23 Jan 2024 3 min read

Innovating in credit strategy

By John Daly , Anne-Marie Morris (née Cunnold)

Pension schemes are looking for innovative credit solutions ranging from improving environmental impact to enhancing collateral efficiency.


The following is an extract from our 2024 Solutions outlook.

2023 looks set to have been the world’s hottest year on record, with extreme weather events becoming far more frequent. We believe investors have a crucial role to play in driving the transition to a low-carbon economy and mitigating climate-related risks.

One way investors can seek to exercise this power in 2024 is by applying LGIM’s destination@risk framework. This framework enables investors to assess the climate-related risk and temperature alignment of individual companies and, by extension, make investment decisions that can both seek to reduce risk and improve the environmental impact of their portfolios.

Investors are also increasingly aware of the importance of biodiversity and in our view are turning to innovative solutions such as LGIM’s Sustainable Development Goals (SDG) alignment methodology which integrates biodiversity considerations. Biodiversity and ecosystems feature prominently across many of the SDGs and associated targets.

For example, SDG 14 – Life below water – and SDG 15 – Life on land – aim to protect and restore the natural environment and biodiversity. SDG 1 – Ending poverty in all its forms everywhere – is also closely linked as biodiversity provides resources and income, particularly for the rural poor. SDG 13 – Climate change – also has strong links given that biodiversity and ecosystems help mitigate climate change by storing and sequestering carbon.

Engagement is a powerful motivational tool that works together with innovative investor strategies. For example, our destination@risk framework assists us in identifying laggards that we can target for engagement and advocate for more ambitious and transparent climate action.

Climate laggards tend to have high carbon emissions intensity which is typically correlated with a higher expected increase in global temperatures, as shown in the example of global electricity issuers in the chart below.


Capital can be directed away from the laggards if, for example, we believe that engagement is not delivering our expected outcome and we think that issuer climate transition risk is relatively high in comparison to peers.

New ways to access credit

In addition to climate frameworks and engagement, we believe innovative investment strategies are both also required for a successful and meaningful ESG strategy. A buy and maintain portfolio is a common way for well-funded DB pension schemes to access credit. For those with limited collateral headroom, they can use:

  • Corporate bond repurchase agreements (repo) for collateral management
  • Committed corporate bond repo where an upfront fee enables access
  • Gilt exposure collateralised by corporate bonds

We believe these tools can work well as backstops, however, there are also synthetic routes for more permanent leveraged exposure to credit spreads:

1. Index credit default swaps (CDS): Quick and inexpensive to implement; integrated matching solutions can efficiently use a shared collateral pot with an LDI mandate, or be implemented via pooled strategies

2. Bespoke synthetic buy and maintain credit: Can be implemented via single name CDS. Our experience demonstrates it has the potential benefits of a physical buy and maintain approach such as credit spread value protection, diversification (albeit a slightly smaller universe than physical bonds) and ESG integration, but with more capital efficiency. Can also offer extra credit spread compared to index CDS, due to single CDS’ higher liquidity premium

3. A hybrid approach: For example, we believe a physical bond approach excluding financials, alongside single name CDS exposure to financials, can have several potential benefits:

  • Helps with security and cost of collateral adequacy, as corporate bond repo pricing for financials may be less attractive
  • Helps with buy-in readiness, as insurers often avoid financials exposure, so this can be unwound easily prior to buy-in
  • Capture potential relative value opportunities of single name CDS versus cash bonds


The above is an extract from our 2024 Solutions outlook.

John Daly

Senior Solutions Strategy Manager

John is a Senior Solutions Strategy Manager within the Solutions Group and has over 20 years of industry experience working in asset-management companies. He focuses on long-term global investment-grade credit and active liability investment strategies. His role encompasses designing developing and servicing investment strategies for DB pension schemes and other financial clients. John has been with LGIM since 2009 and has previously held institutional distribution roles at PIMCO and Fidelity. John holds a BSc in Business Economics from Cardiff University and is a CFA charterholder.

John Daly

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)