The morning sunlight illuminates the office buildings of the Canary Wharf financial district
The ETF will invest in property companies as well as those involved in work such as design or retrofitting buildings to become more energy efficient © AFP via Getty Images

Invesco is launching what is believed to be the world’s first “green building” exchange traded fund, aiming to fill a gap in portfolios in a world increasingly focused on climate change.

The Invesco MSCI Green Building ETF (GBLD), due to list on the New York stock exchange today will target the buildings sector, estimated by the UN Environment Programme to account for 38 per cent of global carbon emissions.

“We can’t talk about decarbonisation without talking about buildings and infrastructure,” said John Hoffman, head of ETFs and indexed strategies, Americas, at Invesco.

The launch comes amid a surge in demand for ESG investment, both in equities and fixed income, with total assets in the sector rising 50 per cent to a record $1.7tn last year, according to Morningstar.

While GBLD is also equity-based, it is designed to invest in real estate companies whose estates boast relatively high energy efficiency, have a healthier indoor environmental quality and make use of environmentally friendlier construction materials.

It will also hold companies involved in the design, construction, redevelopment, retrofitting or third-party certification of green-certified properties to effect climate change mitigation and adaptation.

“[The ETF] will be the first to focus specifically on the entire green building ecosystem,” said Hoffman.

GBLD is likely to receive a mixed reaction. Ben Johnson, director of global ETF research at Morningstar, said: “this is truly a first-of-its-kind product.”

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However, Peter Sleep, senior portfolio manager at 7 Investment Management, was more dismissive, labelling it “another way to package up property companies in an exciting thematic wrapper”.

Invesco, the world’s fourth-largest ETF manager with $400bn in assets, declined to name potential holdings ahead of launch. However, the fund is likely to be heavily exposed to the commercial real estate investment trust (Reit) industry.

It will track the MSCI Global Green Building Index, whose largest holdings at the end of March included Reits such as Boston Properties, Nippon Building Fund, Japan Real Estate Investment and Vornado Realty Trust, as well as other large property companies like Unibail-Rodamco-Westfield and Berkeley Group Holdings.

At least 50 per cent of a real estate company’s estate must be certified as “green” by Leadership in Energy and Environmental Design in the US or equivalent bodies in other countries in order to be included in the index.

Certification typically involves conserving natural resources, being constructed with recycled waste, avoiding toxic emissions, limiting water and energy use or contributing to a “safe, healthy built environment”.

As a result the index’s top 10 holdings are very different to those of existing global real estate ETFs, not least in their geographical diversification.

As of March 31, the index had about 26 per cent exposure to each of the US and Japan, with 11 per cent in both France and Singapore.

In contrast the industry-leading global property ETF, the $3bn iShares Global Reit ETF (REET), has a 66 per cent weighting to the US and only 9 per cent to Japan.

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“While GBLD’s underlying index is mostly made up of Reits, its portfolio has a much different complexion than a broad, cap-weighted global real estate index,” said Johnson “This speaks to its ESG remit as well as the fact that it includes building material suppliers, home builders, and property managers that fit this remit.”

The MSCI Global Green Building Index has also been more volatile, falling more than REET in 2020 (particularly during the market sell-off in the first quarter), 2018 and 2016 (when REET rose) but returning more in 2019 and 2017 — massively so in the latter case, by 29.2 per cent vs 6.8 per cent.

“One of the issues with thematic ETFs is that you tend to get unrewarded volatility, and fees,” said Sleep. “This seems a case in point.” GBLD will charge 39 basis points a year, compared to 14bp for the iShares ETF.

Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, said the MSCI index appeared to be focused on more economically sensitive sub-sectors such as offices and retail, compared to the greater weighting in everything from logistics and data centres to healthcare facilities and self-storage in other real estate ETFs such as REET.

Despite this, Rosenbluth believed GBLD had a place.

“Many investors view Reits as their own investment style or asset class [as opposed to equities] so I think it makes sense for people who are more ESG-focused that there is a portfolio of companies where the buildings themselves are green energy oriented,” he said.

“I can see this ETF making sense and fitting in for investors.”

One possible downside for the ETF is that it is launching in an environment when working from home may become a permanent option for many workers, reducing demand for space.

However Invesco said it saw an “increased desirability” for good air filtration systems, “which are a key element of green building ratings”.

Rene Reyna, head of thematic and specialty product strategy at Invesco, said he believed rising urban populations would continue to support demand for office space.

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