Integration into the fixed income strategies is both bottom up; through LGIM's proprietary scoring tool, dialogue between ESG specialists and the fixed income teams, and top down; through CIO led initiatives to develop the integration agenda and 'deep dives' into specific thematic issues.
Active dialogue with companies allows LGIM to learn more about the company's strategy, finances, risks and opportunities. By engaging with companies, we may be able to influence outcomes to better protect and enhance our clients investments.
Additionally, active engagement with governments and government representatives is an important part of understanding key risks and opportunities, and to encourage greater transparency and processes.
Active engagement activities are shared across the ESG and fixed income desks with open invites, except in cases where sensitive information is discussed. This allows this relevant information to be integrated into the investment processes.
Our Corporate Governance team might also on occasion engage specifically on behalf of our fixed income team, on specific sector issues.
Integration: Sovereign Specific
- Integration of ESG into SSA is done at a top-down and bottom up level.
- At the top-down level, allocation to regions and countries is based on the evaluation of economic, governance and socio-political risks by our in-house economists, credit strategists, credit analysts and portfolio managers. Country-specific ESG criteria captures the performance of previous and current governments and address the transparency, fairness and consistency of the political, legal and administrative framework. Major political parties' prevailing attitudes with respect to ESG issues, including corruption and the respect for private investors' property rights, are taken into account. We monitor the role that technology is playing in adjusting political and societal processes, and its subsequent impact to the governance environment. Exposure and resilience of the economy to environmental phenomenon, e.g. El Nino/La Nina are considered.
- For bottom-up, our analysts covering investment grade sovereign related and sub-sovereign issuers conduct a desktop review of the governance framework applicable to the issuer, its compliance historically with these frameworks and the political risks inherent in the governance framework. The analysts also review the S&E disclosure of the issuer, including a consideration of its social/environmental mandate where applicable, since many government related entities have specific mandates to invest in local development. This assessment is largely qualitative, informed by the economic and political backdrop in the relevant country/countries, and perceived willingness and ability of the issuer to adhere to its stated policies
- Examples of how these considerations pass through into the Investment Grade team decision-making process: our assessment of Temasek, where the closer relationship between the entity and government has prompted us to re-evaluate the governance assessment and view it as less of an arm's length entity; and NWB - where we are trying to understand the environmental impact of its lending policies and those of its customers, the domestic water boards, in order to determine how critical its function is to the economy and therefore how long dated we want our exposure to be.
- The Emerging Market sovereign team also draws on a proprietary ESG-linked scoring tool in assessment of country-credit risk. The tool incorporates assessment of multiple ESG-related factors, e.g. country education levels, internet access, corruption indices, income inequality.
- Examples of how ESG considerations pass through into the emerging markets investment team decision-making process: 1) a structural underweight position in Mozambique that defaulted on its debt in 2016 and has still failed to reach an agreement with investors, 2) a cautious positioning re:Turkish credit, given political and geopolitical concerns, 3) a return to an overweight position in South African external bonds as it became clear positive government change was upcoming (this included pre-empting ratings stabilisation action), and 4) tactical increase in exposure to Angolan sovereign debt in anticipation of government reforms to tackle corruption and economic disparities
In addition, our ESG thematic working groups provide the opportunity to link ESG themes to corporate and sovereign credit analysis. Analysts and PMs from across asset classes and investment strategies sit on the working groups, and outputs are shared across the business through our Thought Leadership webpages and internal updates.
Within segregated mandates, screens are agreed with clients and implemented accordingly.
Within LGIM's Future World Fund the following positive and negative screening takes place: screening out controversial weapons; excluding pure play coal miners; reducing exposure to carbon reserves and carbon emissions; increasing exposure to green revenues. We are in the process of expanding the range of funds under the Future World umbrella.
LGIM's Controversial Weapons Policy excludes companies involved in the production of weapons prohibited under international treaties and applies to all active fixed income funds. This policy is being rolled out to all active equity and fixed income funds over the course of 2018, and will be applied to all funds under the Future World umbrella.
Where requested by clients, we are able to screen companies for violation of UN Global Compact principles. In addition, we are exploring options for exclusions in Future World Fund range based on UN Global Compact violators
LGIM manages a Buy and Maintain fixed income mandate with a combined thematic tilt with an ESG overlay. The fund is underweight companies with a high contribution to carbon intensity and has divested from certain sectors, including coal. Prior to investment into the fund, the portfolio manager requests an ESG analysis to be conducted by an internal ESG specialist. The analysis will be incorporated by the portfolio manager in their analysis. Auditable records are maintained of the ESG analysis, correspondence between the ESG team and portfolio manager, and the final investment decision.
The Future World multi-factor equity fund was launched in November 2016 – more detail on this can be found in the equity integration module. However, we want to highlight that over the course of the next 12 months we intend to launch a number of Future World funds which will invest across a broad range of strategies and asset classes, including fixed income, with a global reach. They will each have their own explicit ESG objective.