Investment firm LGPS Central lowers rating of fixed income manager due to Environmental, Social, and Governance (ESG) shortcomings.
LGPS Central Downgrades Fixed Income Manager Over ESG Concerns
In a move reflecting a strengthened commitment to Environmental, Social, and Governance (ESG) standards, LGPS Central downgraded one of its fixed income managers from "yellow" to "amber" in 2024. The downgrade was due to specific ESG-related concerns about the manager's failure to integrate ESG factors into its decision-making process.
The exact factors leading to the downgrade are not fully disclosed in the available documents, but LGPS Central's evolving stewardship strategy suggests a robust ESG evaluation process. The downgrade indicates that the manager did not meet the expected ESG-related criteria or stewardship requirements, leading to a reassessment of its status within LGPS Central's monitoring framework.
This downgrade is part of a broader trend of asset owners tightening ESG scrutiny and pushing back on asset managers that do not meet their evolving responsible investment standards.
In 2024, LGPS Central engaged with 661 companies regarding climate change, as detailed in its stewardship report published on June 4. The report also reveals that LGPS Central's stewardship provider, EOS, engaged with 687 companies globally during the same period. However, the report does not provide any new information about the ESG-related concerns that led to the downgrade of one of its fixed income managers.
The report focuses on LGPS Central's efforts to address climate change and ESG issues in its investment decisions. It is worth noting that 40% of EOS's engagements in 2024 were linked to climate action.
In Q2 of 2024, LGPS Central downgraded one of its fixed income managers from "yellow" to "amber". The downgraded manager was cited for having several investments with high ESG risk and limited efforts to mitigate that risk.
In a recent engagement with Barclays, LGPS Central discussed the UK 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 are being followed in Q4 of 2024.
Despite a request from our website to disclose the name of the fixed income manager that was downgraded from "yellow" to "amber", LGPS Central declined to disclose the name.
The report states that the manager, despite being able to discuss ESG risks associated with its holdings, did not act upon them, contributing to the downgrade. This underscores the importance of active ESG engagement and integration in investment decision-making processes.
LGPS Central's manager rating process for disclosure of engagement is designed to ensure transparency and accountability in its investment decisions. Unsatisfactory engagement disclosure or unclear link between engagement and investment decision-making can lead to a rating downgrade.
In conclusion, LGPS Central's downgrade of a fixed income manager is a significant step in its commitment to responsible investing. The downgrade highlights the importance of active ESG engagement and the consequences of failing to meet ESG-related criteria and stewardship requirements. Asset owners and managers alike are increasingly focusing on ESG factors, and LGPS Central's actions demonstrate this growing trend.
- The strengthened ESG standards enforced by LGPS Central extend beyond fixed income management, as it is also investing in environmental-science projects that combat climate-change.
- Recognizing the financial risks associated with climate-change, LGPS Central is firmly engaging with businesses like Barclays to secure commitments for divesting from fossil fuels and investing in renewable energy instead, aligning with the agenda of responsible businesses that prioritize finance and ESG.
- As the downgraded fixed income manager failed to adhere to ESG-related criteria and demonstrate active ESG engagement, LGPS Central is looking for opportunities to invest in businesses or funds that show commitment to ESG factors and environmental-science, ensuring a sustainable and ethical business environment for the future.
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