LGIM launches multi-factor fund that also addresses climate change risk; HSBC bank UK pension scheme first to adopt

Legal & General Investment Management (LGIM) has launched the Future World Fund, a multi-factor global equities index fund that incorporates a climate ‘tilt’ to address the investment risks associated with climate change.

HSBC Bank UK Pension Scheme, one of the largest corporate pension funds in the UK, has selected the fund for its equity default option, worth £1.85 billion, in its DC scheme. In doing so, it becomes one of the first schemes to adopt a multi-factor investment strategy incorporating a degree of climate change protection as its default fund. Legal & General will also be investing its own capital in the fund.

The Fund, which tracks the FTSE All-World ex CW Climate Balanced Factor Index¹, targets better long-term risk-adjusted equity returns than a traditional index strategy. It weights constituents according to certain ‘factors’ or attributes, rather than according to their size as with a conventional index. It also incorporates a ‘climate tilt’ to reduce exposure to companies with worse-than-average carbon emissions and fossil fuel assets, and increases exposure to companies that generate revenue from low-carbon opportunities.

Mark Zinkula, Chief Executive Officer at LGIM (photo), commented, “The Future World Fund retains some of the transparency and low-cost characteristics of a conventional index fund, but also provides the opportunity to enhance investment returns by incorporating these factor tilts. Climate change related policies and new technologies will play an important role in shaping our future and the companies that are able to adapt should be well-placed to deliver returns. Pension fund trustees need to ensure they are able to offer better risk-adjusted returns while helping to manage climate change risk.”

Mark Thompson, Chief Investment Officer at HSBC Bank UK Pension Scheme, says, “We believe this fund will offer our members a better risk-adjusted return, incorporate greater climate change protection and deliver improved company engagement. This is a mainstream fund, the new normal.”

Philip Hammond, Chancellor of the Exchequer, says, “Three of Britain’s biggest companies have come together for the launch of this ground-breaking new fund, which is a testament to our status as the world’s leading financial centre. Our ability to continually innovate means we are well positioned to benefit from the opportunities a growing green finance industry presents.”

Mark Makepeace, CEO of FTSE Russell, says, “FTSE Russell has a strong and long track record in the development of innovative ESG benchmarking tools and we are delighted that LGIM alongside HSBC have selected FTSE Russell as their index partner for this ground breaking new index and fund.”

LGIM gets tough on engagement with climate impact pledge

Climate change has risen to the top of political, regulatory, and business agendas following the landmark Paris Agreement from the UN Climate Change Conference in 2015. The agreement, which came into force on 4 November 2016, is the first-ever universal, legally binding global climate deal and ensures carbon-reduction remains a top priority for governments and regulators in the years to come.

The Fund incorporates LGIM’s Climate Impact Pledge, in which LGIM commits to engage with the world’s largest companies that will need to adapt their business models and drive innovation in order to meet global climate change goals.

LGIM has identified the largest companies in six key sectors that it believes are pivotal to shift the market to a low carbon economy². The Fund will divest from companies that fail to meet LGIM’s minimum criteria after an engagement period. LGIM believes this approach to engagement is a powerful tool to raise better corporate standards across the market and, in doing so, is stepping up its responsibility to help build a low carbon future to protect clients’ assets.

The increased attention on climate change has also influenced the attitudes of ordinary investors, according to a survey of pension scheme members by LGIM. The survey found that 81% of members voiced support for their corporate pension scheme to be invested in responsible companies, while an overwhelming majority (95%) said fund managers should be more active in helping to guide companies to be more responsible.

A large majority (86%) of respondents agree that managers should not jeopardise returns based on Environmental and Social Governance (ESG) considerations. The finding highlights the need to communicate to scheme members that ESG investment approaches have the potential to improve returns, rather than detract. 

Other key research findings

• A large majority (95%) of scheme members would also like their employer to provide more communication on their scheme’s philosophy, actions, where their money is invested, and the impact it is having. Only half currently believe they receive ample communication.
• After assessing what choices are important and whether they’ve been given options, 72% consider they’d be likely to move or recommend to their employer moving to a responsible investing pension.
• 84% would prefer a pension that uses investments to encourage companies to be more responsible.
• 83% believe pension fund managers can influence companies by holding stock in the company.
• 80% would think more positively towards an employer that offers a pension investment that is aligned to the needs of their future.
• When deciding amongst different pension options, 76% would opt for the one that is a more responsible investor.

Research methodology

The survey was conducted between 25^th and 26^th October 2016. There were 1,681 UK respondents; 1,076 were a member of either a DC or a DB pension scheme.

¹ The FTSE All-World ex CW Climate Balanced Factor Index balances exposure to four key investment ‘factors’ (quality, low volatility, size and value) that can add value over the long term. A further weighting is applied to address the investment risks associated with climate change. The index has a higher exposure to companies that generate a proportion of their profits from ‘green’ revenue streams while avoiding companies that are not positioned for the future low-emission economy. The Fund excludes companies involved in the production of weapons prohibited under international treaties, such as cluster munitions and anti-personnel landmines.

² The sectors are oil and gas, mining, utilities, automobiles, financials (banks and insurance companies) and food retailers /producers.