Investment management company, LGPS Central, lowers rating of its bond manager due to shortcomings in Environmental, Social, and Governance (ESG) practices.
LGPS Central Downgrades Fixed Income Manager Over ESG Concerns
In a move aimed at promoting environmental, social, and governance (ESG) responsibility, LGPS Central, one of the UK's largest local government pension schemes, downgraded one of its fixed income managers from "yellow" to "amber" in Q2 of 2024. The specific name of the downgraded manager, however, remains undisclosed.
According to reports, the downgrade was due to long-term concerns about the manager's failure to integrate ESG factors into its decision-making process. The stewardship report, published on June 4, 2024, detailed the manager's engagement activities, revealing several investments with high ESG risk and limited efforts to mitigate that risk.
The report also highlighted that 40% of EOS's engagement issues were linked to climate action in 2024. EOS, LGPS Central's stewardship provider, engaged with 687 companies globally in 2024, while LGPS Central itself engaged with 661 companies regarding climate change.
LGPS Central has a rating process for manager engagement disclosure, and it provided written reassurances to the pension scheme in Q4 of 2024 that its new commitments were being followed. However, unsatisfactory engagement disclosure or unclear links between engagement and investment decisions can result in a rating downgrade.
The downgrade was not the only action taken by LGPS Central in response to ESG concerns. In Q2 of 2024, the pension scheme 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.
Despite the downgrade, the downgraded manager was able to discuss ESG risks associated with its holdings. However, it did not effectively integrate these factors into its decision-making process, leading to the downgrade.
Despite several attempts to disclose the identity of the downgraded fixed income manager, LGPS Central's website has declined to do so, citing confidentiality reasons. The pool did not provide information about the identity of the downgraded manager in its stewardship report either.
In conclusion, LGPS Central's downgrade of a fixed income manager in Q2 2024 serves as a reminder of the importance of ESG factors in investment decision-making. While the specific name of the downgraded manager remains undisclosed, the incident underscores the pension scheme's commitment to promoting ESG responsibility among its managers.
- The downgrade of the fixed income manager by LGPS Central, despite the manager's ability to discuss ESG risks associated with its holdings, emphasizes the importance of effectively integrating Environmental-Science factors into business strategies, particularly Climate-Change management.
- In the realm of Finance and Business, the move by LGPS Central to downgrade a fixed income manager for poor ESG integration could potentially signal a shift towards more stringent Environmental-Science, Social, and Governance standards in investment decision-making across various sectors.
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