On the go: There is still room for improvement for asset managers when it comes to environmental, social and governance investment funds, since only a quarter of these received a green score in analysis from pensions consultancy XPS.
The XPS Investment’s ESG ratings Review 2021, which assessed 54 fund managers across 199 funds, attributed a green rating to 23 per cent of these, which is an improvement from the 10 per cent registered in the previous year.
However, the pensions consultancy – which awards a green, amber or red rating after considering aspects such as product, parent, people, process, pricing, positioning, performance and ESG – warned that greenwashing is still a risk.
For example, XPS found evidence of strong firm-level messages not being backed up by fund investment decision-making, with 62 per cent of active equity managers scoring green for firm-level philosophy, while only 10 per cent achieved the same result for ESG within the specific fund.
Furthermore, the pensions consultancy found significant dispersion of scores between asset classes for a given manager, indicating that while the overall firm philosophy score may suggest a commitment to considering ESG risks, there was weaker ESG within investment processes in practice.
In addition, XPS found many funds – 11 per cent of all funds, and 26 per cent of equity funds – were unable to provide any examples of the different ESG factors being taken into account in investment decisions, “raising legitimate concerns over whether the ESG processes being described are being applied in practice”, it said.
When it comes to the different asset classes, fixed income funds were able to most consistently evidence robust integration of ESG when compared with other investment type funds.
XPS noted that private markets are beginning to make some headway in factoring in ESG to decisions, albeit from a low base, since last year only 60 per cent of funds referenced ESG in their investment policy whereas this year all of them did.
The pensions consultancy noted that these findings highlight the need for trustees – after clarifying the scheme’s objectives in beliefs in this area – to challenge their investment consultants on these matters.
Advisers should be asked to undertake thorough due diligence of the pension fund’s portfolio to ensure ESG practices of the managers are aligned to the scheme’s objectives, XPS noted.
Schemes’ governing bodies should also engage with managers to ensure effective stewardship and make changes to the portfolio if needed, and consider the use of sustainable funds that go beyond the minimum expected standards of ESG integration, it added.
Simeon Willis, chief investment officer at XPS, noted that “while the findings clearly show there is a lot more work to do, it is promising to see that fundamental parts of a good ESG strategy are being put in place across the board”.
He added: “Effective ESG risk management must be underpinned by a clear ESG philosophy, and most firms now have this essential foundation in place.
“But managers must move beyond words to actions for this to matter, and this needs to be consistent across all their funds and be well communicated to clients.”
