30 Sep 2021 3 min read

ESG in buy & maintain credit: where next?

By Anne-Marie Morris (née Cunnold)

We look at how far we've come over the past 20 years, and consider what the future may hold.


At LGIM, we’re celebrating 20 years of LDI and have been reflecting upon the changes and evolution over the past two decades. ESG is a clear example of this evolution, as I don’t think many would have considered ESG in the context of LDI 20 years ago. Yet today, almost all our LDI clients want to understand and discuss ESG in their trustee meetings.

In fact, one of my standard interview questions is now to ask candidates in which asset class is ESG potentially the hardest to discuss with clients. I usually expect the answer to be derivatives or liability-driven investing (as you can tell by my other blogs, although this too has been evolving), but that’s not to say that other asset classes are necessarily ‘easy’.

Today, LDI mandates often sit alongside buy and maintain (‘B&M’) credit mandates (potentially as part of a cashflow-aware/CDI portfolio). Within B&M credit, investors may historically have used exclusion lists as a method of incorporating ESG criteria into their portfolios, but this too has evolved over the past 20 years to encompass a higher degree of sophistication. This now includes:

• Integrating ESG risks into credit research processes,

• Active engagement with issuers on ESG, and even

• Proactively adding a number of climate targets or objectives into mandates, such as simple carbon metric reductions or more holistic and forward-looking portfolio temperature alignment.

Indeed, using all of the above can provide a strong foundation for clients seeking a net-zero framework. However, if clients want to go further – in particular looking beyond climate and environmental factors – this has proved challenging. A recent trend seems to be how B&M mandates can further enhance their ‘S’ and ‘G’ credentials, not just ‘E’. The struggle, as always with ESG, is how to quantify this objective into a set of implementable mandate guidelines.

From ESG to SDGs

Fortunately, though, this trend has also identified a potential solution by considering metrics related to the UN Sustainable Development Goals (‘SDGs’), a set of 17 goals which ‘recognise that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.’

The UN SDGs can, we believe, provide a method for asset managers to analyse and compare how the companies in which they invest are doing with regards to ESG, and ultimately quantify this into a metric that can be translated into mandate guidelines.

For example, at LGIM we have developed a scheme for assessing companies’ alignment with the UN SDGs based on whether they are positively or negatively aligned, which we aim to implement consistently alongside our other ESG frameworks. Beyond simply using it as an exclusion list, we also use the results as a basis upon which to focus our engagement activities with issuing companies, to help them better position their firm for the future.

So, as B&M credit moves beyond exclusion lists and climate targets to broader and more sophisticated ESG metrics, perhaps I’ll need to dig a little deeper when it comes to interviewees who say that credit is a challenging space in which to address ESG concerns!

In the meantime, for more on this topic, please read our latest article, Making liability matching part of our ESG mission, in our CIO Autumn Update, which is specifically focused on ESG topics in the run-up to COP26.

Anne-Marie Morris (née Cunnold)

Head of DB Solutions Strategy

Anne-Marie leads the team responsible for the strategy of objective-driven investment solutions, principally for Defined Benefit Pension Scheme clients. In partnership with the Solutions Portfolio Management team, her team structures and delivers strategies across LGIM’s derivative overlay, LDI and CDI strategies including Buy and Maintain credit. Anne-Marie joined LGIM in 2012, bringing industry experience from prior roles including investment strategy at BlackRock and senior fund manager in structured investments and solutions at Close Brothers Asset Management. Anne-Marie is a CFA charterholder, holds the Financial Derivatives paper from the CISI diploma and graduated from Cambridge University with a first class honours degree in Natural Sciences (theoretical physics). When not eulogising about derivatives and LDI, Anne-Marie might be found exploring historic buildings with her two boys.

Anne-Marie Morris (née Cunnold)