Speaking to Investment Week, LGIM's Head of Sustainability and Responsible Investing Strategy, Meryam Omi, says investors are increasingly realising the need to address the long-term financial risks and opportunities associated with climate change.
Omi and the group's Head of Unit Trust Relationships, Nancy Kilpatrick, met this investor need in 2016 by launching the LGIM Future World Fund, together with a major UK pension scheme. The fund is an index-based strategy which maintains broad sector exposures.
Kilpatrick says: "We've seen a move towards solutions-oriented portfolio construction and the broader trend in the market is about being smarter in how we as investment professionals target outcomes for our clients. We see examples of this with the arrival of value indices and smart beta-type, in other words, ‘factor-based' strategies."
The climate ‘tilt'
The Future World Fund incorporates a climate ‘tilt', which gives investors greater exposure to companies that are more likely to benefit from the transition to a low-carbon economy. There are three elements within the tilt, all of which are quite distinctive. Firstly, the tilt works by reducing exposure to companies with worse than average carbon emissions and fossil fuel assets, and increasing exposure to companies that are generating revenue from the green transition. It is all done without significantly changing the performance profile of the fund.
Omi says: "The second element is that we engage with companies in a way that has a real consequence. We say to the companies: ‘This is the transition that is happening, we want you to be a part of it, and we want you to be successful. But if not, there is an investment decision to be made.' The fund allows a small capacity to divest from companies to hold them to account.
"And the third element is that we engage with the end-investors and tell them how their money or helping to finance the world and the future we will have. And what we are doing to enhance their returns and to the society at large."
Click here to read more about LGIM's Future World Fund