Lyxor Asset Management has integrated ESG filters into its sovereign bond management business, underscoring its dual commitment to pursuing innovation in the field of fixed income management and adopting a responsible approach in its day-to-day asset management activities.
This HQLA (High Quality Liquidity Assets) strategy, which enables Lyxor to manage the regulatory liquidity buffers of more than 20 banks, is accessible via dedicated mandates or funds and invested on investment grade sovereign bonds.
Based on MSCI ESG data, Lyxor now integrates a country's overall ESG score to assess its long-term economic sustainability in view of its exposure to environmental, social and governance risks. Governance has a weighting of 50% whereas the other two factors each have a weighting of 25%. We assume that good governance, including the effective functioning of a country's financial, political and legal institutions, is a dominant factor in a country's ability to address environmental and societal risks and to ensure the sustainability of its economic policy choices.
The management preference is to overweight sovereign bonds with a good ESG score without excluding others, given the limited universe for sovereign bond management linked to banks' regulatory obligations in terms of liquidity.
This new sustainable approach has a significant impact on - and is helping to fundamentally alter - its strategic allocation for the management of banks' liquidity cushions.
The application of ESG filters to our sovereign bond management is part of Lyxor Asset Management's ongoing commitment to innovation in the fixed income space, illustrated by the creation of the risk budgeting method 12 years ago, and more recently in 2017 by the integration of liquidity measures in collaboration with Euroclear in order to adequately address the overall liquidity of bond portfolios.
Jean Sayegh, head of Fixed Income at Lyxor Asset Management, said: "This new sustainable approach to bond management enables us to support our client banks in assessing the ESG profile of their regulatory liquidity buffers and consequently to help them to transform these buffers to better reflect the economic, societal and governance challenges we face."