Legal & General Investment Management (LGIM) has removed all elements of ESG from its China bond ETF, 18 months after the firm received public criticism from an investor over the strategy’s sustainable credentials.
In a shareholder notice, LGIM said the L&G ESG China CNY Bond UCITS ETF (DRGN) will be downgraded from Article 8 to ‘non-ESG’ Article 6 under the Sustainable Finance Disclosure Regulation (SFDR) while ESG will be removed from the name of the ETF.
Last July, Alan Miller, CIO and co-founder of SCM Direct, criticised LGIM for “brazenly greenwashing and misleading investors” and called for ESG to be removed from the DRGN’s marketing.
Miller said the ETF did not apply any environmental and social characteristics and pointed out China’s reputation as the world’s biggest polluter.
He added DRGN held the exact same four China government/quasi-government bond issuers as a typical non-ESG China government bond ETF.
Commenting on LGIM’s decision to remove the ESG from DGRN, Miller said he welcomed the changes but lamented the delay in the decision.
“We highlighted their unadulterated greenwashing in this product more than a year ago. It shows a complete breakdown in their compliance function that they ever launched this product as ESG,” Miller said.
An LGIM spokesperson said: “As part of a regular review of our responsible investment proposition, we have refined our responsible investment framework for pooled funds, including ETFs, in the UK and Europe to reflect our perspective as well as the current expectations of our clients, regulators and the general market.
“This covers funds with single sovereign/quasi-sovereigns exposures only and funds with material exposure to high climate impact sectors that do not materially support or address climate transition.
“Based on this, DRGN has been reclassified.”
Launched in December 2020, DGRN had amassed $435m assets under management (AUM) by July 2021 as investors looked to take advantage of the attractive yields in China’s domestic bond market.
However, a recent spike in yields across developed markets has wiped out China’s yield advantage leading to a rotation into US Treasury ETFs.
As a result, DRGN has recorded outflows of $276m over the past 12 months, according to data from ETFLogic, leaving it with an AUM of $192m. The ETF has returned 1.3% over the same period.
Sovereign bonds and ESG has long been a contentious issue for investors with an ETF issuer’s ability to engage and influence governments around their ESG practices limited at best.
LGIM’s downgrade of DRGN comes amid a flurry of SFDR reclassifications by asset managers ahead of the introduction of ‘level 2’ of the regulation in January.