LGIM adds sovereign risk to ESG framework for EM bond fund

L&G Future World ESG Emerging Markets Government Bond Local Currency Index will consider geopolitical stability

Legal & General Investment Management (LGIM) has introduced an Article 8 bond fund that offers a “sovereign risk ESG framework” to investors.

The L&G Future World ESG Emerging Markets Government Bond Local Currency Index fund will consider geopolitical stability in addition to more commonly used ESG criteria, with the hopes of incorporating factors such as a country’s income and additional standing to the traditional scoring of ESG.

In the following months, LGIM also plans to introduce the L&G Future World ESG Developed Markets Government Bond Index fund and the L&G Future World ESG Emerging Markets Government Bond (USD) Index fund.

All three funds will be classified as Article 8 under Sustainable Finance Disclosure Regulation.

The Local Currency Index fund is now available to UK investors, and will become available to the Netherlands, Germany and Sweden by the end of the year.

The fund integrates research from the World Bank, which found there to be an income bias for countries that affects its ESG rating. LGIM hopes to mitigate this imbalance through using a “wealth band” system, which allows for some exclusions for countries at lower income levels.

Lee Collins, LGIM’s head of the index fixed income desk, said: ‘’While ESG integration in equities and corporate bonds exposures is a well-trodden path, it’s fair to say that developments in the sovereign ESG sector have lagged behind.

“These new products will offer investors a deeper ESG integration in the asset class.”

The fund range will also use an “ESG score momentum factor”, which is designed to track whether countries are trending positively or negatively in terms of ESG ratings while incorporating income bias and other factors.

The score will use data from Verisk Maplecroft, a company which provides global risk and climate information to businesses and investors. LGIM said the fund’s scoring will also incorporate sustainable investment initiatives such as the United Nations Global Compact and the Climate Change Initiative.

James Lockhart Smith, VP of markets & ESG at Verisk Maplecroft, said: “We are delighted to be working with LGIM on their new Sovereign ESG Index funds.

“The scale of fast-evolving environmental risks, as well as persistent social and governance deficits, has increased the need for sovereign debt investment products that use ESG criteria in an impactful way. Verisk Maplecroft sees this relationship as critical to deepening ESG incorporation across government bond markets.”

This article first appeared on ESG Clarity’s sister title Portfolio Adviser.