Most fiduciary managers do not incorporate ESG risks into investments properly, despite trustees’ support for ESG’s usage in making investment decisions, research suggests.
Nearly 68% of fiduciary managers have no explicit climate-related requirement for the third-party asset managers they appoint, while 42% do not exclude underlying managers with poor ESG ratings.
According to survey of over 200 pension schemes and trustees, carried out by XPS Pensions Group, 94% of trustees agree that ESG risks should be considered in investment decision making.
With a renewed focus on the environment expected ahead of COP26, most fiduciary managers are failing to provide a comprehensive response to climate change, the report found. Only 32% said they were able to conduct climate change-related scenario analysis and stress tests for their clients’ portfolios.
Meanwhile, stewardship of investments is more established, with 84% of fiduciary managers actively monitoring the voting and engagement activity of the underlying managers and half actively influencing voting activities.
Andre Kerr, partner at XPS Pensions Group, said: “Many trustees will have appointed fiduciary managers with the expectation that their scheme’s ESG beliefs would be reflected in the investment strategy. Although there is a lot of variation between different managers, what this survey has shown is this is not the case and more direct dialogue is needed between the two parties.
“We are currently seeing the effects of climate change across the globe. Sponsors, members and trustees want to know that assets are being allocated in ways that helps reduce the impact on the environment. [Fiduciary managers] need to do much more to reduce the exposure their clients have and report this back to their clients.”
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