Investment strategies focus on ESG screened stocks able to generate sustainable income
15 Jun 2021
Legal & General Investment Management (LGIM) has today announced the listing of the L&G Quality Equity Dividends ESG Exclusions Europe ex-UK UCITS ETF and L&G Quality Equity Dividends ESG Exclusions Asia Pacific ex-Japan UCITS ETF on Deutsche Börse and Borsa Italiana. Both ETFs were listed on London Stock Exchange (LSE) in April. Additionally, the firm is listing the L&G Quality Equity Dividends ESG Exclusions Emerging Markets UCITS ETF on the London Stock Exchange (LSE) today. The ETFs are designed for investors seeking equity income with quality screens and responsible exclusions.
The ETFs track FTSE Russell indices and follow proactively designed index investment strategies, which have been tailored for investors by LGIM and FTSE Russell. These indices rely on the quality of the underlying companies, looking for those with strong dividend characteristics while excluding those facing significant ESG risks. The funds are categorised as article eight under the EU’s Sustainable Finance Disclosure Regulation (SFDR).
The ETFs have been designed to meet two main objectives for investors. On the one hand, with mainstream bond yields at or near all-time lows, the search for income remains a great challenge. On the other, capital preservation also remains a central requirement for investors. The increasing pressure on companies being able to provide investors with sustainable dividends has impacted their capital, and these funds therefore seek consistent dividend payers. They also apply a quality screen to help investors avoid value traps by excluding companies that do not have positive return on equity or robust balance sheets.
The ETFs’ methodology applies a set of three systematic screens for dividends, quality and ESG exclusions. The purpose of the quality screen is to help identify and remove stocks with a fundamentally poor balance sheet and/or income statement characteristics. A quality score is calculated by FTSE as a geometric average of three underlying metrics: company earnings, assessing profitability and cash components; asset growth; and leverage metrics.
The dividend screen aims to maximise exposure to a basket of stocks which have a track record of consistent and rising shareholder distributions and the potential to sustain them into the future. This means identifying companies paying consistent and resilient dividends based on their positive return on equity, a demonstrably positive trend in the dividends distributed per share and a higher consensus forecast on dividend yields.
The purpose of our ESG screen is to exclude companies we believe are exposed to material financial risks based on their business models or operations, applying a number of FTSE exclusion lists to the underlying stocks in the portfolios such as those in breach of the UN Global Compact, involved in manufacturing controversial weapons, and thermal-coal miners and power producers. In addition to exclusions, LGIM applies an active ownership approach with constituent companies, engaging with them on ESG concerns through LGIM’s award-winning Investment Stewardship team, which seeks to raise ESG standards in all holdings.
LGIM sought to work with an index partner in FTSE Russell that covers 98% of the investable market, offering a true picture of global markets and specialist knowledge in developing local benchmarks around the world. Its index design and management are backed up by transparent rules-based methodology and informed by independent committees of leading market participants.
These two funds are part of the LGIM’s existing suite of 44 core and thematic ETFs across different asset classes, 36 of which are available on the German, Italian and/or Swiss stock exchanges. LGIM has been one of the fastest growing ETF issuers in Europe, with its innovative range of thematic ETF strategies and new ESG fixed income strategies helping to deliver an 8th position for European net flows in the first of half of 20211.
Howie Li, Head of ETFs at LGIM: "We apply a rigorous series of quantitative screens to select stocks based on their quality metrics and dividend characteristics as well as exclude companies based on certain ESG considerations. We look to identify those companies that can sustain a consistent dividend and thus believe that this fund range is a powerful proposition for investors seeking to address their search for quality income."
Honor Solomon, Head of Retail, EMEA, Legal & General Investment Management (LGIM): "We are continuing to expand our ETF offering for European investors and we are pleased to make these Quality Equity Dividend ETFs available to German and Italian clients. We believe that in giving investors exposure to a range of quality companies, with strong dividend characteristics and avoiding material ESG risks, we are well positioned to help them generate consistent income in their portfolios."
Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with over £1.2 trillion in total assets under management* of which 39% is international. We have a unique and highly synergistic business model, which continues to drive strong returns. Legal & General provides powerful asset origination and management capabilities directly to clients, which also underpin our leading retirement and protection solutions. We are a leading international player in Pension Risk Transfer, in UK and US life insurance, and in UK workplace pensions and retirement income. Our purpose is to improve the lives of our customers and create value for our shareholders. Through inclusive capitalism, we are investing in long-term assets, such as real estate and infrastructure, that can help build a better society for the future.
*as at HY 2023
Legal & General Investment Management
LGIM is one of Europe’s largest asset managers and a major global investor, with total assets under management of £1.16 trillion1 ($1.47tn, €1.35tn, CHF 1.31tn). We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.
For more than 50 years, we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property, and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.
1 Data as at 30 June 2023. Data combines assets under management by LGIM in the UK, LGIMA in the US and LGIM Asia in Hong Kong.
Assets under management include securities and derivatives positions
*as at HY 2023