The L&G Future World Equity Factors Index Fund is a mirror of its Future World Fund, launched for the institutional market in November 2016.
The ‘climate tilt’ enables the fund manager to reduce exposure to companies with worse-than-average carbon emissions and exposure to fossil fuels, while increasing exposure to companies that seek to generate revenue from low-carbon assets.
The fund also incorporates LGIM’s Climate Impact Pledge into its strategy and stocks that consistently fail to meet its minimum requirements may be excluded.
It is managed by LGIM’s index team, which currently manage over £300bn in assets. It aims to provide both capital and income growth by tracking the performance of the FTSE All-World ex CW Climate Balanced Factor Index.
The fund targets better risk-adjusted equity returns than a traditional index strategy by including investment ’factors’ – characteristics of assets that help explain their risk and return, these being value, low volatility, quality and size, in the design of its benchmark index.
The pledge commits the firm to engage with the world’s largest companies – those which LGIM says will need to adapt their business models and drive innovation in order to meet global climate change goals.
LGIM has identified the largest companies in six key sectors – oil and gas, mining, utilities, automobiles, financials (banks and insurance companies) and food retailers/producers – which it says are critical to the shift to a low-carbon economy. It ranks them against criteria such as their commitment to the low-carbon transition, board composition, strategy and transparency. LGIM engages with them to improve their ranking and help them strive to be the best in their sectors.
Companies that consistently fail to meet the minimum expectations will eventually be excluded from the fund if proactive engagement does not bring about positive change. The asset manager says this approach is a powerful tool to drive better company behaviour and raise standards across the market.
Anton Eser, CIO at LGIM, said: “We are on the path to a low-carbon economy and companies that fail to respond to this reality present a risk to investors’ portfolios. This fund not only aims to help investors navigate these long-term risks, but also provides the opportunity to take advantage of the benefits yielded by the transition.”
Honor Solomon, head of retail at LGIM, said: “The fund retains the transparency and cost-effective characteristics of a conventional index fund, but also gives investors greater exposure to companies that are likely to benefit from the transition to a low-carbon economy. We strongly believe that companies who behave more responsibly with respect to climate make better investments in the medium to long term.”
