Pension fund trustees are urged to address their fiduciary managers’ ESG approaches, as research has shown that despite making progress in implementing effective ESG management systems, some fiduciary managers still display shortcomings.

There may still be a gap between trustee expectations and the actions of fiduciary managers to incorporate ESG approaches into their offerings, a report by XPS Pensions Group has found.

According to the report – Progression of the UK fiduciary management market’s approach to ESG integration – fiduciary managers have continued to make progress implementing ESG approaches across their offerings.

For example, many now explicitly reference ESG policies in investment policy documents or exclude underlying managers that are assigned the fiduciary manager’s lowest ESG rating.

There is still evidence of industry shortcomings, however. The research found that 33% of fiduciary managers are still not excluding funds run by managers that have received their lowest ESG rating from their portfolios.

Similarly, not all fiduciary managers have the capability to report their carbon footprint, despite having made commitments to the Net Zero Asset Managers Initiative.

At a time when alignment with ESG goals is becoming increasingly important for members of schemes, XPS Pensions Group is calling on trustees to evaluate their fiduciary managers’ ESG credentials.

This is in order to identify any gaps between their expectations and the managers’ delivery and take action to close those gaps.

Taking this action is increasingly important to ensure ESG measures are reflected across the pensions industry, as approximately one in five defined benefit (DB) schemes are now under fiduciary management of some kind, XPS Pensions Group found.

André Kerr, partner and head of fiduciary management at XPS Pensions Group, said: “With a significant chunk of UK DB pension schemes now under some form of fiduciary management, it’s time for trustees to be proactive in engaging with their [fiduciary managers] to ensure that their expectations around incorporating ESG activity are met by their current manager. If they don’t, they may well face a challenge from members who are increasingly engaged on ESG.”

Alex Quant, head of ESG research, added: “Engagement with companies is critical for risk management and to improve outcomes, so it’s important fiduciary managers monitor this and hold their underlying fund managers to account.”

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