Number of fund managers committed to net zero double in the last year, but only 2 in 10 have concrete carbon reduction plans: XPS Pensions Group
Number of fund managers committed to net zero double in the last year, but only 2 in 10 have concrete carbon reduction plans: XPS Pensions Group
21 Sep 2022
• Survey shows 81% of asset managers surveyed have committed to net zero by 2050, up from 41% last year
• However, only 22% of managers could demonstrate a credible plan to support net zero commitments
• Other key areas requiring further improvement include reporting against ESG outcomes and focus on ESG within alternative asset classes
There has been a significant rise in the number of fund managers making net zero commitments across 2021, with 81% of managers now having such a commitment in place versus 41% in the previous year, research from XPS Pensions Group has shown.
However, fund managers need a concrete plan to turn these commitments into action. XPS’s report, Investment Fund ESG Rating Review 2022, found that despite this encouraging rise in the number of managers committing to net zero, only 22% of them could demonstrate a credible plan within specific funds to meet their firm-level commitment.
More broadly, managers’ progress on integrating ESG into their investment approach has been offset by stagnation in certain areas, with 24% of managers scoring Green ESG ratings on XPS’s proprietary “traffic light” rating system, up slightly on 23% in 2021. This represents a stalling of progress made in the previous year, when XPS saw a marked improvement in the number of managers meeting this rating in 2021 versus 2020.
Notably a significant number of managers – 31% - could not provide any examples of how they integrated ESG into their funds. This raises legitimate doubts over whether the ESG processes described are being applied in practice by managers across their funds.
As in previous years alternative asset classes (secure income, real assets and private markets) lag behind, particularly in terms of stewardship and engagement, and coverage of climate data is limited, raising concern over whether sufficient focus is being given to ESG and climate change in these funds.
Alex Quant, Head of ESG Research at XPS Pensions Group, said: “Despite the emergence of anti-ESG sentiment in the last year, it remains our view that integrating consideration of ESG factors into investment decisions is a critical part of sustainable, long-term investment practice. We appreciate that a lot of effort is being spent in this area across the investment management industry, however, it’s clear that there remain areas for improvement particularly around considering climate change and reporting back to stakeholders on ESG outcomes.”
About this research
XPS Pensions Group have analysed detailed information provided by 63 managers covering 255 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 Pensions Group assesses and rates funds Green, Amber or Red across 8 key aspects: Product, Parent, People, Process, Pricing, Positioning, Performance 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 Pensions Group requests that fund manager complete a detailed questionnaire comprised of 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.