Fiduciary Managers need to do more to incorporate ESG into their investment strategies according to XPS Pensions Group findings

Most fiduciary managers (FMs) are not effectively incorporating ESG risks into investments, despite most trustees considering this important to decision-making. An XPS survey of FMs responsible for over £200 billion in assets published today reveals that 68% do not have any explicit climate-related requirement for third party managers, while 42% do not exclude underlying managers who have been assigned their lowest ESG rating.

Awareness of environmental social and governance issues is now firmly established in the fund management industry, with 94% of trustees agreeing that ESG risks should be considered in investment decision making. Despite many trustees believing these issues will be managed by their FM, only 42% of FMs surveyed have set KPIs and/ or renumeration policies that refer to ESG, pointing towards a disconnect between the expectations of trustees and what is happening in practice.

With a renewed focus on the environment expected ahead of COP26, most FMs are failing to provide a comprehensive response to climate change. Only 32% said they were able to conduct climate change-related scenario analysis and stress tests for their clients’ portfolios.

To help bridge this gap, XPS believes there needs to be a more transparent approach between trustees and FMs. It recommends:

  • Open discussion around the expected approach towards ESG integration
  • An ongoing relationship in which the FM is challenged and scrutinised
  • Honest reflection of the alignment between ESG beliefs and what is being implemented
  • Ongoing oversight and reporting on the implementation of ESG practices

FM’s stewardship of investments is more established, with 84% of FMs actively monitoring the voting and engagement activity of the underlying managers and half (50%) actively influencing voting activities. This reflects the growing role of activist investors and the influence they have. This stewardship has the potential to grow into more active oversight and management of ESG risks.

Andre Kerr, Partner at XPS Pensions Group, said: “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.”

The findings come after XPS’ ESG survey of defined benefit trustees found that trustees are struggling to implement beliefs around ESG into investment strategies. This trustee survey can be found here.