Risk of stagnation on ESG as investment manager commitment diverges, XPS survey finds

Risk of stagnation on ESG as investment manager commitment diverges, XPS survey finds

24 Nov 2025

• The overall number of 'Green' ESG ratings increased to 43% (up from 40% last year), though progress has slowed compared to previous years.
• Diversity and Inclusion is not where it needs to be, with only 61% of funds run by managers with firm-level targets on D&I. XPS has downgraded some managers due to soft firm-level climate targets.
• Integrating ESG into decision making is by no means universal, with 26% of funds still unable to provide any examples of integrating ESG risks into investment decisions, unchanged from last year.
• Progress on social issues lags behind climate; across equity, fixed income and multi-asset funds, 42% of portfolio holdings were engaged with on environmental issues, but only 17% of holdings on social issues.

XPS Group's fifth annual Investment Fund ESG Rating Review reveals a risk of stagnation among asset managers on ESG, with growing divergence in commitment across the industry.

The survey analysed 170 funds from 41 investment managers across eight asset classes, rating them Green, Amber or Red based on five key criteria: Philosophy (firm-level commitment), Integration (embedding ESG into decisions), Climate Change (specific climate risk management), Stewardship (engagement and voting), and Reporting.

While the proportion of 'Green' ESG ratings increased slightly to 43% (up from 40% in 2024), this represents a slowdown in progress compared to previous years, suggesting relative stagnation from asset managers on ESG.

Firm-level commitment weakening

A concerning trend is at the firm level, where managers set their overall ESG strategy and climate commitments. The proportion of funds rated 'Green' for Philosophy fell to 64%, down from 72% in 2024 and 85% in 2023, the second consecutive year of decline.

XPS downgraded a number of managers who lacked strong firm-level targets on climate change, including some that had softened earlier commitments. This divergence suggests that while some managers remain committed to ESG, others are pulling back amid political uncertainty around sustainability issues. XPS also observed that whilst 90% of managers had a policy on diversity and inclusion for their business, only 61% had firm-level targets on diversity and inclusion.

Integration gaps persist

The weakening firm-level commitment is reflected in day-to-day portfolio management. Despite some progress in Active Equity, where managers provided clearer evidence of ESG integration and engagement, 26% of all funds still could not demonstrate any examples of integrating ESG risks into investment decisions, unchanged from 2024.

This continues to be a source of concern and suggests a material portion of managers are not fully capturing the full spectrum of investment risks in their day-to-day management of portfolios.

Stewardship efforts are mixed

On stewardship – how managers engage with companies and exercise ownership rights – the picture is mixed. Overall, the proportion of funds rated 'Green' rose to 45% (from 33% in 2024). However, engagement activity remains uneven across topics. Across equity, fixed income and multi-asset funds, 42% of portfolio holdings were engaged with on environmental issues, but only 17% of holdings were engaged with on social issues, highlighting the continued challenge of measuring and addressing social risks.

Private markets continue to lag significantly on stewardship, with 47% of Diversified Private Markets funds rated 'Red', reflecting weak evidence of engagement and ESG oversight. This ongoing pattern highlights the structural differences between public and private markets, where the absence of disclosure requirements and voting cycles creates challenges for effective stewardship.

Alex Quant, Head of ESG Research at XPS Group, said: "This year's results reveal a troubling pattern of stagnation. While some managers continue to advance their ESG capabilities, we're seeing a clear bifurcation in the industry, with others retreating on climate commitments and more than a quarter of funds are still unable to demonstrate evidence of basic integration of ESG risks into their investment processes.

"Schemes should therefore engage proactively with their managers to ensure these risks are being properly assessed and integrated, or consider whether their investments remain fit for purpose."

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Notes: 

About the XPS Investment Fund ESG Rating Review

XPS Group's Investment Fund ESG Rating Review is now in its fifth year. The review assesses how investment managers are integrating ESG considerations and climate risk management into their investment processes.

For the 2025 review, XPS analysed detailed responses from 41 investment managers covering 170 funds across XPS clients' portfolios. Managers completed a comprehensive ESG questionnaire with over 70 questions.

The rating system

XPS rates funds as Green, Amber or Red based on five key areas:

1. Philosophy – Firm-level philosophy and commitment relating to ESG, stewardship and broader sustainability issues
2. Integration – Taking account of ESG risks within investment research and portfolio construction
3. Climate change – Explicit climate change considerations within the investment and stewardship processes
4. Stewardship – Approach to voting and engagement to drive positive change in invested companies and underlying managers
5. Reporting – Transparent communication of ESG activity to stakeholders

Each question is scored +1, 0 or -1, with scores weighted appropriately to inform a rating for each sub-area and an overall rating. Funds scoring below -0.2 are rated Red, between -0.2 and +0.7 are rated Amber, and above +0.7 are rated Green.

XPS does not award overall Green ESG ratings to funds which score Red on any individual sub-area, regardless of performance in other areas. Any fund rated Red on ESG cannot receive an overall Green rating from XPS or be recommended to clients.

Asset classes covered

The review covers eight asset classes: Active Equity, Passive Equity, Fixed Income, Multi-Asset, Secure Income, Real Assets, Diversified Private Markets, and LDI (Liability Driven Investment).

For passive mandates, XPS does not assess managers on ESG integration or climate change as these managers have less control over stock selection. For these funds, the focus is on stewardship.