Trustee expectations and fiduciary managers’ efforts to include ESG approaches in their products may still differ, according to XPS Pensions Group.
The implementation of ESG approaches throughout fiduciary managers’ products has advanced, according to XPS’ report, Progression of the UK Fiduciary Management Market’s Approach to ESG Integration.
For instance, many investment policy documents now expressly mention ESG policies or exclude underlying managers with the fiduciary managers’ lowest ESG rating.
But there is still proof of market limitations. 33 per cent of fiduciary managers still do not remove funds managed by managers with the worst ESG ratings from their portfolios. Although they have pledged to the Net Zero Asset Managers Initiative, not all fiduciary managers have the ability to report their carbon impact.
XPS Pensions Group advises trustees to evaluate the ESG credentials of their fiduciary manager at a time when scheme members’ alignment with ESG goals is vital. This is carried out to identify any gaps between their expectations and the manager’s performance and to take action to fill such gaps.
As nearly 1 in 5 DB plans are managed in some way by fiduciaries, taking this action is becoming more and more crucial to guaranteeing that ESG measures are taken into account throughout the pensions industry, according to XPS Pensions.
XPS Pensions Group partner André Kerr says: “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 FMs 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.”