Legal and General Investment Management (LGIM) has today announced the launch of the L&G Future World ESG Emerging Markets Government Bond Local Currency Index Fund, offering investors access to a significantly enhanced sovereign risk ESG framework for the integration of ESG across sovereign debt. This fund will be followed by the launch of the L&G Future World ESG Developed Markets Government Bond Index Fund and the L&G Future World ESG Emerging Markets Government Bond (USD) Index Fund, in the next few months.
Alongside a range of environmental, social and governance (ESG) factors, the funds will also incorporate a new proprietary fourth ESG pillar, referred to as “Geopolitical stability/risk”. This risk factor aims to identify risks beyond headline sustainability metrics, which we believe provides a more comprehensive risk assessment of investing in Government debt.
As per research from the World Bank, there is an ingrained income bias that impacts sovereign ESG scores and the fund seeks to eliminate this. The aim is to facilitate a fairer allocation of capital to nations which require debt issuance to advance their economies and reward those countries that are on a path to improving their ESG credentials.
Through the creation of ‘wealth bands’ which are implemented into our Index Fixed Income Sovereign Risk ESG Future World fund range, we believe we are taking a significant step towards levelling the playing field. These bands are mutually exclusive and the strategy exclusion thresholds are wealth-band specific. The bands apply tiered thresholds for exclusions based on different levels of country income. As a result, the funds in the range aim to provide investors with exposure to sovereign debt with deeper ESG integration, factoring in forward-looking sovereign risk factors and adjusting for wealth bias.
Talking about the new fund, Lee Collins, LGIM’s Head of the Index Fixed Income Desk said: ‘’Following 18 months of research and development, we are delighted to be launching our first, LGIM designed, Index fixed income Sovereign ESG products, collaborating with industry leaders like JP Morgan & Verisk Maplecroft to bring this to market. Whilst ESG integration in equities and corporate bonds exposures is a well-trodden path, it’s fair to say that developments in the Sovereign ESG sector have lagged behind. We believe that with several unique features, these new products will offer investors a deeper ESG integration in the asset class.”
LGIM has also designed and implemented a proprietary sovereign ESG score momentum factor to be incorporated by the fund range. This provides an ethically consistent means of rewarding countries trending positively but also penalising those countries trending down, helping to amplify risk signals which we believe are key to future growth within sovereign ESG. The funds represent a significant evolution in the consideration of ESG risk across sovereign debt, both identifying risks beyond headline sustainability metrics, controlling for income bias and imposing meaningful exclusions and tilts without sacrificing investment performance. Using sovereign risk ESG data powered by Verisk Maplecroft – an industry leader in sovereign ESG data analytics – the fund will be underpinned by the LGIM sovereign ESG framework that is calculated quarterly and spans c.200 countries across all markets.
James Lockhart Smith, VP of Markets & ESG at Verisk Maplecroft commented: “We are delighted to be working with LGIM on their new Sovereign ESG Index funds. The scale of fast-evolving environmental risks, as well as persistent social and governance deficits, has increased the need for sovereign debt investment products that use ESG criteria in an impactful way. Verisk Maplecroft sees this relationship as critical to deepening ESG incorporation across government bond markets.”
The funds’ scoring methodology is also designed around key sustainable investment bodies, initiatives and issues such as: the United Nations Global Compact, the Climate Change Initiative, UN Sustainable Development goals and the Organisation for Economic Co-operation and Development, alongside labour conditions and human rights factors. This builds on LGIM’s established relationship with JP Morgan, leveraging its best-in-class fixed income methodologies.
Shaku Pithavadian, Managing Director, Deputy Head of Global Index Research at JP Morgan added: “We have leveraged our best-in-class fixed income benchmark methodologies and new means of index construction to enhance customized product design for our clients. We are pleased to work with LGIM to integrate their bespoke Sovereign ESG framework in a scalable index solution.”
The funds have been categorised as Article 8 under the Sustainable Finance Disclosure Regulation. The L&G Future World ESG Emerging Markets Government Bond Local Currency Index Fund will be immediately available to institutional investors in the UK, and to those investors in the Netherlands, Germany and Sweden by the end of 2023.