Progress towards climate and diversity goals risks stagnating as asset manager commitment towards broader ESG goals diverges, according to research from XPS.
The pension consultancy firm analysed 170 funds from 41 investment managers across various asset classes — giving them a traffic light rating based on five key ESG criteria.
It found that while the overall number of ‘green’ ESG ratings had increased year on year, up from 40 to 43 per cent progress had slowed. It also highlighted that the number of funds that had a ‘green’ rating for a firm-level commitment to ESG had fallen in recent years. This stood at 85 per cent in 2023, falling to 72 per cent in 2024 and now registered at just 64 per cent.
XPS says it downgraded a number of managers who lacked strong firm-level targets on climate change, including some that had softened earlier commitments. This divergence suggests that while some managers remain committed to ESG, others are pulling back amid political uncertainty around sustainability issues.
This report also highlighted that poor progress on social goals and diversity and inclusion.
The report said this weakening firm-level commitment was reflected in day-to-day portfolio management. Despite some progress with ‘active equity’ funds, where managers provided clearer evidence of ESG integration and engagement, 26 per cent of all funds still could not demonstrate any examples of integrating ESG risks into investment decisions, unchanged from 2024.
When it comes to stewardship – how managers engage with companies and exercise ownership rights – the report painted a mixed picture. Overall, the proportion of funds rated ‘green’ for this aspect rose to 45 per cent, from 33 per cent in 2024.
However, XPS says engagement activity remains uneven across topics. Across equity, fixed income and multi-asset funds, 42 per cent of portfolio holdings were engaged with on environmental issues, but only 17 per cent of holdings were engaged with on social issues, highlighting the continued challenge of measuring and addressing social risks.
Private markets continue to lag significantly on stewardship, with 53 per cent of diversified private markets funds rated ‘red’ — reflecting weak evidence of engagement and ESG oversight.
XPS says this ongoing pattern highlights the structural differences between public and private markets, where the absence of disclosure requirements and voting cycles creates challenges for effective stewardship.
The report also said that diversity and inclusion is not where it needs to be, with only 61 per cent of funds run by managers with firm-level targets on D&I.
XPS Group head of ESG research Alex Quant says: ”This year’s results reveal a troubling pattern of stagnation. While some managers continue to advance their ESG capabilities, we’re seeing a clear bifurcation in the industry, with others retreating on climate commitments and more than a quarter of funds are still unable to demonstrate evidence of basic integration of ESG risks into their investment processes.
“Schemes should therefore engage proactively with their managers to ensure these risks are being properly assessed and integrated, or consider whether their investments remain fit for purpose.”
