Sustainable, Responsible &/or ESG Policy:

The investment objective of the Fund is to seek to provide both capital growth and income by tracking the performance of the Solactive L&G ESG Global Markets Index (the “Index”). As part of the Future World range, the fund incorporates LGIM’s Climate Impact Pledge, a targeted engagement process, detailed below.

LGIM’s Climate Impact Pledge: “To engage with the world’s largest companies that are required to adapt their business models and drive innovation in order to meet the global climate change goals. LGIM commits to encourage and accelerate the transition to a low-carbon economy for the long-term benefit of all companies and their investors.”

How it works: Through our research, we identify the largest companies that are critical to the shift to a low-carbon economy and rank them against criteria such as commitment to the low-carbon transition, board composition, strategy and transparency. We then engage with them to improve their ranking and help them strive to be the best in their sectors. LGIM has identified 84 key companies with which we engage on the Climate Impact Pledge, but the number of companies – and the choice of sectors – may change over time, with input from the Fund’s advisory board. Companies that consistently fail to meet our minimum expectations will eventually be excluded from the fund, subject to a tracking error tolerance. Moreover, in all other LGIM funds that remain invested in those companies that have not met our criteria, we will vote against the chairman until we see satisfactory change. This approach is a powerful tool to drive better company behaviour and raise standards across the market.

Process:

The index methodology is designed to exclude securities involved in pure coal mining, manufacturing of controversial weapons, and companies in perennial breach of the UN Global Compact.

• Firearms - companies derive 5% or more of their revenues from assault weapons
• Military contracting - Companies deriving more than 10% of their revenues from military weapon system manufacturing
• Tobacco – Companies are involved in production or derive more than 10% of their revenue from retail of tobacco products and related services
• FWPL – Companies are included on the Future World Protection List

The index utilizes independent data providers to calculate and apply 28 ESG data points across:

• Environment - focused on climate change
• Social - focused on diversity, human capital and ethics
• Governance - focused on shareholder rights and good governance
• Transparency - Quality of company disclosures.

The index utilizes bespoke design with Solactive and uses overall ESG score to tilt company capital allocation. Moreover, the key differentiator for LGIM is active ownership to engage and influence through stewardship, and to escalate appropriately when required.

LGIM also has a climate impact pledge to encourage strong governance and sustainable strategies, and to divest from those who fail to meet minimum standards.

Resources, Affiliations & Corporate Strategies:

The fund is managed by LGIM’s experienced Global Index Funds 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 Investment Stewardship 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.

ESG resource

Being able to demonstrate ESG integration is fast becoming a hygiene factor rather than an additional capability. In 2019, CIO Sonja Laud established the Global Research and Engagement Platform to bring together the best sector expertise across LGIM to identify the challenges and opportunities that will determine the resiliency of sectors and the companies within them. The output from the platform strengthens and streamlines the firm’s engagement activities across investments and stewardship, to enable us to collectively set goals and targets at a company level with one voice, whilst supporting and guiding our investment decisions across the capital structure. While Sonja also does not have ESG in her title, as CIO, she oversees the integration and education of ESG throughout our investment philosophy, responsible investing approach, solutions and product strategy. Sonja reports to the CEO.

Sacha Sadan is a further example: as our director of investment stewardship he reports directly to CEO Michelle Scrimgeour, and his 16-strong Investment Stewardship team are concerned with the implications of ESG on how we hold companies and their boards to account. Meryam Omi, as LGIM’s Head of Sustainability and Responsible Investment Strategy, uses her extensive ESG expertise to drive change across the business and the financial industry.

Nick Stansbury, Head of Commodity Research, leads our energy transition approach and is one of our most prominent spokespeople on this. Collectively, the principles of ESG are embedded with our investment professionals and across the wider firm – our active ownership work is fully illustrative of responsible investing in LGIM’s framework.

When building the Investment Stewardship team, we have deliberately hired members with diverse experience and expertise across the spheres of investment stewardship and responsible investment. The result is a strong and cohesive set of professionals who possess complementary skills and experience including stewardship, fund management, responsible investment, financial analysis, corporate governance, ESG, sustainability, public policy and regulation. This ensures that from the outset the team is well-positioned to understand and keep abreast of the latest regulatory and industry developments.

The Investment Stewardship team provides objective oversight and guidance to our governance framework, and is allied to the wider investment approach. This includes our real assets business, which has made the most recent ESG appointment, Shuen Chan as the Head of ESG. While the Stewardship team is predominantly based in London, it has a global remit, and includes Aina Fukuda, ESG Manager in Japan and John Hoeppner, Head of US Stewardship & Sustainable Investments, in the US. Over 50% of LGIM’s company meetings are held with companies based outside the UK. The team is continuing to recruit in this area and will expand in both locations and appointments, this year.

In summary, at LGIM we have a long history of ESG integration. This informs everything that we do, from the core investment beliefs we uphold to the decisive action we take to address era-defining challenges, such as climate change. LGIM therefore considers that ESG is part of all roles across the business and investment teams – from investment commentary writers, energy transition, ESG client-facing teams in distribution to ESG investment strategists supporting our CIO.

• Number of people employed in stewardship team globally: 16 people
• Number of people employed with ESG specifically in their job title globally: 12 people
  •  4 Real Assets
  • 1 Head of Responsible Investment Integration
  • 2 dedicated Responsible Investment Analysts in Active Strategies.
  •  3 dedicated Climate Solutions specialists
  • 1 Head of Responsible Investment Strategy and 1 Head of Climate Solution – for investments in the CIO office
• Additional people working in dedicated ESG roles – a dedicated fund analyst etc. (ESG not in their job title): 80

Furthermore, a continuous educational process takes place amongst our investment professionals regarding the development of sustainability and governance changes. This process can involve attendance at seminars on key topics, sharing of research and information as well as engaging in investment dialogue. In addition, there is a continuous exchange of information between the Investment Stewardship team and investment teams, both formally and informally, which serves to further educate team members on the implications of ESG issues.

We recognise the importance of providing access to the latest ESG content and educational materials to all LGIM employees. To that extent in 2021 we have launched the LGIM ESG Academy. This is a web-based portal which will be an internal knowledge centre for sharing our ESG insights and industry best practice with all LGIM employees and the wider investment community to enable us to collectively meet global challenges.

LGIM’s ESG purpose is to ‘create a better future through responsible investing’. Our ESG Academy will help to develop a range of ESG capabilities relevant to the diverse roles across LGIM businesses.

Our aim is to provide ESG education so that every LGIM employee can understand how their job relates to and interacts with LGIM's ESG purpose and to explain ESG to either colleagues or clients in a very simple way.

Through the ESG Academy we will also provide thought leadership and education support to our clients to help them to understand and relate to the LGIM ESG purpose.

External research

We have obtained a large ESG raw data set from a wide range of data and analysis providers which can be used for voting, engagement and index/portfolio design, construction and management.

We typically buy raw data from such providers, as opposed to off-the-shelf ESG scores/rating, as we believe our knowledge and expertise of investing and engaging with companies are best placed to identify material and relevant ESG factors. This quantitative data is supplemented by qualitative research from academic and NGO research as well as sell-side broker reports. ESG data continues to evolve, with significant improvements made in the last three years, and we continue to monitor new data sets. Data input and scoring methodology is subject to a robust and formal review process by the Investment Stewardship team and overseen by the ESG Index Score Working Group which reports into the Index Solutions Governance Committee.

ESG data continues to evolve, with significant improvements made in the last three years and we continue to monitor new data sets.

Integration in investment processes

The integration of ESG considerations forms an essential part of our analysis of companies across our Index and Global Fixed Income teams, while providing a key tool for our Asset Allocation team.
By bringing together the three ESG pillars comprising of the LGIM ESG Score, the active ESG View and Engagement and Voting, we are able to make a comprehensive ESG evaluation.

It is important that as a group we collectively leverage the expertise from across the investment teams and Investment Stewardship in order to assess a company’s ESG risks, but also to enable us to identify investment opportunities.

ESG Score

Our Investment Stewardship and Index teams have developed a rules-based and transparent methodology by which to score companies against ESG metrics. This generates the LGIM ESG Score, which we use universally across the business. The LGIM ESG Score is the starting point for assessing ESG quality across all active funds and is also used to tilt our Future World Index funds.

Companies are scored on the basis of 28 ESG indicators. The indicators are based on the factors we believe to be most significant for long-term investors. We have only chosen indicators for which credible, quantifiable and consistent data are available across broad investment universes.

The score utilises inputs from four external data providers (Sustainalytics, Refinitiv (Formerly Thompson Reuters), HSBC and Trucost). ESG scores are generated for over 19,000 companies, between -1 and +1, which is then converted into a score out of 100 for reporting purposes, which are publically available. They are grouped under the following themes:

• Environmental – assessing the exposure of companies to climate change and the shift to a low-carbon economy; comprising carbon emissions, the level of carbon reserves and green revenues.
• Social – comprising of diversity (representation of women in company boards, executive, management and workforce); and human capital (policies to ensure companies have the right culture and treat workers fairly).
• Governance – a range of criteria that indicate ‘best practice’ in terms of investor rights, board diversity and high-quality audits.
• Disclosure – assessing the quality of company disclosures. These indicators give us insight into the quality of the ESG disclosure and the level of disclosure in relation to ESG-related data points.

The LGIM ESG Score aligns with how we engage with, and vote on, the companies in which we invest. To facilitate this process, we publish the scores and explain the metrics on which they are based. This enables companies to know exactly where they are doing well and where they need to improve.

Our approach also enables us to drive positive change within companies on the ESG factors we believe to be most significant for long-term investors, across a broad range of sectors, geographies and business activities.

By exerting pressure on all companies, through incentivising them to improve their scores, we can spur the market itself to raise ESG standards and best practice.

Active ESG View

Our active ESG View form an essential component of the overall active research process. They go one step further than the LGIM ESG score, incorporating additional granular quantitative and qualitative inputs and assessments in order to reflect a full picture of the ESG risks and opportunities embedded within each company.

The active ESG View involves the teams leveraging their sector expertise, in-depth knowledge of company dynamics and the corporate access we enjoy due to our scale. We believe that incorporating the View into analysis helps to shield our investors from risks and increases the probability of better long-term outcomes.

ESG risks vary across sectors and therefore the proprietary tool we have developed evaluates sector-specific ESG factors, spanning 64 specific sectors/sub-sectors.

The quantitative input into the View utilises the same external data providers as the LGIM ESG Score (Sustainalytics, Refinitiv [formerly Thomson Reuters], HSBC and Trucost) as well as data from Bloomberg, Reprisk, Maplecroft, MSCI and ISS, reported company data and proprietary LGIM analysis. The quantitative inputs include real time updates based on company newsflow and controversies, aiming to capture changes in ESG risk faster than most external data providers.

In practice, the data alone may not tell the full story, which is why we believe that incorporating a qualitative element is essential in order to fully capture the ESG risks embedded within each company. Our qualitative inputs capture ESG insights from LGIM's company analysis and engagements, – either on an individual data point or an overall risk factor – leveraging the extensive knowledge of our various research teams and our industry leading corporate access.
This is fed into the ESG tool and it is captured in our overall Active ESG View.

When we combine these considerations we are able to apply a quality status ranging from ‘very high quality’ through to ‘very low quality’ for each company.

In producing an ESG View we seek to provide an overview of how the company is managing potential, sector-specific ESG risks and opportunities, so that these can be considered alongside all other components of investment analysis.

The degree to which the ESG View drives bond and equity selection will depend on the fund design.

In addition, we are in the final stages of developing an ESG fund profile tool to allow clients to view exposures to important ESG criteria, including carbon intensity, green revenues, carbon reserves, gender diversity, ESG laggards and more. This tool leverages LGIM’s ESG scores and can be applied to listed debt and equity portfolios. It also provides the capability to compare a client’s ESG exposures to a specified/relevant benchmark.

Engagement and voting

As one of the largest asset managers and a leading responsible investor, we believe we can use our scale and influence to help ensure the companies in which we invest are delivering long-term sustainable value for our clients.

Our direct engagement with companies helps us identify ESG risks and opportunities. On-going dialogue with companies is a fundamental aspect of LGIM’s approach to responsible investment, representing one of the three pillars of our framework. Investment teams and the Investment Stewardship team regularly meet companies together, when appropriate. Importantly, outcomes from these engagements (including voting decisions undertaken by our Investment Stewardship team) are fed back into our Active View tool, enriching the data set for our active investment teams.

Engagements with companies take place at a number of levels: through the Investment Stewardship team, the investment teams, and joint meetings and engagements between the two teams (where appropriate and not conflicted).

Our industry-leading Investment Stewardship team helps to shape the business models of some of the world’s largest companies, encouraging them to raise their standards through regular contact. The team seeks to advance this agenda by voting at shareholder meetings, collaborating with other investors and working with policymakers.

The 17-strong team works closely with our investment teams, helping us to make more sustainable investment decisions. But it also operates independently of our fund managers, reporting directly to the LGIM board. This structure is designed to ensure that any potential investment conflicts of interest are minimised.

In addition to the meetings undertaken by our Investment Stewardship team, our credit and equity specialists hold over 2,000 meetings per year (where appropriate these meetings may be shared). Each meeting is an opportunity to collectively reinforce a consistent message to company management, with the goal to collaborate, build trust and long-term relationships to ultimately drive change. Where we have concerns over ESG factors we believe to be material to the business model of the investee company, these issues will be raised in meetings with management. If we believe that management do not have sufficient resource to address material ESG risks, then this will be factored in to our overall fundamental assessment of the issuer.

It is essential that company engagement follows a proactive approach. We draw upon the active ESG View for each company to shape and guide our active engagement with company management teams. Likewise, findings of our company engagement are fed into the ESG View. These are an important and iterative input into the qualitative ESG analysis, providing a forward looking perspective on the overall ESG View.

Affiliations and memberships

LGIM has been a signatory to the UN backed PRI since September 2010. We endorse the six PRI principles to incorporate and report on ESG activities.

2020, the UN PRI awarded LGIM an A+ score for our strategy and governance, the top rating in its evaluation of our responsible investment practices.

• We are members of multiple industry-wide associations and networks which promote and encourage strong ESG practices and responsible investing standards. Our involvement with organisations is summaried in list form below;
• International Corporate Governance Network (ICGN)- Member since 2011
• Institutional Investor Group on Climate Change (IIGCC)Member since 2011
• Aldersgate Group
• The United Nations Principles for Responsible Investment (PRI)
•  Council of Institutional Investors (CII) Member since 2011
• Asian Corporate Governance Association (AA) Member since 2012
• Investment Association (IA) Member since 2014
• Investor Forum Founder and member since 2015
• Taskforce on Climate-related Financial Disclosures (TCFD) Supporter since inception (2015)
• Climate Action 100+
• Climate Bonds Initiative
• CDP (formerly Carbon Disclosure Project)
• UNEP Finance Initiative
• Sustainability Accounting Standards Board (SASB)
• World Business Council for Sustainable Development (WBCSD)

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