Legal & General Investment Management (LGIM) has partnered with London-based index boutique Foxberry to launch the L&G Europe Equity (Responsible Exclusions) UCITS ETF on the London Stock Exchange.
Howie Li, Head of ETFs at LGIM.
The fund, which is linked to the Foxberry Sustainability Consensus Europe Total Return Index, aims to provide investors with a dynamic approach to environmental, social and governance (ESG) investing while maintaining broad market exposure to European developed market stocks.
Unlike the majority of ESG indices on the market which follow systematic rules-based methodologies, the Foxberry index deploys a committee-based approach to determine index constituents.
A committee of ESG investment experts screens an eligible universe of 600 of the largest stocks with sufficient liquidity (≥ €1m average daily traded volume) listed on developed market European stock exchanges (including Warsaw) to identify companies that pass a set of ESG exclusion guidelines. The guidelines take into account environmental, governance, sustainability, equality and ethical concerns, as well as adherence to UN sustainable development goals and business-practice norms.
The resultant companies are then weighted based on free-float market-capitalisation, subject to a constituent cap at point of rebalance of 20%, to create the index. The index is rebalanced quarterly and denominated in euros. Once in the index, LGIM engages with the boards of the companies to promote best practices and incentivise them to improve their sustainability ratings.
According to the fund’s sponsors, the aim of the committee-based approach is to increase ESG effectiveness by unlocking the sustainability expertise among the asset owner community and create a consensus which is able to develop in line with changing markets. This approach, the sponsors argue, facilitates a dynamic investment process that can respond to new and evolving sustainability considerations and be able to have an impact where the data from sustainability research providers falls short.
The all-important committee – effectively the fund’s stock pickers – is composed of five individuals. They are Tomas Franzén, a senior adviser to Foxberry and a former chief investment strategist of Swedish national pension fund AP2; Gustaf Hagerud, a former deputy CEO of AP3, AP2’s sister fund; Vesa Syrjäläinen, a responsible investment analyst at Helsinki-headquartered pensions insurer Varma, which has seeded the fund; Caroline Ramscar, head of sustainable solutions at LGIM; and David Sahlin, a former investment solutions sales chief at investment bank Nomura and now chairman and director of Foxberry.
The index has 561 constituents, suggesting that around 39 companies have been excluded by the committee. A comparison of the index with the Stoxx Europe 600, a broadly comparable universe, points to the absentees; among the most prominent exclusions are ESG bêtes noires pharmaceuticals giant Novartis, oil majors Total, BP and Shell, aerospace and defence company Airbus, and tobacco manufacturer British American Tobacco.
The fund comes with a total expense ratio of 0.16%, uses full physical replication with direct exposure to underlying index constituents, and is available to trade in pound sterling (RIEG LN) and euros (RIEU LN).
It has debuted with a hefty investment of €200m from Varma. The insurer, which oversees around €44 billion in investments in total, is an acknowledged patron of ESG causes, having ceased investing in tobacco companies, nuclear and controversial weapons manufacturers, and firms that rely on coal operations for more than 30% of their net sales, as far back as 2004. Varma went a step further earlier this year, overhauling its sustainability policies and adopting recommendations from the Taskforce for Climate-related Financial Disclosures that companies it is invested in publicly disclose what they are doing to combat climate change.
Timo Sallinen, Head of Listed Securities at Varma, commented: “Our investment in this ETF reflects our strong belief that a dynamic exclusion approach is required. We also believe that a collective approach is required for responsible investing and we are excited to be part of this initiative in bringing consensus to investment exclusions. We recognise that ESG considerations are important for many investors but there are also investors that are under-resourced to meaningfully research individual companies for exclusion. Through the Sustainability Committee, prospective investors have a forum to maintain a dialogue with its members and build consensus behind the fund’s responsible investment decisions. Sustainability is an integral part of Varma’s investment operations and philosophy, so we are excited to see how this unique partnership with LGIM and Foxberry develops.”
Howie Li, Head of ETFs at LGIM, added, “We have frequently heard from clients that, with an increasing focus towards responsible investing, there needs to be a source of consensus on where capital should be allocated, but also where it shouldn’t be. In terms of exclusions, we’ve seen a variety of different exclusion lists that have been embedded into investment strategies over the years but they are often static or constrained only to certain industries that captured the perspective at a single point in time. Investor expectations and awareness of new issues are constantly evolving and this has highlighted a need for integrating a dynamic investor and expert-led approach to help navigate through the changing landscape. By bringing experts together to collectively evaluate companies, their actions and behaviours on an on-going basis, this ETF is designed to provide the investment community with a dynamic and transparent exclusion approach for their market cap index investment but also provides them with the ability to provide suggestions and contribute to the committee’s thought leadership.”