Legal & General Future World ESG Tilted & Optimised UK Index: February 2025 fund update

• Legal & General is one of the UK’s leading providers of responsible passive funds

• We think this fund offers an attractive blend of responsible and passive investing across the UK market

• It could be a good addition to a broader responsible investment portfolio

• This fund currently features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Legal & General Future World ESG Tilted & Optimised UK Index fund provides broad exposure to the UK stock market, while being mindful of environmental, social and governance (ESG) issues. The companies that the fund invests in vary in terms of their size and the sectors in which they operate.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a great low-cost starting point for a portfolio aiming to deliver long-term growth in a responsible way. It could help diversify an investment portfolio focused on other areas, like the US or Asia, and add a responsible tilt. It could also be a good addition to a portfolio of other tracker funds.

Manager

Legal & General is one of the largest providers of index tracker funds in the UK and has offered index funds to investors for over 30 years. That means it’s got the resources and expertise to track indices as closely as possible, and the scale to keep charges to a minimum.

Each equity index fund at Legal & General has a primary and secondary manager, although in practice it’s a team-based approach. The primary manager for this fund is Jason Forster who heads up the team responsible for the fund management of the UK. Forster was formerly responsible for the development of the in-house index fund management system before becoming a fund manager in 2002.

The secondary manager for this fund is Konstantins Golovnovs. He is responsible for managing a range of UK and global equity funds. Golovnovs joined Legal & General as part of the graduate scheme in 2010 and worked his way up to become a fund manager in the index team.

Process

This fund aims to track the performance of the Solactive L&G Enhanced ESG UK Index. It does this by investing in every company in the index and in the same proportion. This is known as full replication and helps the fund closely match the performance of the benchmark.

The fund is made up of 303 companies spread across the UK market, mainly in the consumer and financials sectors. The top ten companies make up 45% of the fund, with HSBC, AstraZeneca and Unilever being the largest holdings. It also invests in smaller companies in line with the benchmark, which are usually subject to more extreme share price movements, and this can increase risk.

The fund won't invest in direct violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption) and companies that earn more than 10% of their revenue from tobacco. It excludes companies that are involved in controversial weapons and those that earn a certain amount of revenue from military and assault weapons. The fund's exclusions include companies that earn more than 20% of their revenue from the mining and power generation of thermal coal and those involved in its expansion. It also excludes companies that earn more than 5% of their revenue from the extraction of oil sands.

The index increases investments in companies that score well on a variety of ESG criteria – from the level of carbon emissions generated, to the number of women on the board and the quality of disclosure on executive pay. It also reduces exposure to companies that score poorly on these measures.

The advantage of reducing investments in poorly-scoring companies, rather than selling their shares completely, is that the Legal & General team can engage to help them improve. An increased investment in exchange for improvement on various factors is also a good incentive, so investors' money could make a positive difference.

The fund also adopts a decarbonisation pathway. This means it aims to reduce emissions by 50% compared to the non-ESG benchmark and then achieve at least a 7% reduction in carbon emissions per year until 2050. The goal is to align the fund with the Paris Agreement, which aims to limit the temperature rise caused by global emissions to 1.5°C above pre-industrial times. We think this is a positive step overall, but it increases the fund’s complexity.

Culture

Legal & General has developed its passive fund range over the last three decades. The company manages around £500bn in tracker funds, allowing it to offer a wide range of index-tracking options.

It’s built a team of experienced passive fund specialists and they’re innovative too. If an index doesn’t exist for a sector they’d like to track, they’ll often work with index providers, like Solactive, to create a suitable index for them to track.

The team managing this fund work closely with various risk departments across the business. We believe this provides support and adds challenge where appropriate.

Employees are also encouraged to participate in Legal & General’s share save scheme which should encourage them to be more engaged with the growth of the company. In addition, a portion of fund managers’ bonuses are invested into the funds they manage. By doing this, their interests are further aligned with the investors in the fund.

ESG Integration

Legal & General Investment Management (LGIM) is predominantly a passive investor, but we’re impressed with the extent to which they’ve woven Environmental, Social and Governance (ESG) matters into their culture. Being a mostly passive fund house hasn’t stopped them being innovative when it comes to ESG. In May 2019, the firm launched its ‘Future World’ range of funds, which this fund is part of.

The Future World range incorporates LGIM’s ‘Climate Impact Pledge’, which is their commitment to assess and engage with the world’s largest companies on how well they manage the implications of climate change. Engagement is carried out with reference to comprehensive ‘sector guides’, which outline best practice and LGIM’s expectations for companies in each key sector. Companies that consistently show a lack of awareness of climate change, and don’t respond positively to engagement, are sold from the Future World funds.

In 2019, LGIM established its Global Research and Engagement Platform, which brings together representatives from the investment and stewardship teams, in order to unify their engagement efforts. Engagement is conducted in line with the firm’s comprehensive engagement policy. A detailed description of the firm’s engagement and voting activity (including case studies) is available in its annual Active Ownership report. Quarterly Engagement reports are also available.

LGIM’s Stewardship team is responsible for exercising voting rights globally, both for LGIM’s active and index funds. Voting decisions are publicly available through a tool which allows a user to search for any company to find out how LGIM voted, and a detailed rationale is provided for votes against management and abstentions.

The FCA (Financial Conduct Authority) recently launched its Sustainability Disclosure Requirements (SDR), which include anti-greenwashing, naming and labelling rules. It includes four labels to help investors find funds that have a specific sustainability goal. This fund doesn’t have a sustainability investment label as it doesn’t have a specific sustainability objective. However, the fund and the index it tracks apply ESG criteria as described above. Therefore, it added ‘Tilted and Optimised’ to its name in December 2024 to reflect how it incorporates ESG into its process.

Cost

The fund has an ongoing annual charge of 0.15%, but we've secured HL clients an ongoing saving of 0.05%. This means you pay a net ongoing charge of 0.10%. This is more expensive than some other UK tracker funds, but we think it's a reasonable price to pay given the additional ESG analysis that takes place.

Our platform charge of up to 0.45% per annum also applies, except in the Junior ISA, where no platform charge applies.

Performance

Since the fund launched in April 2019, it’s gained 18.00%*. As expected from an index tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved in running the fund. However, the tools used by the managers have helped to keep performance tight to the index.

Over the past 12 months, the fund has tracked the index closely, returning 7.15%. Remember, past performance isn’t a guide to future returns.

With inflation closer to the 2% target, the Bank of England (BoE) lowered interest rates in August after holding rates at a 16 year high for a full year. Since then, the BoE have cut rates again although it’s becoming less clear how far these rate cuts will go, and rates could stay higher, and for longer, than initially expected.

Banks performed particularly well over the year. Higher interest rates have been a tailwind for banks, who profit from the increased cost of borrowing, and could benefit from rates staying higher for longer.

On the other hand, the broader financial services sector detracted from the fund’s performance during this time. Oil & gas companies also struggled.

Due to the exclusions and tilting mechanism, we expect the fund’s performance to differ slightly from the broader UK stock market. For example, having less invested in industrials held back the fund’s performance in 2024 as companies in the industrials sector performed well.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index closely in the future, though there are no guarantees.