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Investment managers continue to strengthen ESG integration despite increased debate around approach

Investment managers continue to strengthen ESG integration despite increased debate around approach

11 Oct 2023

  • The overall number of ‘Green’ ESG ratings increased to 36% versus 24% last year, suggesting that fund managers are responding to the ongoing requirements of investors.
  • However, more focus is needed on engagement as 56% of engagement examples were rated Amber or Red.
  • Key areas for improvement include increasing focus on engagement and investing in tools and research capabilities to improve the availability of data and analysis.

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 has increased to 36% versus 24% last year.

Despite ongoing debate around industry commitment and approach towards ESG issues, the results of XPS’s 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, 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 gap continued to narrow on 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.

This latest research also shows that 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. Although private markets also showed some improvements as overall Red ESG ratings fell to 7%, there are still no private market managers rated Green. A high proportion of private market managers still scored Red on climate change, stewardship and reporting indicating that there is still work to be done to fully embed ESG in this asset class.

The research indicates 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.”

To read our Investment Fund ESG Rating Review 2023 report, click here.

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