Legal and General IM 

Product Adviser: LGIM's climate change-focused fund

Legal & General Investment Management (LGIM) has launched its Future World Fund strategy for UK retail investors.

The L&G Future World Equity Factors Index Fund is managed by LGIM’s index team, which currently manages more than £300bn in assets. The company said the strategy would help address climate change risks in equity investing.

The fund aims to provide both capital and income growth and tracks the FTSE All-World ex CW Climate Balanced Factor Index.

The index has a built in climate tilt, which reduces exposure to companies with worse-than-average carbon emissions and exposure to fossil fuels. It also increases exposure to companies that generate revenue from low-carbon assets.

Additionally, it targets better risk-adjusted equity returns than a traditional index strategy by including investment factors. These include characteristics of assets that help explain their risk and return, being value, low volatility, quality and size.

The fund incorporates LGIM’s climate impact pledge, in which it 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.

The product mirrors the Future World Fund launched in November 2016 for institutional investors.

Provider view

Honor Solomon, head of retail at LGIM, said: “We have created the fund to respond to our clients’ concerns about the risks associated with climate change and the demand we have seen from retail investors for funds which incorporate environmental, social and governance (ESG) considerations.

“The fund retains the transparency and cost effective characteristics of a conventional index fund, but also gives investors greater exposure to companies that are likely to benefit from the transition to a low-carbon economy. We strongly believe that companies who behave more responsibly with respect to climate make better investments in the medium to long term.”

Adviser view

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “It looks like a fairly niche product to me, combining smart beta factors with a sustainability overlay. The index is not well known and so investors need to do their research to make sure they are happy with its construction.

“Apart from weapons manufacturers, the fund doesn’t exclude any other sectors, simply increasing or decreasing exposure based on their green credentials.”

Fees/charges

Ongoing charges figure of  0.3 per cent.

Verdict

This type of strategy is also in vogue, but generally those seeking climate-sensitive strategies have had to go down the active route, usually paying active fees. The combination of smart beta factors with an additional climate overlay could either be interesting for advisers, or off-putting, as is the Marmite nature of such products. However, an additional concern could be its lack of exclusion. The index itself only tilts away rather than excludes polluting stocks, which might not meet the criteria of some climate-sensitive investors. At 0.3 per cent, it is an expensive passive product, but does aim to provide more.

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