Legal & General Investment Management (LGIM) has partnered with London based index provider Foxberry to launch the L&G Europe Equity (Responsible Exclusions) UCITS ETF (exchange traded fund) for investors seeking a dynamic approach to responsible investing while maintaining broad market exposure.
The new ETF and the Foxberry Sustainability Consensus Europe Total Return Index (the “Sustainability Consensus Index”) launched today, has raised €200m from Varma, a leading Finnish pensions insurer that has recently been recognised by the UN-supported, Principles for Responsible Investment (PRI) for work in the sector. With a TER of 0.16%, the ETF is competitively priced and is listed on the London Stock Exchange. The fund uses full physical replication to offer investors direct exposure to its underlying assets.
The Index uses the combined expertise of a sustainability advisory committee to help construct the portfolio. The committee’s recommendations for exclusion are implemented systematically with a rules-based methodology. With experts from a diverse range of fields, the committee currently includes luminaries with significant Environmental, Social and Governance (ESG) experience including Tomas Franzen and Gustaf Hagerud who were both instrumental in establishing the responsible investing frameworks of Swedish pension funds AP2 and AP3. They provide insight into corporate responsibility and ESG investing and draws on the expertise of major asset owners, such as institutional pension funds. Researching market developments, the committee monitors companies to identify those engaged in irresponsible behaviour across traditional industry classifications.
Companies are actively assessed against a range of criteria and this dynamic investment approach minimises exposure to companies that are likely to face longer-term challenges from for example, more stringent regulation, consumer boycotts or environmental hazards. Guided by the committee, the fund will exclude companies that become less responsible. It will also account for those companies that become more responsible, which may otherwise be missed by static or sector-based exclusion. To encourage and build on consensus in the investment community, the committee will take a collaborative approach that allows investors and interested parties the chance to review summary findings and contribute insights and suggestions to the process.
As a responsible asset owner, LGIM also engages with the boards of the companies in which the ETF does hold shares to promote best practices. This active engagement in corporate governance can help specifically target any companies that may be flagged by the committee’s ‘watch list’ of companies at risk of exclusion.
Howie Li, Head of ETFs at LGIM, says: “We have frequently heard from clients that, with an increasing focus towards responsible investing, there needs to be a source of consensus on where capital should be allocated, but also where it shouldn’t be. In terms of exclusions, we’ve seen a variety of different exclusion lists that have been embedded into investment strategies over the years but they are often static or constrained only to certain industries that captured the perspective at a single point in time. Investor expectations and awareness of new issues are constantly evolving and this has highlighted a need for integrating a dynamic investor and expert-led approach to help navigate through the changing landscape. By bringing experts together to collectively evaluate companies, their actions and behaviours on an on-going basis, this ETF is designed to provide the investment community with a dynamic and transparent exclusion approach for their market cap index investment but also provides them with the ability to provide suggestions and contribute to the committee’s thought leadership.”
Timo Sallinen, Head of Listed Securities at Varma, says: “Our investment in this ETF reflects our strong belief that a dynamic exclusion approach is required. We also believe that a collective approach is required for responsible investing and we are excited to be part of this initiative in bringing consensus to investment exclusions. We recognise that ESG considerations are important for many investors but there are also investors that are under-resourced to meaningfully research individual companies for exclusion. Through the Sustainability Committee, prospective investors have a forum to maintain a dialogue with its members and build consensus behind the fund’s responsible investment decisions. Sustainability is an integral part of Varma’s investment operations and philosophy, so we are excited to see how this unique partnership with LGIM and Foxberry develops.”