LGIM launches ESG Paris Aligned World Equity Index Fund

Legal & General Investment Management (LGIM) has launched the L&G ESG Paris Aligned World Equity Index Fund for institutional investors in the UK and Europe.

By offering broad (ESG) exposure to developed market equities, while also integrating Paris-aligned reductions in carbon emissions and UN SDG principles, the product is aimed at those investors seeking to align their portfolios with climate outcomes and to maintain a robust societal and governance profile for their equity exposure.

The Fund has already gained support from some key institutional investors, including London Borough of Newham Pension Fund which has invested approximately GBP520 million, and Irish pension investors. As part of its wider commitment to ESG principles, Legal & General’s alternative asset platform, Legal & General Capital, has also invested GBP100 million as it continues to strengthen its exposure to asset classes which will have a positive impact on climate outcomes.

The investment objective of the Fund is to provide low carbon emission exposure in view of achieving the long-term global warming objective of the Paris Agreement. Classified as Article 9 under the EU Sustainable Finance Disclosure Regulation (SFDR), the fund seeks to achieve this objective by tracking the performance of the Solactive L&G Developed Markets Paris Aligned ESG SDG Index, which has been constructed to meet the minimum requirements of the Paris-aligned Benchmark (PAB) Regulations.

It seeks to achieve alignment with the Paris goals by applying the following constraints and conditions:

• 50 per cent reduction in greenhouse gas (GHG) emissions intensity
• 7 per cent greenhouse gas (GHG) intensity reduction on average per annum
• Exposure to ‘high impact sectors’ aligned at least to the exposure of the parent index
• 100 per cent increase in green revenues relative to the universe/parent index

The Fund also incorporates both PAB and UN SDG exclusions including exclusions on companies involved in activities such as controversial weapons and tobacco production, as well as companies whose revenues are disproportionately weighted towards coal mining and power generation, fossil fuels, and electrical power generation from fossil fuels.

The Fund does not only have a strong ‘environmental’ focus through its Paris-alignment, but also has tilts towards companies with better ‘social’ and ‘governance’ scores. LGIM’s proprietary ESG scores are integrated into the Solactive index to improve ESG metrics relative to a traditional developed market equity fund. Its portfolio is tilted to increase the allocation to companies with high ESG scores and reduce the allocation of companies with low ESG scores, within certain constraints to ensure sustainable outcomes. The Fund benefits from LGIM’s market leading investment stewardship activities.

James Sparshott, Head of Local Authorities Distribution, Legal & General Investment Management (LGIM), says: “We are delighted that the London Borough of Newham Pension Fund has decided to make such a significant investment into our strategy. We recognise the urgency of addressing climate change and continue to experience demand for ESG investment strategies. In line with our own pledge to net zero emissions by 2050, we believe that taking action on climate is in the interest of long-term investors. This fund will benefit from LGIM’s track record in working with the companies in which we invest to improve their resilience to climate risks.”

Councillor Nareser Osei, Chair of the London Borough of Newham Pensions Committee, adds: “ESG is a key consideration for us, as we look to contribute towards positive environmental change, while also ensuring that our investments avoid future risks. This is underlined by our investment in LGIM’s Paris-Aligned fund, which is with a view to supporting the long-term future of our investments, as well as society and the planet.”

LGIM has a strong expertise in responsible investing and takes its investment stewardship obligation seriously. As well as assessing 17,000 companies under its ESG scoring methodology, LGIM uses its Climate Impact Pledge programme of engagement to effect positive change on companies in which we invest and on society as a whole. Where companies continually breach the standards of our Pledge, the firm retains the discretion to divest in order to act in the best interests of our investors.

LGIM supported the most Climate Action 100+ key resolutions vs peers in 2020. During the same year, independent NGO ShareAction ranked LGIM No1 among asset managers for its approach to climate change[1]. The firm was also selected by the UN Principles for Responsible Investment in October last year as part of its ‘leaders group’ on climate change.

Councillor Terence Paul, Cabinet Member, Finance and Corporate Services, London Borough of Newham, says: “This investment decision sends a strong signal that the Newham Pension Fund is a pioneering responsible investor committed to managing climate risks while at the same time exploiting the investment opportunities that it presents. In addition, this fund will help create better conditions for workers and promote better governance.  This fund embraces the Councils values and will play a key role in delivering our climate action plan.”