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Blog Posts — November 3, 2022

LGIM switches to iSTOXX World Min Vol ESG index for pension fund mandate

Legal & General Investment Management (LGIM), the biggest UK-based asset manager, has switched to the iSTOXX® World Min Vol ESG index to manage a mandate for a large pension-fund client. 

At the center of this sustainable, factor-based index solution is a systematic process that uses the Axioma optimizer to balance multiple investment objectives and considerations. They include minimizing portfolio volatility, offering above-average factor exposure to the low volatility and quality factors, and investing in high ESG-rated companies. 

Leveraging Qontigo’s open architecture approach, the index incorporates the use of LGIM’s proprietary ESG scores and third-party carbon intensity data to enhance the index’s overall sustainability characteristics. Lastly, the index maintains diversification and ensures tradability through embedded regional, country, industry and liquidity constraints. 

The mandate previously tracked an index from a different provider.

“Investing in minimum volatility strategies has traditionally come at the cost of potentially poorer ESG outcomes compared with standard market-cap benchmarks,” said Fadi Zaher, Head of Index Solutions at LGIM. “However, this new solution can allow the investor to enhance their environmental objectives, improve ESG profiles and achieve a net-zero decarbonization pathway, while also targeting a lower risk profile than a broad market benchmark.”

“The research process was a truly collaborative effort carried out by LGIM, the client and Qontigo, who shared the same vision,” he added. “We are pleased to have created an innovative solution that incorporates LGIM’s ESG framework.”

“Investors in general, and pension trustees in particular, increasingly need to meet a higher number of objectives in their investment allocations,” said Axel Lomholt, Chief Product Officer, Indices & Benchmarks at Qontigo. “This is particularly true of sustainability criteria and, given the market backdrop, a defensive positioning. The iSTOXX World Min Vol ESG index is an example of how we can embed multiple requirements, and incorporate the most appropriate third-party data, into a rules-based, passive strategy. The index methodology also incorporates risk mitigation with the help of our Axioma optimizer.”