Investment managers continue to improve ESG risk management, but integration remains mixed across asset classes, XPS survey finds

Investment managers continue to improve ESG risk management, but integration remains mixed across asset classes, XPS survey finds

20 Nov 2024

• The overall number of ‘Green’ ESG ratings increased to 40% (up from 36% last year), including more managers effectively embedding climate risks into their investment process
• However, the approach is mixed across asset classes with 26% of managers unable to provide any examples of considering ESG risks in practice, with the worst practice found in active equity managers
• Passive equity funds lead improvement on stewardship, with 45% rated ‘Green’ (versus 10% in 2023)
• Private market funds continue to show progress, particularly on climate change, albeit from a low base, but lag on Stewardship, with 33% rated ‘Red’ in this sub-area

XPS Group’s fourth annual Investment Fund ESG Rating Review assesses how XPS Group’s clients’ investments (including 43 investment managers, covering 184 funds) are progressing their ESG considerations and climate risk approach. It found that the number of managers receiving a ‘Green’ ESG rating has increased to 40%, versus 36% in 2023.

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Despite the recent withdrawal of a number of investment managers from industry initiatives such as Climate Action 100+ and the ongoing debate around the industry’s commitment to ESG, the results of the annual survey suggest that the majority of fund managers now robustly embed ESG factors into their decision-making. Nevertheless, laggards do remain. 26% of all managers could not provide any examples of taking into account ESG risks, which is concerning.

In the context of COP29, consideration of ESG and climate risks remains critical to good investment management. XPS has seen progress on climate change in most asset classes, and many managers are now embedding net zero targets into their existing funds and demonstrating better management of climate risks. In private markets in particular, there has been progress from a low base, with an improvement in the ability to report on carbon emissions data and the first ‘Green’ ratings on climate change seen.

Stewardship continues to be a key area of discussion in the market, and passive equity funds saw a notable improvement, with 45% achieving a ‘Green’ sub-rating, compared to 10% the year before. Private market funds lagged, with 33% ‘Red’ on Stewardship, compared to 27% last year, and notably poor responses on engagement by private debt managers.

Alex Quant, Head of ESG Research at XPS Group, said: "This year we saw continued divergence between managers, across ESG and climate risk management and on stewardship, with some doing well but laggards remaining in all areas. COP29 will either lead to more national commitments and support for the climate transition, or the impact of climate change on global warming will get worse and worse - either way, this creates significant risks for investors not thinking about transition or physical risks. Investors must ensure their managers are effectively managing these key sources of risk.”

Notes:

XPS Group has analysed detailed information provided by 43 investment managers covering 184 funds to understand their current approach towards incorporating ESG and climate change risk management into their funds.

As part of its comprehensive research process, XPS Group assesses and rates funds Green, Amber or Red across eight key aspects: Parent, People, Product, Process, Positioning, Performance, Pricing and ESG. Within the ESG element, funds are assessed on five key areas – Philosophy, Integration, Climate Change, Stewardship, and Reporting.

To carry out this process, XPS Group requests that fund managers complete a detailed questionnaire involving over 70 questions and score each question +1, 0 or -1 with the score weighted appropriately and combined to inform an overall score within each area. This then informs the overall ESG rating where an average weighted score of below -0.2 is red, between -0.2 and +0.7 amber and a score of +0.7 is green, with qualitative oversight to ensure that overall ESG ratings are appropriate