Over two thirds (68 per cent) of fiduciary managers (FMs) responsible for over £200bn in assets do not have any explicit climate-related requirement for third party managers, according to research from XPS Pensions Group.

The survey found that a further 42 per cent of the group do not exclude underlying managers who have been assigned their lowest environmental, social and governance (ESG) rating, prompting concerns over a potential disconnect between trustee expectations and what is being implemented in practice.

Indeed, the provider found that awareness of environmental, social and governance issues is “firmly established” amongst pension scheme trustees, with 94 per cent of agreeing that ESG risks should be considered in investment decision making.

Despite this, just 42 per cent of FMs have set key performance indicators (KPIs) or remuneration policies that refer to ESG.

Previous research from XPS has also prompted concerns over the alignment of intention and action, after it found that less than half (40 per cent) of pension scheme trustees believe that their schemes' ESG policies reflect their preferred approach.

XPS warned that despite renewed focus on the environmental concerns ahead of COP26, most FMs are "failing" to provide a comprehensive response, with only 32 per cent able to conduct climate-change related scenario analysis and stress testing for client portfolios.

Considering this, XPS Pensions emphasised the need for a more transparent approach between trustees and FMs, suggesting that trustees have an open discussion around the expected approach towards ESG and establish an ongoing relationship in which the FM is challenged and scrutinised.

This is alongside recommendations for “honest reflection” as to the alignment between ESG beliefs and what is implemented in practice, and ongoing oversight and reporting on the implementation of ESG practices

XPS Pensions Group partner, Andre Kerr, commented: “Many trustees will have appointed fiduciary managers with the expectation that their scheme’s ESG beliefs would be reflected in the investment strategy.

“Although there is a lot of variation between different managers, what this survey has shown is this is not the case and more direct dialogue is needed between the two parties.

“We are currently seeing the effects of climate change across the globe. Sponsors, members and trustees want to know that assets are being allocated in ways that helps reduce the impact on the environment. FMs need to do much more to reduce the exposure their clients have and report this back to their clients.”

Despite concerns, the survey also found that FMs stewardship of investments is "more established", with 84 per cent of FMs actively monitoring the voting and engagement activity of the underlying managers, and 50 per cent actively influencing voting activities.

XPS highlighted this as a reflection of the growing role of activist investors and their influence, arguing that this stewardship has the potential to grow into more active oversight and management of ESG risks.

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