Integration of environmental, social and governance (ESG) considerations is steadily becoming the norm for investment managers as they respond to the requirements of investors, according to XPS Pensions Group.

Its Investment Fund ESG Rating Review showed that the proportion of fund managers receiving a ‘green’ ESG rating had increased by 12 percentage points year-on-year to 36 per cent.

XPS’s annual survey found that, despite ongoing debate around industry commitment and approach towards ESG issues, the majority of investment managers were embedding ESG factors into their decision making, with ‘green’ scores on integration rising from 44 per cent to 54 per cent.

However, despite the improvement, 23 per cent of funds were still unable to provide examples of E, S or G issues being taken into account, which XPS said raised doubts about the credibility of their approach.

‘Historically challenging’ asset classes, such as real assets and secure income, saw some improvement, while fixed income, passive equity and multi-asset classes all “continued to make strong advances”, XPS noted.

While private markets showed some improvement, with overall ‘red’ ESG ratings falling to 7 per cent, there were still no private market managers rated ‘green’.

XPS said that a high proportion of private market managers still scored ‘red’ on climate change, stewardship and reporting, which it stated meant that there was still work to be done to fully embed ESG in this asset class.

Furthermore, the research found there was a general lack of positive outcomes resulting from engagement activities, with 56 per cent of engagement examples rated ‘amber’ or ‘red’.

Across all funds, governance issues were the most common examples of engagement, with ‘limited focus’ on other social and environmental issues.

Just over half (53 per cent) of the firms surveyed provided good evidence that diversity and inclusion was part of their engagement approach, with 12 per cent providing no evidence it was on the agenda.

“It’s very welcome to see the great strides many managers have made in steadily making an ESG-focused approach the norm,” commented XPS Pensions Group head of ESG research, Alex Quant.

“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.”

Share Story: