75: ESG: Why divestment might hold some nasty surprises

Many investors will still tell you that responsible investment approaches begin and end with negative screens – excluding whole sectors such as oil & gas from portfolios. This is entirely understandable: if an investor wants an ESG integrated portfolio, it seems strange to continue to hold oil stocks. But when you apply this to a market-cap index – such as the MSCI World with its whopping 5% energy weighting – exclusion means allocating more to the technology and finance sectors as a result, perhaps not necessarily the diversification you might have been looking for from an index. It’s also important to think about what exclusions do to your factor exposure. Swapping energy for tech might have been great for returns these past five years, but on a factor basis that means you will be overweight growth and underweight value going into the next turn of the economic cycle. In this conversation, we discuss the unintended consequences of exclusions and dive into the ways ESG analysis can be integrated into index products to give you a high ESG impact without a high tracking error. To find out more and read Dave’s full research paper, visit: www.lgim.com/friendorfoe?cid=lgimtalks ·         Dave Barron, Head of Index Equity & Smart Beta ·         Robert StGeorge, Content Manager We want to hear from you! Email us at [email protected] with your thoughts on the podcast and any suggestions of the guests or types of content you’d like to see covered. This podcast is intended for investment professionals, and shouldn’t be shared with a non-professional audience. This podcast should not be taken as an invitation to deal in Legal & General investments. Any views expressed during this recording belong to the individuals and are based on market conditions at the time of recording, and do not reflect the views of Legal & General Investment Management. Legal & General Investment Management is authorised and regulated by the Financial Conduct Authority. Legal & General Investment Management, One Coleman Street, London, EC2R 5AA. Register in England no. 2091894. All rights reserved. No part of this audio may be reproduced in whole or in part without the prior written consent of Legal & General Investment Management.