L&G Future World Equity Factors Index I Acc (OEIC/Unit Trust)
SRI / Ethical Overview
The fund is a global equity fund with a climate change focus aiming to achieve better risk-adjusted returns and to incorporate protection for a transition to a low carbon economy. The fund combines multi-factor investing with ESG considerations to change the way investment decisions are framed. As well as being benchmarked against an ESGand-factor based index the fund has a specific feature called the Climate Impact Pledge. This pledge is added by LGIM who commit to encourage and accelerate the transition to a low-carbon economy for the long-term benefit of all companies and their investors. LGIM set minimum criteria for fund, governance and transparency and companies which don’t meet these criteria risk being excluded after an engagement period. LGIM target companies in the sectors they believe will have the most impact on the transition to a low-carbon economy, to ensure their engagement has real consequences. They have initially identified six key sectors and the largest companies in these sectors are ranked based on a scoring methodology incorporating criteria such as transparency, innovation, public policy, board governance and reputation.
The fund retains the transparency and cost effectiveness of a conventional index fund, but also provides the opportunity to enhance investment returns by incorporating four ‘factors’ (value, low volatility, quality and size). The fund targets better risk-adjusted equity returns by incorporating the ‘factors’ into index design, while seeking to address the investment risks associated with climate change. The fund tracks the FTSE All-World ex-Controversial Weapons Climate Balanced Factor Index, an alternatively-weighted index that provides a balanced exposure to the four factors (value, low volatility, quality and size). It does so by tilting the All World (ex-Controversial Weapons) index using a rules-based approach, diversified across stocks, sectors and regions.
The fund is targeted against sustainability themes. LGIM has appointed an advisory board consisting of LGIM employees and independent members who are responsible for providing informed and expert advice to the fund, ensuring the fund remains representative of clients’ needs and acknowledging changing markets with regards to factor-based investing, and best practices in corporate governance. The advisory board comprises climate change and factor investing expertise.
SRI / themed / ethical assets under management – overview
- Fund Size (GDP): £200.0m (as at 31 May 2018)
- Total value of SRI/ethical/environmental/ social/ environmental or sustainability themed funds under management: £10.1bn. Source: LGIM internal data as at 31 December 2017
- Total value of assets covered by responsible ownership policy: The LGIM Corporate Governance and Responsible Investment Policy covers £983.3bn*, that being 100% of the firm’s assets under management.
- Total assets under management: £983.3bn* (LGIM is one of Europe’s largest asset managers and a major global investor)
*LGIM internal data as at 31 December 2017, including derivative positions and advisory assets. These figures include assets managed by LGIMA, an SEC Registered Investment Advisor.
SRI Policies (Primary strategy in bold)
- Environmental policy Find investment funds with environmental policies - ie that consider issues such as pollution, climate change, resource management, environmental impact. This will include options from all of the different SRI Styles, including funds where their core strategy is to focus on other areas such as ethical funds. See fund information for fund specific policy details.
- Ethical policies Find funds with 'traditional' ethical investment policies. These typically focus on avoiding companies that are involved in the armaments industry, tobacco, gambling and/or pornography. Options will include funds where their core strategy or style may be to focus other issues - like sustainability or the environment, not just 'ethical funds'. Strategies vary significantly. Check fund literature for details.
- Sustainability policy Find fund options that consider issues relating to the sustainability agenda (e.g. resource management, environmental impact, climate change and/or social issues such as equal opportunities, human rights and adherence to recognised codes). This will include funds from all of the different SRI Styles. See fund information for explanations of the different strategies.
- Governance policy Find fund options that have policies that relate to corporate governance issues such as board structure, executive remuneration, bribery and/or corporate corruption. These funds will typically avoid companies with poor practices.
- Armaments manufacturers avoided Find ethical fund (and other SRI) options that avoid avoids companies that manufacture products intended specifically for military use. Fund strategies vary - particularly with regard to non strategic military products. Read fund literature for specific details.
- Measures positive impacts Find funds that measure the positive effect of their investment decision making on society and/or the environment. (This may involve eg carbon saved or jobs supported.) Managers aim to quantify the benefits they deliver (relative to other strategies or other benchmarks) to ensure they are delivering positive benefiting. This is a new and evolving area. See fund literature for information
- Limits exposure to carbon intensive industries Find environmental, sustainable investment, ethical fund and other options that aim to significantly reduce or limit exposure to carbon intensive industries (ie sectors which are major contributors to climate change). Funds vary - strategies may involve excluding sectors such as coal, oil & gas, mining or airlines - or may indicate a 'best in sector' approach is taken. See fund literature for details.
- Coal, oil &/or gas majors excluded Find sustainable investment and ethical fund options that avoid significant involvement in coal, oil and/or gas producing companies. Funds vary. See individual fund literature to confirm details.
- Climate change / GHG policy Find sustainable investment and ethical fund options that pay significant attention to climate change related issues such as greenhouse gas/carbon emissions. Strategies vary, see fund literature for individual fund information.
- Invests in clean energy/renewables Find ethical, sustainable investment and other environmentally aware fund options that aim to invest in companies in the clean technology and renewable energy sectors. Fund strategies vary. Some funds may have limited exposure to this area, others may have significant exposure. Check fund literature for details.
- Positive selection bias Find funds where their main 'ethical approach' is to invest in companies that are considered to be positive/good or useful to people and/or the environment. The fund may also have negative avoidance criteria - see fund details to read more about fund strategies.
- Negative selection bias Find funds where their main 'ethical approach' is to avoid companies by using negative screening criteria. Read fund literature for further information.
- Balances company 'pros and cons'/best in sector Find ethical funds and other options that consider both the 'positive' things companies do and the 'negative' things they do in order to make balanced, often complex decisions about where they might invest. Such funds often invest in the best/most ethical companies across most industries ('best in sector'), rather than excluding entire sectors. The fund manager may combine this with 'responsible engagement' activity to encourage better business practices. See fund literature for specific policy explanations.
- Over 50% large cap Find funds that invests more than half of their money into what are commonly regarded as 'large companies'. This will typically mean that the market capitalisation (or value) of the companies they hold is in excess of £5 to £10 billion.
- Sustainability themed Find funds where there is a significant emphasis on sustainability issues either as its primary strategy or as a core strategy that compliments other criteria. (This may apply to a number of different SRI Styles). Such funds will consider environmental and social issues when making stock selection decisions. Read fund literature for further information.
- Favours cleaner, greener companies Find funds that aim to nvest in companies with strong environmental policies and practices. This may mean it invests in smaller companies offering market leading environmental services or products and/or larger companies that are working towards the improved management of their negative impacts. Read fund literature for further information.
- Aims to generate positive impacts Find funds that aim to help deliver positive social or environmental impacts or outcomes through their investment decisions - which typically involves holding companies that are viewed as being necessary or beneficial. Strategies and approaches vary. A small number of funds have recently started to measure outcomes (see 'Measures Impacts' in the Policy filter). This is a new area - so most funds do not do this yet. See fund literature for further information.
- Available via an ISA Find funds that are available via a tax efficient ISA product wrapper
- Clean energy themed Find funds that in clean technology / clean energy companies. See fund information for further details.
- ESG/SRI engagement Find funds and fund management companies that actively encourages higher 'environmental, social and governance' and/or 'sustainable and responsible investment' practices amongst investee companies - when positive change is aligned with the best interest of investors. This may apply to a single fund or a group of funds. Read fund literature for further information.
- Responsible Ownership policy for non SRI funds Find funds run by fund managers that apply Responsible Ownership or 'Stewardship' policies to all or most of their investment assets. This means that active involvement (e.g. voting, dialogue) with the companies they invest in across funds (not normally limited to ethical or SRI options.) Read fund literature for further information.
- Integrates ESG factors into all/most fund research Find fund management companies that research environmental, social and governance (ESG) issues when deciding whether or not to invest in a company. This typically applies to all funds, not only those which are promoted as being 'ethical' or 'SRI themed'. This is increasingly often used as a risk management tool.
- Vote all* shares at AGMs/EGMs This fund manager votes or aims to vote all* the shares they own at Annual General Meetings and Extraordinary General Meetings. A commitment to voting shares is a key indicator of 'responsible share ownership' - where fund managers consider - and express their views on - the key business issues effecting the companies they part own. (*Allowance is made for exceptional situations such as when shares are in the process of being sold.)
- In house responsible ownership/voting expertise Find fund / fund management companies where there is in-house expertise that enables the fund manager to make their own decisions on issues such as shareholder voting, setting of in-house guidelines - for example - particularly with regard to environmental, social and governance (ESG) issues.
- Responsible Ownership/ESG a key differentiator The fund managers have said they consider this area to be a key differentiator for their business
- UK Stewardship Code signatory Find fund managers that are signatories to the FRC UK Stewardship Code, which sets out a framework for constructive investor / investee relations where fund managers are encouraged to behave as responsible 'company owners'.
- Publish Responsible Ownership/Stewardship report Find fund management companies that publish information on their approach to responsible investment ownership - also known as 'Stewardship' - following the introduction of 'the Stewardship Code'. This sets out their approach to voting, dialogue with company management and any related activity. This is publicly available.
- Publish full voting record Find fund management companies that publishes a full record of how they vote at AGMs and EGMs. This information is publicly available.
- Regularly lead collaborative ESG initiatives Find funds managed by fund management companies that regularly initiate or help run industry wide (collaborative) investor projects aimed at raising environmental, social and governance standards amongst investee companies.
- PRI signatory Find fund management companies that have signed up to the UN backed 'Principles of Responsible Investment' initiative.
SRI / Ethical Policy
The investment objective of the fund is to seek to provide both capital growth and income by tracking the performance of the FTSE All-World ex CW Climate Balanced Factor Index.
The fund combines multi-factor investing with ESG considerations to change the way investment decisions are framed. As well as being benchmarked against an ESG-and-factor based index the fund has a specific feature called the Climate Impact Pledge. This pledge is added by LGIM who commit to encourage and accelerate the transition to a low-carbon economy for the long-term benefit of all companies and their investors. LGIM set minimum criteria for strategy, governance and transparency and companies which don’t meet these criteria risk being excluded after an engagement period. LGIM target companies in the sectors they believe will have the most impact on the transition to a low-carbon economy, to ensure their engagement has real consequences. They have initially identified six key sectors and the largest companies in these sectors are ranked based on a scoring methodology incorporating criteria such as transparency, innovation, public policy, board governance and reputation.
The index’s climate tilt aims to address the risks associated with climate change and seeks to raise the standards of companies that are critical to the transition to a low-carbon economy. The tilt reduces exposure to companies with worse-than-average carbon emissions and fossil fuel assets, while increasing exposure to those seeking to generate revenue from green transition; renewable sources, energy efficiency and environmental solutions.
Pure coal mining stocks are excluded, diversified mining companies that extract coal have their weight reduced by 75%. The index reduces exposure to oil and gas companies which own more oil reserves than the industry average and cuts the overall exposure to the oil and gas sector by a quarter.
Companies that don’t meet LGIM’s minimum criteria are excluded from the fund if proactive engagement does not bring about positive change.
The fund excludes companies involved in the production of weapons prohibited under international treaties.
Resources, Affiliations & Corporate Strategies
The fund is managed by LGIM’s experienced Index team. Research is conducted by the portfolio managers within LGIM’s Index team. The team has full access to the research offered by other teams within LGIM, such as the economists and strategists as well the analysis and research provided by the Corporate Governance team. Research is performed on an ongoing basis to capture all elements that could affect the risk profile of benchmark indices. It is, therefore, most effective if it is carried out by the same professionals who are involved in managing portfolios as they have a thorough knowledge of index products and market conditions.
Furthermore, LGIM has a dedicated Corporate Governance team which is tasked to work with colleagues across the firm in order to support the incorporation of ESG into all of LGIM’s investment activity. The Corporate Governance team internally carry out industry and company research around ESG issues. External sources are used to support and complement this research process. This includes drawing on academic and NGO research, as well as sell-side broker reports. In addition, we have access to ESG-specific data and research.
Company meetings and site visits serve as a vital part of understanding ongoing and emerging issues that we need to be aware of when analysing companies’ fundamentals.
The Climate Impact Pledge is managed by LGIM’s corporate governance team.
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