Open Windows Investing by TPFG

Rene Reyna of Invesco: Is ESG still where the Growth Is?

March 17, 2022 Julie Mochan Season 1 Episode 5
Open Windows Investing by TPFG
Rene Reyna of Invesco: Is ESG still where the Growth Is?
Show Notes Transcript

In this Episode, Julie Mochan interviews Rene Reyna, CFP®, Head of Thematic & Specialty Product Strategy,  Invesco ETF and Indexed Strategies. TPFG's Strategy PLUS platform utilizes Invesco's expertise in the thematic ESG space to expand investment model choices for advisors wanting to help their clients through self-directed brokerage accounts (SDBA) of group retirement plans.

🌎  What IS thematic investing and thematic
ESG investing
🌎  The
Principles for Responsible Investing (PRI)
🌎  The United Nations 17
Sustainable Development Goals (SDGs)
🌎  Trends in ESG Investing
🌎  Why every financial professional should offer ESG options
🌎  Links to learn more about energy and ESG:
US Energy Administration       ✔ MSCI             ✔ SASB

At TPFG, our success depends upon your advisory business flourishing 🌳, by doing what is in the best interest of every customer.  Sharing In-Plan advice to those who need it most, no matter your zip code, status, or hairstyle.✨ 
Invesco is an independent investment management company built to help individual investors, financial professionals, and institutions achieve their financial goals.
Need help for the TPFG Team? 
Click Here Want to hear something on the podcast?  Contact  Julie Mochan

 Original🎵 by  Ma’aM

Important Disclosure: This podcast recording has been prepared and made available by The Pacific Financial Group, Inc., also known as TPFG, a Registered Investment Adviser (RIA) offering advisory services. Information in this podcast is to be used for informational purposes only. The information contained herein, including any expressions of opinion has been obtained from, or is based on sources believed to be reliable, but its accuracy or completeness is not guaranteed and is subject to change without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. Any expressions or opinions reflect the views of the speakers and are not necessarily those of TPFG or its affiliates. TPFG does not provide tax or legal advice. Investors should consult their financial, tax or legal professionals before investing. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss.

Open Windows Investing Episode 5: Invesco’s Rene Reyna Explains Thematic and ESG Investing

[00:00:00] Julie Mochan: Hello podcast listeners in the land of podcasts.

[00:00:13] Hello financial professional looking for a podcast that can help you. Today's your lucky day. This is Open Windows. My name is Julie Mochan. Open Windows is a podcast created, especially for financial professionals that have struggled with their inability to manage their own client's 401(k)s, 403(b)s, or 457 accounts.

[00:00:36] This episode of Open Windows Investing, which is number five is brought to you by The Pacific Financial Group, Inc. Also known as TPFG. The firm was founded in 1984 on the single premise that everyone, regardless of their investment account size should have access to the best opportunities and the best independent expert advice.

[00:00:58] So for those of you listening that don't know much about us, we are pioneers in the arena of self-directed brokerage account management. We’ve been able to build relationships with many world-class strategists and these strategists have enabled us to expand our offerings in our Strategy PLUS™ investment platform, which is for pre retirees of group retirement plans through self-directed brokerage accounts,  

[00:01:23] otherwise known as SDBA. I do have a lot of acronyms, I apologize ahead of time, but I will have everything in the show notes. Today, I'm lucky enough to be joined by Rene Reyna of Invesco. Invesco is a global investment management firm with offices in over 20 countries. And we tap into their focused ESG ETFs which is environmental, social, governance exchange traded funds.

[00:01:48] Invesco plays a big role in our ESG PLUS™ investment models that we build for participants of group retirement plans, looking for growth with “greener” options. If you need clarity on the SDBA, our Team is here to help. If you need clarity on the ESG, you're going to get it today by listening to this podcast.  Quickly, before I get into it with Rene,

[00:02:10] Please know that I have a list of sites in the show notes and the transcript is there as well with backlinks. I ended up doing a lot of digging and fact checking on news sources and gathering information, trying to keep up with the geopolitical turmoil that's going on right now, you know, with Russia, Ukraine, shining a huge, bright light on energy resources.

[00:02:31] And the more discovery I did, the more I understood that there are many “shades of green”. So, when we're talking about ESG, it's just not like cut and dry/ black and white. It's just not about climate change or about a race to net zero emissions necessarily.

[00:02:54] It’s more about preserving humanity. And I think Kermit the frog was right when he said it's not easy being green. There are plans, processes to put in place, work that needs to be done on transparency, disclosures, setting expectations that are not outrageous. We don't have to be extreme to appreciate clean.

[00:03:14] And so, no matter which way you may lean politically, I'm sure we can all agree that a more peaceful world with clean air, energy and water is something worth working towards. If you're a financial professional looking for greener options, you're going to want to check this out. And even if you are not looking for greener options, you're going to want to check this out because guaranteed there is someone in your book of business or a prospect out there, or someone that's going to enhance.

[00:03:43] Assets in your book of business that is going to look for these greener options. Again, today I'm welcoming Renee ranger of Invesco. He's the head of thematic and specialty product strategies for Invesco’s ETF and Index Strategies. We're going to ask him about that. And a lot of other things. And he was a pleasure to talk to super easy, friendly and is available by the way, along with our team to help you, if you would like to just get down into the nitty gritty of sustainable investing.

[00:04:13] So here we go!

[00:04:19] Head of Thematic and Specialty Product Strategy. I'm going to start with the easiest question that I think I can ask. What does that mean? What is your role at Invesco? And if you could explain even what thematic means, that would be awesome.

[00:04:35] Rene Reyna: Thank you. And I'm happy to be here. So, my role is Head of Thematic & Specialty Product Strategy for ETF and Index Strategies….so long title, but the thematic investing,

[00:04:46] think of the root word "theme". It's more of this growing trend of investors looking to invest in segments of the market that are currently trending and have longer sort of secular growth opportunities. So, think technology is example, and on the ESG side, the thematic side is really the environmentally themed products.

[00:05:07] And so those ESG products fall under my purview. In my role, I serve as a strategist, I provide market insights, commentary for product line, and then also establishing our strategic agenda for growth. So, from more of a product strategy perspective, I help make decisions around where we should allocate our resources and our focus.

[00:05:31] Yes, ESG is clearly a key priority for our organization. And I think it's a space that's growing in, demand on the marketplace. And it's one area that I'm really excited to discuss today on this. 

[00:05:45] Julie Mochan: Let me see if I have the straight, because this is what is going on in my head while you're talking. So ESG and thematic, if you put those together, does that mean that you concentrate on one part of environmental social governance, as opposed to all of it, meaning getting to net zero on carbon emission or social equity or disclosures? You know, all the stuff that you can get into with ESG, you do more of a focused ESG?  Is that what that means? 

[00:06:15] Rene Reyna: That's a great question. And yes. From a thematic ESG perspective. So, these are areas where you focus on themes and sectors dedicated to solving sustainability related challenges. So that can be clean energy.

[00:06:29] That can be water. And you bring up a good question too, because I think part of the broader discussions around this sort of taxonomy, I think for some investors, ESG can be somewhat confusing because you see all these different terms like broad-based, screener funds, thematic ESG fund, 

[00:06:47] you must almost take a step back and think about how the issues evolve. Many might recall, older sort of SRI, or socially responsible investing funds; impact investing funds in the early days, descriptions of investments that allowed you to. Screen out sort of these rudimentary issues or topics screening 

[00:07:10] Julie Mochan: Like screening out tobacco, or you wanted to exclude tobacco from your portfolio, Philip Morris, who changed their name to Altria Group thinking that, uh, no one would know, I guess Kraft, mac and cheese and tobacco is all the same. {laugh} So screening out was the thing to do at the time. 

[00:07:25] Rene Reyna: Right? Exactly. And in a way it was, how can I boycott with my investment dollars? How do I ensure that my capital is not going to these particularly? And so that was the early days of ESG. And then the world evolves in 2006, the United Nations Principles for Responsible Investment or PRI.

[00:07:44] They came out with a report and for the first time ESG was required to be incorporated in financial evaluations. And so, since then, you now have these Sustainable Development Goals created, or SDGs sometimes referred to as, so the 17 goals to transform our world. So, this is the include things such as no poverty, zero hunger, clean water and sanitation and climate action to just name a few. And within those SDGs, you then evolve and now you have these three pillars of ESG, so environmental, social, and governance. And within that framework, you now have these underlying. Sort of segments and that's where you can get into ESG integration.

[00:08:26] Broad-based screener funds and thematic ESG, which is really where Invesco's roots are in terms of when we first entered this space. Many investors may not realize that some of our strategies go back 15 plus years. Through some of our legacy names. So back when the ETF business was Power Shares and we had the first clean energy funds come to market, some of the first water funds come to market.

[00:08:50] And so a lot of our history in terms of being in the ESG space, started back then around these sorts of environmental themes. And so, it's evolved since then. We now have eight strategies that sort of fit that category. And that's where I spend a lot of my time and focus. All right. 

[00:09:07] Julie Mochan: That's a lot to get through my head. So you said seven, as far as the UN 17, what are they called again? 

[00:09:16] Rene Reyna: So, the United Nations Rules for Responsible Investment or PRI. They created the Sustainable Development Goals,

[00:09:26] and sometimes we refer to them as SDGs, and it's interesting too, because this is a part where we recognize how challenging it could be for investors because investors naturally say, okay, well, ESG is relatively new.

[00:09:38] You have strategies that have been around for 15 plus years, help us understand that. And you know, one thing we'll do to try to describe our strategies the same way they weren't designed with the ESG in mind, but they happen to align with ESG. And part of the alignment we discuss is with these sustainable development goals or SDGs, especially when you think of the areas of climate action or clean water and sanitation.

[00:10:02] Julie Mochan: So, Episode 3 of this podcast, I interviewed Matt Sommer of Janus Henderson Investors, and Janus Henderson did a study recently looking at self-directed retirement participants, and out of like 4,500 people surveyed (I'll put it in the show notes), it was interesting because they found that it showed that the correlation between the people who were philanthropic, you know, giving to charities that you would think would be wanting to invest in ESG didn't necessarily lean that way.

[00:10:33] It was, it was more people that did, uh, he had a name for it, conscious, conscious consumption, meaning that if you don't like the way that a company is doing something, you do your own screening, you don't buy their product. So, if you don't like how a company is treating their employees, or there's a company that is creating the product in Asia, and they're not following the labor practices that we would here in this country,

[00:11:01] and someone decides to not buy a product because of that. They're the ones that are more likely to invest in ESG funds. Um, at least in their retirement, not necessarily the ones that you would think of that are giving towards, you know, certain charities, which I thought was super interesting, a high correlation there.

[00:11:17] And, you know, I think the studies are coming out because pre-retirees want to have the ability to utilize ESG-type investments within their retirement accounts. And, and it's, I think it's really cool to hear that, Invesco, like you guys were doing this for so many years, you know, even before it was like the vogue thing to do, which is, I feel it says a lot about your company, obviously.

[00:11:44] Rene Reyna: Exactly. So, there was a sort of intention to invest in clean energy solutions. And just over time as the concept around ESG evolves, but just happened to align with some of those other line themes. I would just, just say to that, we've been innovative over time and really try to be. Investment solutions to market that didn't exist.

[00:12:05] Those were areas where we were early days. And so, it just so happened that the demand has grown so much over time, but that's an example of us understanding and recognizing there was some investment demand. There was no. Fill that demand. And we created this solution back then. 

[00:12:21] Julie Mochan: Let me ask you what you're kind of famous for at Invesco and that's ETFs /exchange traded funds. Can you tell me how your managers can be more tactical, or nimble by using ETFs? And then can you also explain what the difference is or is there a difference when it comes to voting rights, her proxy voting, meaning if you're able to vote the same way with an ETF as you would be with a mutual fund.

[00:12:48] And I'm saying this because I'm thinking of the impact that proxy voting can have on an advisory board of a corporation to change what they're doing are or making sure they have something impulsive. To be healthier towards the environment, their corporate governance. 

[00:13:06] Rene Reyna: Sure. Okay. No. So those are all great questions.

[00:13:08] So maybe I'll start, I guess you can look at it a couple different ways. So, one, the nimbleness advantage may be for those that are looking to get in and out of their positions intraday. So, the ETF could have that advantage just being exchanged, traded, but the history around ETFs is they tended to be more passive rules or index strategies.

[00:13:30] And that's expanded over time. I think that. Uh, compared to active management, there is a clear difference, but you have seen ETFs evolve over time. And so specifically what I mean by that is if you think about how a strategy reconstitutes or rebalances, in some cases, some funds now reconstitute monthly.

[00:13:50] So although the whole. I say the same for 30 days, give or take, um, per the index methodology. Those holdings can change. And so be dynamic and capture whatever the methodology is and opportunities that you're trying to capture with that ETF. It can evolve and change. And then you got the rebalancing components as well, which in some cases are

[00:14:08] quarterly, annually, so it does evolve, I think the nice thing about the ETF is the ability to capture the exposure type, um, efficiently trade in the marketplace. And in some cases, based on how frequently it reconstitutes, you are ensuring you're getting the best securities for that underlying exposure type.

[00:14:28] So those are some of the differences ETF versus. They tend to be again, passive and more rules or index-based strategies. It is blurring a little bit, and you're starting to see more active mutual funds convert into an ETF and become active ETF. So, the world does seem to change, but for now I would say that ETFs are predominantly passive.

[00:14:47] And then your question around sort of proxy voting. So that's an organization we're able to leverage sort of our positions and holdings within our ETF complex and still go out and vote. So, we're actively involved in the proxy process. Like a fund now to mutual fund side, you may have the fund manager, perhaps a little more active as it relates to, um, proxy voting, maybe the act, the fund has a position that's significant on the fund itself and sort of wants to

[00:15:20] leverage or lobby for some change. You know, they may have some of that involvement there, but, but as an organization, we look at sort of our entire complex and, uh, we use our positions as a way to influence and get involved in the proxy voting process, which we are very active as an organization.

[00:15:37] Julie Mochan: That makes sense. Yeah. For anyone who's listening and wondering what the heck we're talking about when it comes to proxy voting, it comes to ESG. You know, I referred to just screening things out, whether it's tobacco or whatever it is. Right. You know, back in the day, you just screened things out. If you, you just didn't buy the company that was doing something that went against.

[00:16:01] Values as the whole ESG environment changed and it's been around for a while, but as it changed, institutional managers started buying companies that they wouldn't normally buy because they were doing things that, uh, that didn't. Their values, but they bought in to make a change by voting. And so instead of just divesting or not investing in something, you can invest in a company.

[00:16:31] And if you have enough people investing in that company, you can make a change for the better is the bottom line. Oh, good. Okay. Uh, so Rene, one of the things that I think about a lot is, um, the journey of, of trying to go from “brown energy”, meaning oil to “green energy” and that transition, how it's going to happen.

[00:16:54] I know you don't have a crystal ball obviously, but you do see a lot of trends in the industry that our audience is not able to see. What can you tell us there? 

[00:17:02] Rene Reyna: S on one hand, it's interesting to see how much growth is occurring in this space. Just broadly, as we think about investment flows into ESG products, ESG ETFs, it's been substantial in the last three years.

[00:17:17] It is like hockey stick growth. And I think part of it is trying to understand what is driving some of that. On one hand and in sort of the broadest sense, you are seeing a rising standard for corporate business practices. And so that's being pushed out by employees and, and globally, you're seeing that shift take place.

[00:17:42] And then if we just think about the COVID pandemic, buildings are a prime example of the need for airflow quality. If you had to return to the office, that's a big concern. And so you're seeing standards from all different angles, whether it be gender and diversity, whether it be on the environmental side, clean air standards if you will, but there are these demographic trends taking place.

[00:18:07] That's driving some of it and you're also seeing regulatory and policy developments, and then you're seeing these global sustainability or climate issues or challenges that. So all of that, I think in the backdrop is what's driving some of this demand. And I think interestingly enough is the U.S., which was following Europe.

[00:18:26] Europe had been the clear leader, just in terms of adoption of ESG, incorporation of ESG from a regulatory standpoint, product solutions, if you will, or investment solutions, but we've seen the U S really grow substantially over the last three years. And so, if we look at last year's U.S. ESG ETF inflows for example, they were up 67% year over year.

[00:18:50] Now what is driving some of that? I mentioned the climate aspect of it. You know, you're first for the brown to green climate is becoming a concern so we can disagree on sort of the root, but these extreme climate events, they keep reoccurring. And so, I think it's more top of mind now for investors and you're seeing pressure

[00:19:14] on the government side on the corporate side, and you're starting to see corporations now make decisions to voluntarily transition their business models. And so, the whole green thing, for example, yes, we have the Paris Accord, the Paris Agreement. You see all these global net zero commitments, whether it's us by

[00:19:37] 2030, or China by 2050.  Globally, you're seeing these commitments take place, but then you're also seeing corporations make some commitments on their own, whether it's to one extreme the auto industry, when some of your largest us auto manufacturers come out and basically say, they're going to transition away from the combustible engine.

[00:19:56] I think that speaks to the EV or electric vehicle growth, both in the States, but also across the European and Asian markets. And we're seeing a lot more organizations make commitments to be net zero or not attributed to carbon emissions. And this is this trend that we're seeing in the marketplace.

[00:20:19] And we think that's just going to continue to grow and accelerate Policy is a key part of that, however, at the same time you see this transition taking place, we're also seeing the costs more broadly speaking, a solar energy, wind energy declining dramatically. If we think about the battery technology, the lithium battery market, for example, I mean those costs and efficiencies have just improved phenomenally over the last 10 years, and so you have that sort of taking place as well. And so, policy can help accelerate that, although some of the costs have come down so massively that it's almost viewed as just icing on the cake. In other words, we're going to transition regardless, but I think policy can be sort of an accelerator. 

[00:21:08] Julie Mochan: Rene, I just read an article that essentially was saying that more people would invest in ESG, but it's not being presented to them. Maybe that's because advisors are not necessarily comfortable presenting it, meaning that there's that old stigma of, if you're going to invest SRI or ESG, you’re going to give up performance. So, I think advisors need to understand that there are more people interested in ESG maybe than what they think. Do you have any advice for advisors who feel comfortable with clean water and clean air, but they don't feel comfortable talking to their clients about it investing in a more sustainable way?

[00:21:48] Rene Reyna: I'd say first and foremost, from an investor perspective. So, if I'm thinking about long-term secular growth opportunities to grow my capital. Since these countries have all aligned and committed to this transition, there's going to be trillions of dollars of capital that are going to be allocated to see this.

[00:22:10] So from an investment opportunity perspective, that should seem attractive. So, let's put aside views on climate change is real, or is it not the fact that there's these commitments put in place you're going to need capital for that transition to. And so, to me, there's an investment opportunity there.

[00:22:30] So I think that's the first part. The second part about that is for the companies that stand to benefit our companies, that over time have been improving their margins. Uh, their expenses have come down dramatically as supplies, uh, and the technologies around clean energy for example have improved. And so, you know, to me, there's like a compelling investment case.

[00:22:51] Now, away from that, there's also this element over the last three or four years, and even more pronounced in 2021. And again, it's anecdotally, but just more than I've ever seen. I've been pulled into conversations with our clients because their clients are asking them about it. And so, they recognize that there's a risk that they can lose a client if they do not at least try and better understand this space.

[00:23:19] And so, you know, I think there is this drive or, or, you know, part of the demand that's driven from the client base, reaching out proactively. There's an element of demographics. Uh, you know, our younger investors, uh, more open to investing for climate related solutions, for example. Yes. Do they necessarily have.

[00:23:41] The capital, maybe not, but they're going to inherit it. And so, there’s that money shift that's going to take place, you know, over the next decade or so. And so, I think it's, it's responsible to try and just understand, what options exists and the fact that there are many ways now to get exposure.

[00:24:00] And so I think that optionality has grown quite a bit. And if you haven't looked lately, I do think it makes sense to, to see what's out there and what exists because the marketplace has changed dramatically over the last few years. 

[00:24:14] Julie Mochan: Before we wrap up quick question, the last couple of years, the pandemic has had a huge influence on life, how has it changed your life? The way you do business, what you're doing, how you do business, did it change things for the better, for worse? Tell us how it made your life different, 

[00:24:33] Rene Reyna: You know, with COVID being forced to work from home in the last couple of years, and now we're all sort of slowly starting to return to the office. Some of you maybe have been there for a long period already, but for those of you that are our parents, I think the one thing I always wanted to do was coach my kids. And with commuting and with traveling, you know, it just wasn't, it didn't make sense. Uh, for my schedule. And over the last couple of years, I've coached four different teams for my kids.

[00:25:00] And, uh, it's really been a good experience. And so, yes, I spent a lot of time behind a desk. I spent a lot of time on calls. But to go out now and experience this for the first time has been neat. I'm sure maybe some of you listening in you've had that same experience just because of COVID.

[00:25:21] But so right now I'm coaching two basketball teams. So, a seventh grade travel team with my son and a fourth grade Biddy Ball team for my daughter.

 Julie Mochan Which one is more fun to coach?

Rene Reyna: The Biddy Ball team.These are young girls who are making their first basket ever, and there's just something about that smile when they score their first bucket that, that I just love seeing. So that's been the most fun. 

[00:25:47] Julie Mochan: That's super, and I love. The good things that came out of the pandemic. That's definitely one of them, obviously, when you can help out and be with your kids and be in that process of dealing with the other parents, we won't get into that. {laugh} All right. Hey, have a great day. Thank you so much. And we'll have you back again. 

[00:26:08] Rene Reyna: Thank you. This was awesome.
Disclosure: This podcast recording has been prepared and made available by The Pacific Financial Group, Inc., also known as TPFG, a Registered Investment Adviser (RIA) offering advisory services. Information in this podcast is to be used for informational purposes only. The information contained herein, including any expressions of opinion has been obtained from, or is based on sources believed to be reliable, but its accuracy or completeness is not guaranteed and is subject to change without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. Any expressions or opinions reflect the views of the speakers and are not necessarily those of TPFG or its affiliates. TPFG does not provide tax or legal advice. Investors should consult their financial tax or legal professionals before investing. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss.