L&G's new ETF combines the power of automation with a human touch

By Allan Lane, Algo-Chain – During the past weeks we’ve seen the world's largest demonstration demanding urgent action to tackle climate change, so don't be surprised that another ETF with an ESG badge has landed on our doormat.

In this case, Legal & General Investment Management is the latest ETF provider to enter the impact investing arena having previously made a name for themselves with their well thought out suite of investment themes, covering such areas as Robotics & Automation, Cyber Security and Battery Technology to name a few. At first blush, it wasn't at all obvious how this launch was on message with their brand of innovative investment solutions, but how wrong of me to think that.

The L&G Europe Equity (Responsible Exclusions) UCITS ETF, listed on the London Stock Exchange with ticker RIEU, comes with an annual management fee of 0.15 per cent and aims to track the Foxberry Sustainability Consensus Europe Index, which in essence offers exposure to the largest 600 European stocks, minus those that don't meet Foxberry’s ESG selection criteria. All conceptually very straight forward, but only on doing a double take did I realise that the business strategy that Howie Li's team at L&G has taken, is itself very innovative and will almost certainly be copied by their competitors in the years ahead.

With so much happening in the ESG space, choosing an index from which to benchmark one's investment is proving to be one of the main challenges, so much so that index firms and investors alike are finding the increasing array of variations difficult to keep up with. Foxberry's approach is exclusion centric, with tobacco and controversial and/or inhumane weapons out; firms with coal involvement out; companies with material stranded assets out; stocks with the highest CO2 emission intensity in the underlying investment universe out; and any companies on a sustainability blacklist are out as well.

L&G clearly decided to deal with the index selection topic by taking a leaf out of the AI & Machine Learning playbook which says that the best system is one that combines the power of automation with the agility that the human mind can bring to the table. In this case one starts with a rules-based stock selection process which is then augmented with the oversight of real ‘thinking’ people in the form of Foxberry’s selection committee, comprising a small group of subject matter specialists.

On studying their literature, it is quite clear that Foxberry’s modus operandi is to screen out those specific stocks that have been the bad boys of the industry, such as Aggreko, Heidelberg Cement, G4S, Novartis and Volkswagen, among others. What is a little bit surprising is how hard it was to see what stocks were actually in the portfolio, on either of LGIM’s or Foxberry’s website.  Obviously, this didn’t hold back the investment from Varma Mutual Pension Insurance Company, which has seeded the fund with an initial investment of EUR200 million. Now is not the time for the pension fund industry to be sitting on their hands, so I suspect this case study provides a blueprint that many other pension funds will follow.  

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