next step is to identify companies that are performing well versus their peers from a carbon perspective and therefore could be suitable potential investments for the fund.

• Investment selection process: Climate Comparator

To help in this assessment, the team uses an Invesco-developed proprietary sector-based Climate Comparator which incorporates data from over 2,000 corporate bond issuers, incorporating a wide range of climate and specifically carbon-oriented indicators.

Examples of indicators include the percentage change in a company’s carbon emissions, different measures of carbon intensity, the percentage change in a company’s intensity and measures of carbon emissions relative to an output such as power.

Each company’s performance in each indicator is converted to a sector-relative 1-5 score (1 being the best). The indicator scores are then summed to produce an overall sector-based 1-5 rating. In cases where data is missing, those indicators are excluded from a company’s overall score.

The weights applied to each indicator are determined by its importance based on the team’s judgement. The weights of each indicator can also be tailored to individual sectors. For example, the CO2 / kwh indicator is given a 60% weighting for the electric utility sector but is not included in other sectors.

Below is an example of how an electric utility company is scored based on the indicators that are applied to that sector. This company scores particularly well on its low use of thermal coal and its assessment by the Transition Pathway Initiative, a climate-focused organisation that assesses companies on the basis of their carbon intensity and management’s approach to dealing with climate change.

• Electric utility sector indicators, their Weighting, Data and Score
• CO2mt per MWH: 60%, 0.32mt and 2
• CDP Grade: 15%, A- and 2
• Transition Pathway Initiative Assessment: 15%, 4 and 1
• MSCI Low Carbon Transition Management Score: 10%, 6.60 and 1
• Overall score: 1.8

The fund will typically invest in companies which have better scores than their peers. Although the fund is permitted to invest in lower scoring companies, the fund managers must justify their inclusion in the portfolio.

In instances in which the investment team judges that the quality of the data for certain indicators in specific industries is poor, those indicators can be excluded. A good example of this is banks’ scope 3 emissions. In this case, banks’ efforts to calculate their funded emissions are in their nascency and comparative data is not yet available. Instead, the focus is on banks’ willingness to engage with industry initiatives, a qualitative assessment of their policies towards funding emissions intensive sectors and other qualitative assessments.

Considerations of a Climate Comparator – Data limitations and the team’s input

It is important to recognise where a quantitative approach has limitations. These include both limitations with each individual metric, the lack of data and in some instances, data which may be misleading.

For example, a company’s absolute emissions may be affected by corporate actions, or by its general operational performance rather than efforts to reduce emissions. The extent to which a company owns its supply chain (upstream raw material sourcing and downstream distribution) can significantly affect how a company calculates its emissions. The quantitative approach also struggles to judge diverse sectors or diversified companies. It is also has a tendency to look backwards and miss companies about to undergo change. Private companies are a feature of fixed income markets, a group of companies where data is often sparse.

Therefore, whilst the output of the Climate Comparator is a vital component, it is not the sole determinant of which companies qualify for the universe of potential investment candidates. When identifying companies with strong climate characteristics, understanding and contextualising data is critical and as a result, the team uses a combination of research resources including the team’s credit analysts, its dedicated ESG research analyst and Invesco’s 13 strong Global ESG Team which consists of specialist research analysts.

The team permits investment in companies which are not in the Climate Comparator in instances that it can justify, either because we have sufficient climate-related data on the company from other sources, or where a company’s core activity is supporting transition.

Nonetheless, the team believes there are numerous advantages of using a Climate Comparator approach to analyse companies in a systematic and thorough way. It is an efficient way of identifying the broad trends in a sector, it can help the team understand which companies are leading and lagging in the drive towards decarbonisation, and identify those companies whose record is mixed and may warrant further investigation. The Climate Comparator will evolve to accommodate advances in data reporting and also facilitates the comparison between the fund and the benchmark.

In addition, at the portfolio level, the fund is expected to achieve a lower (better) Climate Comparator score than the fund’s benchmark by a minimum of 10% although this is not a fund target or a constraint and the fund is actively managed.

• Fundamental Research: Invesco’s ESG team

In addition to the Climate Comparator, the investment team also benefits from the fundamental research capability of not only the team’s credit analysts but also Invesco’s Global ESG team.

Invesco’s Global ESG team consists of 13 specialists who conduct fundamental research in co-ordination with Invesco’s investment teams. Fundamental climate and carbon research is directed towards those issuers for which the investment team judge that further investigation is warranted, for example where data is sparse, or inconclusive, or where the investment team believe that the historic data does not properly capture the investment opportunity to support future carbon reduction.

Research involves an assessment and contextualisation of the carbon data, understanding an issuer’s carbon reduction strategy, their objectives and success to date. The views of the ESG team analysts and investment analyst are then considered by the fund managers who are able to make an informed judgement about the appropriateness of a security.

• Green, sustainability-linked, and transition bonds

The fund will also invest in a range of green bonds where an investment opportunity is identified and, given the rapid growth and development of this market, there is no upper limit to how many green bonds will be held in the fund.

Supply of green bonds has grown rapidly in recent years as issuers have sought to benefit from the rise in demand from socially responsible investors. A key challenge in the development of the green bond market has been to develop common standards as to what constitutes a green bond. To counteract the threat of greenwashing, the use of external reviews of green bonds has become widespread. External reviews can take the form of second party opinions, verifications and ratings. These reviews confirm (or otherwise) alignment with green bond principles and verify that the use of proceeds conforms to standards as set out in the Green Bond Principles.

The development of the market was boosted by the introduction of Green Bond Principles from the International Capital Markets Association (ICMA) in 2014 and the Climate Bond Initiative Standards and Certification Scheme which set out to provide a framework in which green financing could develop.

The investment team assesses green bonds to ensure they meet acceptable standards. To do this, the team follows the International Capital Markets Association criteria.

Bonds are scored on four criteria: the use of proceeds, management of proceeds, reporting, and external verification.

A green bond can score 1 – 10 and the investment team will invest in green bonds that score 4 or more.

Use of proceeds, Score: 0 – 4, Definition: Are qualifying projects clearly identified? Is refinancing permitted, if so for how long? Is there committee oversight?

Management of proceeds, Score: 0 – 2, Definition: Are proceeds held in a separate account? Is there a timeline for distribution of proceeds?

Reporting score, Score: 0 – 3, Definition: Is there regular reporting on the project? Is the report published? Is the project audited?

External verification, Score: 0 – 1, Definition: Is the bond verified by an external party?

Total out of 10

• Net zero emissions alignment

The fund will also invest in bonds issued by companies that have made net zero pledges.

The Carbon Trust, a well known authority on climate change, defines ‘net zero’ as ‘achieving a state in which the activities within the value-chain of an organisation result in no net impact on the climate from greenhouse gas emissions.’

Companies and governments often set 2050 as their ‘net zero’ goal to align with the IPC’s own global goal of carbon neutrality. However, with such a long time frame it is important that issuers set out a clear roadmap with interim targets.

In this regard, Science Based Targets (SBT, a leading climate-focused not for profit organisation that works with companies who are reducing their carbon emissions) is at the forefront of defining how companies can achieve net zero status.

SBT states that there are three key elements to the definition of a net zero emissions company:

• The company will set and pursue an ambitious 1.5°C aligned science-based target for its full value chain emissions
• The boundary must be global scopes 1, 2 and 3 for the organisation
• Any remaining hard-to-decarbonise emissions can be compensated with certified greenhouse gas removals (GGR). These should be restricted to only certified methods of GGR, to increase confidence that the carbon is permanently sequestered. Importantly, the company or organisation should make sure that only truly ‘hard-to-decarbonise’ emissions may be compensated.

Net zero also differs from ‘carbon neutrality’ in a number of ways. The Carbon Trust states:

• Whereas the boundary of a net zero target includes global scope 1, 2 and 3 emissions of the organisation, carbon neutrality for an organisation only requires scope 1 and 2, with scope 3 emissions encouraged but not mandatory.
• The boundary of a carbon neutral claim can refer to a specific product or service instead of encompassing the whole organisation in the case of net zero.
• The reduction in reported emissions required differs. Net zero targets must align to a 1.5°C science-based target, whereas the level of ambition of a carbon management plan for carbon neutrality is not specified.
• The approach to residual emissions differs, with specific greenhouse gas removals required for net zero targets, whereas carbon offsets are accepted for carbon neutrality.

At this stage, the number of companies making a pledge to achieve net zero status is small but growing.

The fund has not set a minimum level of exposure to net zero issuers as its process is already designed to seek out those companies with strong climate characteristics, some of which are likely to be aligned to the temperature reduction goals even without making a formal commitment. However, it is likely that through the fund’s climate objective and the increasing number of companies making net zero commitments, the fund’s exposure to net zero aligned companies will grow over time.

• Climate risk assessment for government debt

The fund can invest in both developed market and emerging market sovereign debt as part of its investment strategy and the team also applies a quantitative and qualitative assessment to determine the most appropriate issuers from a climate perspective.

The starting point is Invesco’s ESG quantitative tool, ESGIntel, which scores sovereign issuers on 23 indicators, of which 7 are environmental (including 3 focused on climate change), 8 social and 8 governance-focused. These indicators assess governments on a range of topics including carbon emissions, air quality, life expectancy, education and health.

Data is sourced from a number of intergovernmental organisations such as the UN and World Bank as well as specialists such as the International Energy Agency. Governments are scored relative to 5 separate groups: overall, IMF REO regions, (Europe, Asia, Middle East and Central Asia etc), IMF Economy (advanced, low income emerging market etc), Developed/Emerging Market and GDP cohort.

Data is converted to a scale (1-5 with 1 the best) and quintiled.

The team assesses the government scores. The fund will not invest in governments scoring 4 and 5.

Stage 3. Credit analysis

Once an issuer has been judged as being suitable for inclusion from a carbon perspective, the investment team then assesses individual financial corporate credit risk. The team has fourteen credit analysts who are organised by industry on a global basis.

Given the investment team’s active approach and benchmark agnosticism, there are no predetermined rules that govern which credits analysts review, although given the size of the team’s assets under management, smaller issuers are less likely to be attractive. Instead, it is the responsibility of both the fund managers and the credit analysts to generate investment ideas for review which can result from a range of different factors including a change in outlook, a change in price or new bond issues.

Although the research approach taken by the team’s credit analysts will vary according to circumstance, when assessing a new issuer, the process begins with an understanding of the Offer of Memorandum which states the objectives, risks and terms of a bond issue. This is followed by a review of credit rating agencies reviews (where the issuer is already rated but not yet covered by the analyst) and attendance at a presentation given by the issuing company’s management.

Given the size of the team’s assets under management, the credit analysts are typically able to secure additional time with the issuer’s management if needed. The team’s credit analysis encompasses a range of inputs that are presented in the table below.

• Credit ratings: Moody’s, S&P, Fitch
• Operational: Management, competitive position, business outlook
• Balance sheet: Capital structure, leverage, equity, cash, debt mix/maturity
• Cashflow: EBITDA, capital expenditure, working capital, interest coverage
• Protection: Covenants, asset value, franchise, banks

It is the role of the analyst to understand for each bond which of these considerations are the most important and warrant focus. The emphasis of the analyst’s work is on understanding the evolution of credit metrics rather than on the numerical value of the ratios at a point in time. Moreover, the analyst needs to place both the risks of the company and the value of the bond in some context. How does this issuer compare to others in the sector? How much value does the bond offer relative to others from the same or similar issuers?

The credit analysts have the flexibility to work and present their assessment in a way that best suits the circumstances and the team does not employ a template model. Once the research is complete, analysts present their work to the fund managers, providing an informed opinion on which the fund managers can decide the attractiveness of the bond.

Value assessment

Once a deep and informed credit risk opinion has been established about a corporate borrower, absolute and relative risk and value judgements can be made.

The fund managers are ultimately responsible for determining which bond issues are selected for the portfolio. Bonds are not selected with reference to an index, but rather on merit of their value assessment and the balance of risk and reward according to the fund manager’s judgement.

The investment team constantly seeks to understand why an investment opportunity may exist, including factors such as:

• The team’s different assessment of a company’s outlook to that of the market
• Market overreaction to one aspect of a company’s situation
• The effects of ratings changes, such as moving between investment grade and non-investment grade
• Issuance patterns of the company such as the frequency and size of supply
• Mispricing of covenant protection (investors mis-interpreting particular protections awarded to bondholders or lack thereof)

In keeping with an absolute risk and return mentality, the investment team also considers the risk/return profile of a bond in relation to cash and government bonds. This aspect can be particularly important in periods in which the credit market as a whole can appear attractively or unattractively valued.

An appreciation of relative value enables the investment team to select the best value corporate bonds given pre-determined variables such as maturity, sector and credit rating. This also helps the team to identify credit trends and pricing anomalies.

Stage 4: Portfolio construction and risk management

The investment team employs a multi-faceted approach to oversight and risk management with processes bolstered and overseen by several independent controls. It is an integral part of the investment process and is the product of the following factors:

• Fund manager understanding: the fund managers effectively control bond-specific risk by ensuring the portfolio is always appropriately diversified. Continuous analysis of all holdings gives the fund managers a comprehensive understanding of the financial risks associated with any bond.

The team manages portfolio risk from the perspective of:

• Market risk
• Currency exchange risk
• Investing in assets traded on non-eligible markets
• Use of financial derivative instruments
• Counterparty risk
• Use of warrants
• Market liquidity risk
• Interest rate risk
• Issuer risk
• ESG and climate risk

• Continuous monitoring: At the portfolio level, monthly performance and risk reports are produced by the Investment Oversight team, ensuring that the fund managers adhere to investment objectives, guidelines and parameters.
• CIO Challenge process: Invesco’s essential belief is that fund management is a skill and the inherent risks taken in managing investments are those made by the fund managers themselves. Thus, no unnecessary restrictions exist that limit a fund manager’s freedom to back his/her own convictions. A periodic meeting is held between the CIO and the individual fund managers which seeks to ensure that the fund managers are managing money in a way that adds value and that the risks taken in respect of the fund are understood and are considered appropriate. The Investment Oversight team provides reports to facilitate this process.
• In addition to the risk management procedures within the team and the investment centre, risk management is also conducted on an EMEA-wide level by the Operational Risk and Investment Risk Oversight teams.

Stage 5: Climate monitoring and Invesco’s Global ESG team oversight

The fund is monitored from a performance perspective and to ensure that it meets its climate objectives.

The fund’s benchmark for performance comparison purposes is a composite index consisting of 75% ICE BofA Global Corporate Bond Index (USD Hedged) and 25% ICE BofA Global High Yield Index (USD Hedged). While the composite benchmark is not consistent with the ESG characteristics of the fund, it is a suitable proxy for the wider investment and therefore it is likely that the majority of issuers in the fund are also components of the composite benchmark. As an actively managed fund, this overlap will change and this statement may be updated from time to time. The Investment Manager has broad discretion over portfolio construction and therefore it is expected that over time the risk return characteristics of the fund may diverge materially to the benchmark.

For some share classes, the benchmark may not be representative and another version of the benchmark may be used or no benchmark at all where a suitable comparator does not exist. Such details are available in the KIID of the relevant share class.

The fund’s benchmark for climate comparison (not performance) purposes is the Climate Comparator which consists of companies drawn from the ICE BoAML Global Corporate Index (G0BC) and the ICE BoAML Global High Yield Index (HW0C).

The fund is expected to achieve a lower (better) score than the Climate Comparator by a minimum of 10% however, this is not a fund target or a constraint and the fund is actively managed.

The portfolio is also compared to the Climate Comparator for a range of metrics such as carbon emissions, carbon intensity, as well as a number of sector specific indicators.

The proportion of the fund in green and sustainability-linked bonds and companies that have made Net Zero commitments will also be calculated.

Invesco’s Global ESG team’s Oversight

The investment team also benefits from the advice and expertise of Invesco’s Global ESG Team which meets periodically to review the portfolio and ensure that it is meeting its climate objectives, discuss upgrades to the Climate Comparator and investment process and co-ordinate on engagement with the management of companies relevant to the fund.

Resources, Affiliations & Corporate Strategies:

Invesco Global ESG Team

Created in 2013, Invesco’s dedicated Global ESG team is responsible for leveraging best practices in ESG capabilities across Invesco including ESG integration, voting and engagement, supporting distribution teams with client engagement, and advising product teams on ESG innovation.

Our Global ESG team acts as a center of excellence to guide, support and inform Invesco's investment teams on all work in this area. The team is organized across five pillars:

• Client: Guides messaging and training for distribution teams, engages clients on ESG issues, and supports product strategy.
• Research: Conducts proprietary ESG research and collaborates with investment teams on engagements.
• Proxy: Provides guidance on governance issues and supports development of our PROXYintel voting platform and Global Proxy Voting Policy.
• Analytics: Manages ESG analytics, data vendor selection, portfolio screening and reviews.
• Operations: Project manages ESG initiatives and manages the scheduling and organization for the ESG team.

The team includes 35 ESG professionals (as at 30 June 2024) located in North America, Asia Pacific, and EMEA who provide localized support and analysis to our investment teams across the globe. 

Our ESG professionals collaborate closely with these investment teams, providing support, insights and analysis while investment teams maintain discretion on portfolio decisions. Our governance structure enables oversight and accountability through the ESG Steering Committee, while allowing our investment teams to integrate ESG approaches tailored to their asset classes and styles. 

The Global ESG team's five pillars allow the team to support ESG efforts across specific functions firm-wide. The team's geographic structure also ensures that most Invesco teams have an appropriate local contact. The ESG Steering Committee, asset class-specific investment teams, and firm-wide functional units also collaborate with Global ESG team members from each of the five pillars. 

Each investment team has a unique approach to incorporating ESG considerations, as defined in its investment process and appropriate for the respective asset class. To support this effort, Invesco has dedicated ESG specialists and ESG champions within individual investment teams across the globe. These individuals are closely connected with the Global ESG team and formally collaborate via the ESG Steering Committee.

Governance oversight structure

Invesco’s Executive Leadership Team (ELT) is tasked with establishing the firm’s culture and ensuring all employees are aware of their own responsibilities for risk management, including on ESG matters. As such, with the oversight of Invesco’s Board of Directors, the ELT is responsible for establishing and maintaining our risk management framework and for ensuring that risk management is embedded in our day-to-day decision-making, as well as our strategic planning process. Invesco’s global risk management framework supports our focus on key risks in all areas of the business, including strategy and governance, investments, clients, people, operations and financial risk, and enables consistent and meaningful risk dialogue up, down and across the organization.

Our risk management framework leverages two primary governance structures: The Global Performance and Risk Committee, which oversees the management of core investment risks, and the Enterprise Risk Management Committee (ERMC), which oversees the management of all other business and strategy related risks. A network of regional, business unit and specific risk management committees, with oversight of the ERMC, provides ongoing identification, assessment, management and monitoring of risk to ensure both broad and in-depth, multi-layered coverage of the risks existing and emerging in the various domains of Invesco’s business.

Given the importance that Invesco places on ESG at an investment level, Invesco has a governance structure across multiple dimensions, which enables oversight and accountability for effective stewardship.

Investment Team Leadership. Invesco believes the best outcomes are achieved through distinct investment teams across the globe, with discrete investment perspectives, operating under a disciplined philosophy and process. Teams incorporate environmental, social, or governance related considerations where relevant or required to achieve portfolio objectives. Investment team leaders have responsibility for overseeing the implementation of investment strategies including those with ESG related objectives or incorporating ESG factors.

Invesco’s Global ESG Team acts as a center of excellence, responsible for investment team support and analysis related to ESG risks and opportunities, voting and engagement, supporting the distribution teams with client engagement, and advising product teams on ESG innovation, while investment teams maintain discretion on portfolio decisions. The team comprises circa 30 professionals located across three regions: North America, Asia Pacific and EMEA. The team is organized across four pillars that define their major responsibilities: Client, Research, Proxy and Analytics.

The ESG Executive Steering Committee (ESG Executive Steerco) establishes strategic direction for and implementation of ESG related investment management initiatives at Invesco. The Committee is composed of representatives from Investments, Distribution, and many functional areas. It provides direction for resource allocation and operational implementation while facilitating communication across the firm. The Committee aids in fostering global collaboration on ESG issues, enabling us to benefit from diverse perspectives and maintain consistent standards. Alongside various cross-functional working groups, it encapsulates our inclusive approach to ESG, ensuring a purposeful, holistic strategy that aligns with client objectives.

We have created a variety of working groups across the organization in support of delivering ESG related investment capabilities. Some groups are tasked with delivering on a specific initiative or facilitating collaboration across an asset class or region. Others are designed for providing broad communication about current themes or regulation, tools or resources such as data, or they focus on evergreen priorities including proxy voting.

Invesco's Global Invesco Proxy Advisory Committee is guided by our philosophy that investment teams should manage proxy voting. It is a global investments-driven committee comprised of representatives from various investment management teams and chaired by the Director of Proxy Voting and Governance. The committee provides a forum for investment teams to monitor, understand and discuss key proxy issues and voting trends within the Invesco complex, to assist us in meeting regulatory obligations, and to consider conflicts of interest in the proxy voting process.

Assurance

Invesco’s Internal Audit department provides independent, objective assurance and consulting services which are designed to add value and improve the firm’s operations. Internal Audit provides these services on an ongoing basis through a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. All business units globally, including ESG investing and proxy voting activities, are subject to Internal Audit oversight. The department generally performs testing related to ESG matters as part of Invesco’s annual audit plan.

Additionally, the Global Compliance department's annual testing plan seeks to assess compliance in key risk areas, avoiding duplication of testing and considering other control reviews, including internal audits. Our Compliance Monitoring team seeks to apply testing standards consistent with regulatory expectations in each region in which Invesco operates, and reports findings to senior management of Compliance and other impacted business functions. For example, in 2020 the Compliance Monitoring team conducted an advisory review of proxy voting in North America. The purpose of this review was to provide guidance and recommendations around the region's proxy voting process, to evaluate whether policies and procedures were reasonably designed and to determine how effectively the controls in place comply with regulations.

Invesco is an active member and supporter of several external organisations, largely via our global investment teams. Following is a representative list of current affiliations.

A member of:

• 30% Club Japan Investors Group
• Asian Corporate Governance Association (ACGA)
• Asia Investor Group on Climate Change (AIGCC)
• Better Building Partnership (BBP)
• Bipartisan Policy Center ESGTask Force
• Carbon Disclosure Project
• Coalition for Climate-Resilient Investment (CCRI) (founding member)
• Climate Bonds Initiative
• Confluence Philanthropy (Associate Advisor Menu)
• Corporate Responsibility Interface Center (CRIC) (DACH countries)
• Council of Institutional Investors (CII) (US)
• Disclosures and Labels Advisory Group (DLAG)
• Farm Animal Investment Risk & Return Initiative (FAIRR)
• Global Real Estate Sustainability Benchmark (GRESB)
• EFAMA Sustainable Finance Committee
• ESG Disclosure Study Group (Japan)
• Hong Kong Green Finance Association (HKGFA)
• Investment Company Institute (ICI) (ICI Fund Disclosure Working Group, ICI Global ESG Task Force, and ICI Proxy Issues Working Group)
• Investment Association (UK)
• Investor Forum (UK)
• Institutional Investors Group on Climate Change (IIGCC), including Net Zero Investment Framework working group
• Italian Sustainable forum (ItaSIF)
• Investment Management Education Alliance (IMEA)
• Irish Funds ESG Legal committee
• Quoted Companies Alliance (QCA)
• Responsible Investment Association (RIA) (Canada)
• Responsible Investment Association Australasia (RIAA)
• SASB Alliance
• Task force on Climate-Related Financial Disclosures (TCFD) (Supporter and Discloser), TCFD Consortium
• Transition Pathway Initiative
• Task force on Nature-Related Financial Disclosures’ (TNFD) Forum
• UK Sustainable Investment and Finance Association (UKSIF)
• World Economic Forum Financing the Transition to a Net Zero Future Working Group

A signatory to:

1. Principles for Responsible Investment (PRI)
2. EFAMA Stewardship Code
3. Indian Stewardship Code
4. Japan’s Stewardship Code
5. UK Stewardship Code
6. Net Zero Asset Managers Initiative

Additionally, GRESB provides the basis for the reporting, scoring and peer ranking of Invesco Real Estate's (IRE’s) ESG management and policies:

• IRE has submitted data to GRESB since 2012 and has been a GRESB member since 2014.
• In 2023, four IRE-managed strategies achieved five out of five Green Stars, placing them in the top 20% of all global submissions in 2023.

Source: Invesco as at 30 June 2024. 

ESG Resources

ESG data continues to evolve at a rapid pace, while the industry also faces challenges such as data comparability and coverage. At Invesco, we believe having quality data on ESG factors is critical for effective investment analysis to support our stewardship efforts in the area of ESG. We continue to enhance our ESG data and analytics capabilities by building out and updating our proprietary tools.

ESGintel

Launched in 2020, ESGintel is a proprietary ESG research and ratings platform that provides insights on key ESG topics for corporate and sovereign issuers across a range of metrics and data points. Available to all investment teams, this tool enhances the ESG investment process by:

• Highlighting ESG factors with potential investment implications
• Storing ESG engagement notes
• Facilitating ongoing monitoring of issuer progress towards sustainable value creation

ESGintel Corporate ratings

When assessing ESG funds and strategies, ESGintel Corporate provides users with ESG ratings based on Invesco’s internally developed methodology, ratings trends and momentum information, and access to the underlying company-level data. Sector and sub-sector materiality lenses are applied within the framework, ensuring that companies are evaluated on the most relevant ESG topics according to their business activities. A variety of underlying indicators feed into the topic-level assessments, providing a holistic view in each of these key areas. Topic-level ratings are aggregated into E, S and G theme ratings and input, operations and output value chain ratings.

ESGintel ratings are provided on a 1–5 scale at the overall, theme, value chain, topic and indicator levels. Computations are based on absolute, sector/sub-sector relative or region-relative performance as appropriate, specified on an indicator-by-indicator basis. ESG Corporate ratings are updated weekly to reflect the most current information available. In addition to ratings, company rankings are provided at the sub-industry and country levels. The ESGintel platform has built-in analytical capabilities that enable point-in-time and historical comparisons between companies and user-selected peers.

Not all issuers are covered on ESGintel; currently, approximately 15,000 companies meet our minimum coverage criteria for creating an overall ESG rating. Furthermore, the tool leverages a machine-learning algorithm to impute missing datapoints for a company based on data observations at companies with similar characteristics. ESGintel’s transparent interface highlights where such approximations are used and enables analyst scrutiny of the underlying inputs.

ESGintel Sovereign ratings

Responding to feedback from investment teams, Invesco has also expanded ESGintel beyond corporate ratings to cover other asset classes, including sovereign debt. With over 20 inputs, ESGintel Sovereign (previously called SovereignIntel) generates a score for countries across E, S and G categories that can then be aggregated into an overall ESG score. ESGintel Sovereign provides an internal rating, a rating trend and a global ranking out of 160 countries that are updated on a monthly basis.

Engagement Notes

With the Engagement Notes function, investment teams can upload any of their own company-level ESG research or engagement notes to share this insight with others across Invesco. Using this function, the Global ESG Research team has uploaded all of its historical ESG research and engagement reports, so these are all available on the platform. 

ESGCentral

While ESGintel is primarily used as a research tool at the issuer level, ESGCentral is a platform that includes ESG portfolio analytics and ESG screening.

ESGCentral brings in 40+ ESG data sources—together covering more than 52,000 companies and ESG data metrics—and integrates them with Invesco’s ESG portfolios and benchmarks to provide a holistic portfolio-level ESG analytics capability. The platform’s data fueled ESG insights highlight ESG opportunities and risks within the portfolios. The tool enables users to screen the portfolios for positive and negative ESG screens, net zero, Article 8, sustainable/responsible investing and other ESG frameworks. Through these capabilities, the platform supports ESG compliance, risk management, ESG reporting, and regulatory initiatives such as SFDR and TCFD. As a result, ESGCentral provides clear differentiation to Invesco’s ESG approach.

FocusIntel

FocusIntel is a list of the highest ESG risk issuers across all of Invesco’s aggregated holdings that identifies top-priority issuers for engagements using ESGintel’s research and data points. The Global ESG Research team maintains this list, which categorizes issuers into High/Medium/Low ESG risk buckets and compliance status (when assessing specific ESG funds and strategies). 

Our proprietary tools have built-in feedback processes to encourage continuous improvement, gathering users’ feedback regarding issues, observations and requests on sources, data and methodology.

ESGintel’s research and datapoints to helps to identify the highest ESG risk issuers at an aggregate level for Invesco (all the holdings of an issuer are aggregated across the portfolios in Invesco). Ownership and ESG risk materiality criteria are applied on the aggregated holdings and the issuers are segregated into high/medium/low buckets, signifying the ESG risk of the issuers. The Global ESG Research team collaborates with investment teams to engage with highest risk issuers and understand the path issuers are taking to mitigate the ESG risk and influence the issuers to bring a positive change towards ESG issues.

PROXYintel

Invesco’s proprietary proxy voting platform, PROXYintel, is a global knowledge-share platform that tracks proxy votes and rationales across Invesco with respect to individual companies and proxy issues. PROXYintel facilitates the implementation of voting decisions and rationales across our global investment teams. Launched in 2014 and patented in the US, the platform tracks proxy votes and rationales in real time, and investment teams are able to view votes cast by other shareholders within Invesco. This tool helps to build institutional knowledge across the Invesco complex with respect to individual companies and proxy issues.

PROXYintel integrates:

• Meeting information and proxy ballots
• Vote execution and vote rationales
• Invesco global proxy voting guidelines
• Client-customised voting policies
• Third-party proxy research
• ESG ratings
• Conflicts of interest
• Historical proxy vote record keeping
• Client reporting
• Ballot and vote reconciliation
• Security lending
• Account/data maintenance
• Custodian/vendor management

Users directly input proxy votes with the ability to view votes cast by shareholders within Invesco. PROXYintel tracks proxy votes and rationales real time. Historical proxy voting information is stored to build institutional knowledge across the Invesco complex with respect to individual companies and proxy issues. Certain investment teams also use PROXYintel to access third-party proxy research and ESG ratings. This proprietary system facilitates internal control and oversight of the voting process.

External ESG Resources

Invesco uses external service providers to support our stewardship activities, including ESG rating providers, proxy research, business involvement screening, carbon data and more. Data from these service providers feeds into our proprietary tools and supports in-house ESG research and analysis, enabling investment teams to make informed decisions. We consider various factors in reviewing third-party data providers prior to integrating the data into our investment decision-making framework, such as whether the data provided is the most up-to-date information available.

We ensure that data providers are providing the most up-to-date information prior to being integrated into our investment decision-making framework. Through our ESG Data Governance Model, we undertake due diligence to ensure they are providing on-time deliverables such as ESG data, research and recommendations. We are constantly evaluating vendors to ensure our investment teams and clients are given the most current information.

 
Invesco's Global ESG team has access to a variety of external resources, shown below, leveraging external organisations for collaborative engagement and knowledge sharing:

• ESG Research Providers:
• Sustainalytics
• MSCI
• Bloomberg 
• Institutional Shareholder Services (ISS)
• Sell-side research
• SG analytics
• Clarity AI
• Vigeo Eiris 
• Equileap
• Just Capital
• Morningstar
• Nikko Research Center
• Farm Animal Investment Risk & Return (FAIRR)
• Net Zero Tracker
• Proxy Insight
• Carbon Disclosure Project
• Carbon Underground 200
• Transparency International
• Transition Pathway Initiative (TPI)
• Science Based Targets Initiative
• Climate Bonds Initiative
• International Energy Agency
• UN Human Development Index
• Worldwide Governance Indicators (WGI)
• Sustainable Development Goals (SDG) Index
• Environmental Performance Index
• Child Rights Benchmark

Proxy Voting Research and Vote Recommendations:

• Glass Lewis
• ISS
• Institutional Voting Information Service (IVIS) (UK Equities)

ESG Policies

Invesco is committed to adopting and implementing responsible investment principles in a manner that is consistent with its fiduciary responsibilities to clients. Our ESG website provides details of our commitment to ESG investing, and summarizes the various ways Invesco applies ESG principles as investors and how we live them as an organization. The site also provides a range of global ESG policies, statements and reports, including:

• ESG Investment Stewardship Report outlines Invesco's accomplishments, reaffirming our commitment to global stewardship and detailing how our endeavours reinforce this core mission.
• Invesco’s Policy Statement on Global Corporate Governance and Proxy Voting describes Invesco's commitment to responsible investing and proxy voting, as well as the good governance principles that inform our approach to engagement and voting at shareholder meetings. 
• Invesco's Corporate Responsibility Report outlines Invesco’s efforts to ensure the well-being of our people through a culture of inclusion and innovation. We also share details on our new hybrid work model that provides greater flexibility and work -life balance for employees while they continue to provide excellent service to our clients.
• Invesco's Task Force on Climate Related Financial Disclosures (TCFD) Report seeks to build on our past experience and provide a comparable, investor-relevant disclosure on our activities and capabilities in climate-aware investing.
• Invesco’s Approach to Sustainability Preferences outlines Invesco's work to consider principal adverse impacts in our investment decision-making processes, discusses our investor-led approach to sustainable investments, and explains what it means to invest in EU Taxonomy aligned investments.
• Invesco Group Global Remuneration Policy that complies with the SFDR requirements.

SDR Labelling:

Unlabelled with sustainable characteristics

SDR Literature:

• Consumer Facing Disclosure