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Nov. 6, 2021, 10:24 a.m. EDT

This new fund gives an ESG flavor to the tech-heavy Nasdaq-100 — and beats the index

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By Debbie Carlson

A persistent knock on environmental, social and governance investing is that by excluding some sectors or companies, an investor’s performance suffers.

That belief persists despite numerous studies that show ESG funds and ESG indexes can outperform the broad market. Recent research by Morningstar shows 57 of 65 ESG indexes, or 88%, outperformed their broad-market equivalents for the five years through the end of 2020; additionally, 91% of ESG indexes lost less than their broad-market equivalents during down markets over the past five years, including 2020’s first-quarter bear market.

A part of that outperformance derives from ESG funds’ traditional tendency to have a heavier weight to technology. Tech usually has lower ESG risks because most tech firms aren’t big emitters of greenhouse gases or have other financially material environmental risks.

That is changing with the launch of a fund that closely tracks the tech-heavy Nasdaq-100’s /zigman2/quotes/210598364/realtime NDX -1.00% performance while underweighting tech stars like Tesla and Facebook, among other big names, and eliminating six stocks altogether.

The Invesco ESG NASDAQ 100 ETF /zigman2/quotes/230600846/composite QQMG -0.49% is based on the Nasdaq-100 ESG index , which designed to measure the performance of Nasdaq-100 companies that meet specific ESG criteria, using data from ESG ratings agency Sustainalytics. The Nasdaq-100 comprises the 100 largest domestic and international non-financial companies listed on the Nasdaq Stock Market .

According to backtested data supplied by Nasdaq, the Nasdaq-100 ESG Index outperformed the Nasdaq-100 Index in from March 18, 2016 to Sept. 20, 2021 by 7.7 percentage points. Cumulatively the return was 267.7% versus 260%. The Nasdaq-100 ESG index has been live only since June.

Microsoft /zigman2/quotes/207732364/composite MSFT +0.02% is the largest holding in the ESG index, at 15%, while Apple /zigman2/quotes/202934861/composite AAPL -0.70% is No. 2, at 13%. In the Nasdaq-100, Apple has the largest weighting. Tesla /zigman2/quotes/203558040/composite TSLA +0.20% saw its weighting cut in half in the ESG index, to 2.2%, and both it and Facebook /zigman2/quotes/205064656/composite FB -0.46% dropped out of the top 10.

The biggest stocks in the Nasdaq-100 ESG index, by weighting, versus the Nasdaq-100 index

Company Name Symbol Nasdaq-100 ESG  rank Nasdaq-100 Nasdaq-100 rank
Microsoft MSFT 14.53 1 10.43 2
Apple AAPL 13.11 2 11.04 1
Nvidia NVDA 5.47 3 3.86 6
Amazon.com AMZN 3.67 4 7.77 3
Alphabet (class C) GOOG 3.64 5 4.08 5
Alphabet (class A) GOOGL 3.40 6 3.82 7
Adobe ADBE 3.14 7 2.07 9
PayPal PYPL 2.41 8 1.94 11
Netflix NFLX 2.38 9 1.96 10
Cisco Systems CSCO 2.38 10 1.60 13
Facebook FB 2.27 11 3.64 8
Tesla TSLA 2.25 12 4.95 4
Data as of Oct. 22, 2021
Source: Nasdaq Stock Market

Although those companies have little environmental risks, social and governance factors matter too.

The fund’s ESG nuts and bolts

Nick Kalivas, head of factor and core equity product strategy at Invesco, says the ESG scores reflect both the managed and unmanaged ESG risks.

A managed risk is something the company can and does try to control, which an unmanaged risk is one the company can or can’t always control, like an oil spill.

That’s why companies such as Amazon.com /zigman2/quotes/210331248/composite AMZN -2.78% , Tesla and Facebook saw their weightings shrink relative to the Nasdaq-100.

“That’s where you get the differences. It’s related to that unmanaged risk that is present in the ESG framework,” he says.

The index methodology adjusts Nasdaq-100 company weightings based on how effectively a firm manages ESG risk. Companies with lower risk receive a lower overall ESG score from Sustainalytics. To be considered, the company must be rated by Sustainalytics and have an overall risk score lower than 40. In Sustainalytics’ rankings, a rating of greater than 40 is considered severe, 30-40 is considered high, 20-30 is medium, 10-20 is low and 0-10 is negligible.

Nasdaq also used some exclusion criteria for its ESG index. The usual exclusionary ESG screens appear, including excluding companies involved with adult entertainment, alcohol, fossil fuels, nuclear power and tobacco.

/zigman2/quotes/210598364/realtime
US : U.S.: Nasdaq
14,897.12
-150.72 -1.00%
Volume: 757,969
Jan. 20, 2022 3:49p
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/zigman2/quotes/230600846/composite
US : U.S.: Nasdaq
$ 24.38
-0.12 -0.49%
Volume: 28,839
Jan. 20, 2022 3:26p
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/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 303.38
+0.05 +0.02%
Volume: 25.35M
Jan. 20, 2022 3:49p
P/E Ratio
34.10
Dividend Yield
0.81%
Market Cap
$2277.40 billion
Rev. per Employee
$973,762
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/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 165.06
-1.17 -0.70%
Volume: 68.79M
Jan. 20, 2022 3:49p
P/E Ratio
29.56
Dividend Yield
0.53%
Market Cap
$2715.26 billion
Rev. per Employee
$2.38M
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/zigman2/quotes/203558040/composite
US : U.S.: Nasdaq
$ 997.60
+1.95 +0.20%
Volume: 20.33M
Jan. 20, 2022 3:49p
P/E Ratio
325.01
Dividend Yield
N/A
Market Cap
$999.90 billion
Rev. per Employee
$662,097
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/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 318.12
-1.47 -0.46%
Volume: 13.02M
Jan. 20, 2022 3:49p
P/E Ratio
22.81
Dividend Yield
N/A
Market Cap
$889.02 billion
Rev. per Employee
$1.92M
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,039.15
-86.83 -2.78%
Volume: 2.65M
Jan. 20, 2022 3:49p
P/E Ratio
59.78
Dividend Yield
N/A
Market Cap
$1585.33 billion
Rev. per Employee
$352,824
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