Legal & General Investment Management (LGIM), one of Europe’s largest asset managers, has announced the launch of the L&G Future World ESG Emerging Markets Government Bond Local Currency Index Fund, the first in a series of new funds aimed at providing investor exposure provide an improved ESG framework for government bonds, and the integration of ESG into government debt.
Additional funds launching in the series include a developed markets government bond index fund and a USD-denominated emerging markets government bond fund.
According to LGIM, in addition to a range of ESG factors, the funds will also integrate ‘Geopolitical Stability/Risk’ as a new proprietary fourth ESG pillar, aimed at identifying risks beyond key sustainability metrics, which the company says provide a more comprehensive pose a risk. assessment of investments in public debt.
Citing World Bank research showing that there is a deep-seated income bias in the ESG scores of government bonds, which is leading to money flowing mainly towards the more developed countries and away from the developing countries that need the investments, LGIM said that the new framework aims to remove these prejudices by making a higher allocation possible. of capital to countries that need debt issuance to advance their economies, and rewarding countries that are on track to improve their ESG credentials, while penalizing countries that are trending negatively.
LGIM added that it has implemented ‘asset ranges’ across their Index Fixed Income Sovereign Risk ESG Future World fund range, applying tiered exclusion thresholds based on different levels of country income. The company said this will provide investors with exposure to government bonds with deeper ESG integration, taking into account forward-looking government bond risk factors and adjusting for wealth biases.
LGIM also said the new fund range will include a ‘sovereign ESG score momentum factor’ that rewards countries showing a positive trend in ESG factors, and penalizes those showing a downward trend, reinforcing the risk signals that come from are crucial for future growth within the ESG countries.
Lee Collins, Head of the Index Fixed Income Desk at LGIM, said:
“Although ESG integration in equity and corporate bonds is a well-trodden path, we can rightly say that developments in the ESG sovereign sector have lagged behind. We believe that these new products, with several unique features, will provide investors with deeper ESG integration into the asset class.”
The company said the new fund will leverage ESG sovereign risk data powered by Verisk Maplecroft and leverage JP Morgan’s fixed income benchmark methodologies.
James Lockhart Smith, VP Markets & ESG at Verisk Maplecroft, said:
“We are excited to be working with LGIM on their new Sovereign ESG Index funds. The scale of rapidly evolving environmental risks and persistent social and governance deficits have increased the need for government bond investment products that use ESG criteria in an impactful way.”
Shaku Pithavadian, Managing Director and Deputy Head of Global Index Research at JP Morgan, added:
“We leveraged our best fixed income benchmark methodologies and new ways of constructing indices to enhance custom product design for our clients. We are pleased to work with LGIM to integrate their custom Sovereign ESG framework into a scalable index solution.”
The funds are categorized as Article 8 under the Sustainable Finance Disclosure Regulation.