Legal & General Investment Management (LGIM), one of Europe’s largest asset managers, announced the launch of the L&G Future World ESG Emerging Markets Government Bond Local Currency Index Fund, the first in a series of new funds aimed at providing investors with exposure to an enhanced sovereign ESG framework, and the integration of ESG across sovereign debt.

Additional funds to be launched in the series will include a developed market government bond index fund, and a USD denominated emerging markets government bond fund.

According to LGIM, in addition to a range of ESG factors, the funds will also incorporate “Geopolitical stability/risk” as a new proprietary fourth ESG pillar, focused on identifying risks beyond headline sustainability metrics, which the company said provides a more comprehensive risk assessment of investing in government debt.

Citing World Bank research revealing an ingrained income bias in sovereign ESG scores, which results in money flowing primarily to more developed countries and away from developing nations that need the investment, LGIM said that the new framework seeks to eliminate this bias by facilitating a higher allocation of capital to nations that require debt issuance to advance their economies, and rewarding countries that are on a path to improving their ESG credentials while penalizing those that are trending negatively.

LGIM added that it has implemented ‘wealth bands’ into their Index Fixed Income Sovereign Risk ESG Future World fund range, applying tiered thresholds for exclusions based on different levels of country income. The company said this will provide investors with exposure to sovereign debt with deeper ESG integration, factoring in forward-looking sovereign risk factors and adjusting for wealth bias.

LGIM also said that the new fund range will incorporate a “sovereign ESG score momentum factor” that rewards countries trending positively on ESG factors, and penalizes countries trending down, amplifying risk signals key to future growth within sovereign ESG. 

Lee Collins, LGIM’s Head of the Index Fixed Income Desk said:

”Whilst 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. We believe that with several unique features, these new products will offer investors a deeper ESG integration in the asset class.”

The company said that the new fund will use sovereign risk ESG data powered by Verisk Maplecroft, and leverage JP Morgan’s fixed income benchmark methodologies.

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.”

Shaku Pithavadian, Managing Director, Deputy Head of Global Index Research at JP Morgan, added:

“We have leveraged our best-in-class fixed income benchmark methodologies and new means of index construction to enhance customized product design for our clients. We are pleased to work with LGIM to integrate their bespoke Sovereign ESG framework in a scalable index solution.”

The funds have been categorized as Article 8 under the Sustainable Finance Disclosure Regulation.