Central Pension Fund LGPS lowers rating of fixed income investment manager due to shortcomings in Environmental, Social, and Governance (ESG) standards.
In a move aimed at promoting responsible investment, LGPS Central, a prominent pension pool, downgraded one of its fixed income managers from "yellow" to "amber" in Q2 of 2024. The decision, detailed in the pension pool's stewardship report published on June 4, 2024, was based on ESG-related concerns about the manager's decision-making process.
The report, which outlines LGPS Central's manager engagement and the process of manager rating review, states that the downgraded manager had several investments with high exposure to ESG risk and limited efforts to mitigate that risk. This lack of integration of ESG factors into the decision-making process was deemed evidence of the manager's unsatisfactory engagement.
In the report, LGPS Central explains that the presence of high ESG risk investments coupled with limited efforts to mitigate that risk is a clear sign of a manager's lack of commitment to responsible investment practices. The report cites that the manager was able to discuss ESG risks associated with its holdings but was not integrating these factors into its decision-making process.
While the report does not explicitly name the fixed income manager that was downgraded, it does mention LGPS Central's stewardship strategy and the importance of ESG considerations. The pension pool engaged with 687 companies globally in 2024, with 40% of the issues addressed by EOS in its engagements linked to climate action.
Notably, LGPS Central also engaged with Barclays following the bank's commitment to stop financing new oil and gas fields and restrict lending to energy companies expanding fossil fuel production. Barclays provided LGPS Central with written reassurances that its new commitments were being followed in Q4 of 2024.
The stewardship report for LGPS Central did not detail any new ESG-related concerns about any managers other than the one that was downgraded. However, it did not disclose any new investments by any managers with high exposure to ESG risk and limited efforts to mitigate that risk.
The report concludes by emphasising LGPS Central's commitment to responsible investment and its ongoing efforts to engage with managers to ensure their decision-making processes are aligned with ESG considerations. Despite the downgrade, LGPS Central remains hopeful that the manager will address the concerns raised and improve its ESG practices moving forward.
The stewardship report of LGPS Central highlighted that the downgraded fixed income manager failed to adequately integrate environmental-science factors such as climate-change into its investment decision-making process, in spite of being able to discuss ESG risks. Consequently, the report illustrates that investing with a focus on financial returns alone, without regard to ESG considerations, may not align with LGPS Central's commitment to responsible investment.
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