Legal & General Investment Management has bolstered its range of sustainable fixed income ETFs with the launch of a green bond fund.
Howie Li, Head of ETFs at LGIM.
The L&G ESG Green Bond UCITS ETF is available to trade in pound sterling on London Stock Exchange (GBNG LN) and in euros on LSE (GBND LN), Deutsche Börse (GBNB GY), and Borsa Italiana (GBNG IM).
It comes with an expense ratio of 0.25%.
Similar to LGIM’s other fixed income ETFs, the fund is linked to an index developed in partnership with JP Morgan.
The JP Morgan ESG Green Bond Focus Index consists of green bonds issued by government, quasi-sovereign, corporate, or supranational issuers from developed and emerging markets.
The index includes bonds denominated in US dollars, euros, and pound sterling, as well as local currency government bonds that satisfy liquidity and accessibility metrics. Eligible bonds must have a remaining time to maturity greater than one year and a minimum amount outstanding of $300 million, €300m, or £250m.
Bonds must be classified ‘green’ by the Climate Bonds Initiative, a not-for-profit organization working to promote the use of bond markets to tackle climate change. Green bonds are defined as debt instruments in which the proceeds are applied exclusively towards new and existing projects that promote climate or other environmental sustainability purposes.
Green bond issuers that earn revenue from tobacco or weapons or do not adhere to UN Global Compact principles are excluded from the index.
Constituents are weighted using a modified market value approach that increases the weight of issuers with higher ESG scores based on insights from Sustainalytics and RepRisk. Exposure to any single issuer is capped at 10%.
Similar to the indices underlying LGIM’s other fixed income ETFs, the index aims to structure the portfolio in such a way as to create value and address liquidity considerations.
This includes leveraging LGIM’s liquidity-aware approach which uses an optimization process to further enhance portfolio liquidity without sacrificing potential performance. Additionally, the index enhances cash efficiency by reinvesting coupons immediately rather than waiting until the end of the month as is commonly done in traditional bond benchmarks.
Howie Li, Head of ETFs at LGIM, said: “As with the rest of the range, we have designed these new ETFs to be portfolio building blocks that answer to investors’ increasing call for ESG integration and liquidity considerations. Through the active design of these indices, the expansion of this range continues to draw on LGIM’s deep experience in bond management and responsible investing. As questions mount on how “green” some bond issues in the market may be, the incorporation of the Climate Bonds Initiatives certification process into the design means that we can direct more of an investor’s money towards green projects that have been independently verified.”
James Crossley, Head of UK Retail Sales at LGIM, added: “We are excited to build out our ETF suite which encompasses a diverse range of nearly 40 core and thematic products for retail and wholesale investors in the UK. It was important that we could incorporate some of our pragmatic portfolio management techniques into the index design itself, allocating to green bonds and issuers with the highest ESG scores while retaining a similar risk/return profile to traditional indices.”
Several other issuers in Europe offer green bond ETFs including Lyxor, Franklin Templeton, and UniCredit. The largest is Lyxor’s €580m Lyxor Green Bond (DR) UCITS ETF (CLIM LN) which tracks the Solactive Green Bond EUR USD IG Index.
LGIM now offers seven ESG-focused fixed income ETFs. Other funds in the suite target US dollar, pound sterling, and emerging market corporate bonds, emerging market government bonds, and Chinese bonds.