XPS finds a disparate approach to ESG integration in their latest ‘FM Watch’

XPS Pensions Group (XPS) Investment team’s survey, ‘FM watch - ESG Special’, launched today, highlights how ESG integration varies widely across 16 fiduciary managers, representing over £170 billion of assets and around 90% of UK fiduciary mandates.

The research carried out by XPS over the second half of 2019 assessed 4 key elements: Philosophy, ESG integration in practice, Stewardship of assets, and Climate Change. The main issue to come out of the research is that trustees need to assess their fiduciary manager’s approach to ensure it is aligned to their stated investment beliefs.

Key findings of the research are:

  • All fiduciary managers believe that ESG considerations can improve risk-adjusted returns.
  • Whilst most fiduciary managers say they integrate ESG across all asset classes, closer inspection found that the extent of asset class coverage varies in practice, with 30% not scoring managers for ESG across all asset classes.
  • Under 20% of fiduciary managers specifically exclude funds from investment where their own research has assigned it the lowest possible ESG score.
  • The majority of fiduciary managers use third party funds and so need to make a sustained effort to ensure that the underlying managers they invest in are good stewards of capital.  25% do not engage with their underlying third party managers to improve their ESG processes.
  • Over 80% of fiduciary managers said they consider climate change explicitly within their portfolios and consider and report the carbon footprint for some parts of the portfolio. This is a positive sign, however there may be potential barriers to fully implementing this.

Sarita Gosrani, Head of ESG at XPS and co-author of the research, said: “Being a step removed from the portfolio construction process makes it vital that pension scheme trustees are comfortable with their fiduciary manager’s approach to ESG integration. This should also form an integral part of any tender or re-tendering being undertaken in relation to the CMA Order and be monitored on an ongoing basis.”

Guy Plater, co-Head of Fiduciary Management Oversight at XPS added: “The research highlights the significant range of approaches to ESG integration adopted across the fiduciary market and, therefore, the challenges faced by trustees in having their ESG beliefs appropriately reflected in their fiduciary mandates. This is especially true for those fiduciary models which are one-size-fits-all.”

Sarita concluded: “Whilst it’s positive to see that fiduciary managers are demonstrating a greater focus on integrating ESG into their portfolios, only 3 out of the total number surveyed currently exclude underlying funds that receive their lowest ESG ratings.  Industry standards must improve in this area. We want to see this number increase so FM’s must engage with, and demand more from, their underlying managers.”