Investment managers used by pension funds continue to strengthen ESG integration despite increased debate around approach, a new report from XPS Pensions has found.
ESG integration is steadily becoming the norm as managers respond to the requirements of investors according to XPS Pensions Group’s latest Investment Fund ESG Rating Review.
The number of fund managers receiving a Green ESG rating in the review increased to 36% versus 24% in 2022.
XPS said that despite ongoing debate around industry commitment and approach towards ESG issues, the results of the annual survey suggest that the majority of fund managers now robustly embed ESG factors into their decision-making, with Green scores on Integration increasing from 44% to 54%.
While an improvement on last year, XOPS pointed out that 23% of funds were still unable to provide examples illustrating an E, S or G issue being taken into account, “which raises doubts about the credibility of their approach”.
The review also flagged improvements in climate change reporting and analysis, with “an encouraging increase in the number of funds both reporting data and improving data coverage within multi-asset, real assets, and diversified private markets in particular”.
In addition, historically challenging asset classes such as real assets and secure income saw improvement, while fixed income, passive equity and multi-asset classes “all continued to make strong advances”.
However, the research indicated a general lack of positive outcomes resulting from engagement activities, with 56% of engagement examples rated Amber or Red. Across all funds, governance issues were the most common examples of engagement, with limited focus on other environmental and social issues.
Only 53% of firms surveyed provided good evidence that diversity and inclusion was part of their engagement approach, with 12% providing no evidence it is on the agenda, suggesting there is much more focus needed.
Alex Quant, head of ESG Research at XPS Pensions Group, said: “It’s very welcome to see the great strides many managers have made in steadily making an ESG-focused approach the norm. Our research highlights an overall improvement in approach to ESG this year in comparison to relative stagnation last year. Whilst good progress is being made, it’s important that managers continue to invest in the tools and resources to fully embed ESG considerations and effective stewardship into their process.”
