Legal & General Investment Management (LGIM) recently announced the launch of its L&G ESG Paris Aligned World Equity Index Fund for institutional investors in Ireland and Europe.
The fund is aimed to provide global market exposure to pension scheme investors who are seeking to align their portfolios with climate outcomes and to maintain a robust societal and governance profile for their equity exposure.
Richard Kelly, head of client business at LGIM Ireland, says, “We have aligned the fund from a carbon emissions perspective with the 2050 goals of the Paris Agreement. From the day of launch, it had a 50 per cent reduction in greenhouse gas emissions than a standard world equity index, then on a year-on-year basis the fund needs to decarbonise by 7 per cent per annum. We’re all being asked to decarbonise by this amount if we have any chance of hitting the goal of 1.5 degrees reduction by 2050.”
The fund does not only have a strong “environmental” focus through its Paris-alignment, but tilts towards companies with better “social” and “governance” scores.
“We’ve incorporated ‘social’ and ‘governance’ within the portfolio. We score over 17,000 stock with the LGIM scoring methodology. We score the companies that could go into the fund, who are the best performers with a positive ESG [environmental, social and governance],” Kelly says.
The fund, which has been up and running since July, has already seen huge interest from clients and there is now €800 million in the fund. This is led by large institutional investors.
Young investors
“I am delighted a large Irish defined-contribution scheme was one of the first investors in the fund. It’s very attractive to companies with younger members. They are engaged in what’s going on in the world and are pushing that they can invest their own pensions in funds that are aligned with their thinking.
“It’s going to be a core part of many of our client’s portfolios in coming years,” he says.
“A lot of pension investors will need to have exposure to equity markets. Over the long term, history has shown equity markets provide the best return for investors, and when young investors are starting out on pension savings they need to try to create the biggest pot available to them. This fund allows them to have the equity market exposure they need to get the returns but also does it in a sustainable way,” he adds.
“We can see regulators asking trustees of pension schemes to consider ESG risks within their own portfolios and to make sure they are taking adequate steps to address that. Companies that are concerned about climate change within their own equity portfolio, moving their assets to a fund like this will help address this risk.”
He says he sees this as giving the next generation a choice. “For many years the Irish market was dominated by ethical funds, not necessarily ESG but driven by ethical beliefs. This fund is integrating ESG into the portfolio, and a generation of young members of DC schemes have been saying the choice they have had for many years is insufficient and doesn’t align with their beliefs.”
There is no guarantee this fund will outperform a fund that is non-ESG but Kelly says over the last number of years they have seen ESG funds outperform regular funds.
Carbon footprint
“That is because ESG funds and carbon-aligned funds have less exposure to the gas and oil industry than standard market funds. That industry has underperformed. These funds are typically seen as more expensive and there’s a premium on having them. What we’re doing is bringing it to the market and it’s cost-effective. You don’t need to be some of the largest pension schemes in Ireland to have such an advanced fund as this where we’re screening 17,000 stocks and looking at carbon footprint.
“It’s also very transparent, how the fund is built.”
Meanwhile LGIM is currently working on another ESG-aligned fund on global diversified credit. “Credit is used as a diversifier away from a typical equity portfolio, it can be used for DC schemes or DB schemes or insurance companies. The idea with this fund is to make sure it’s an article eight fund, so the ESG criteria is embedded into the portfolio.
"We're bringing our emerging market debt, global high yield and investment grade credit together into one portfolio that investors would be able to have access to. It won't be Paris-aligned, it won't be decarbonising but it will achieve an article eight rating, all subject to Central Bank approval."