Fund firms falling short on net-zero and ESG targets

Research finds that just 22% of fund groups have a ‘credible’ plan to be carbon neutral.

While there has been a sharp rise in asset managers committing to net-zero carbon emissions by 2050, there is lack of concrete plans in place to meet their targets.

XPS Pensions Group, a consultancy, found that 81% of asset managers surveyed have committed to net zero by 2050, up from 41% last year. However, its research showed that just 22% of fund groups could demonstrate a “credible plan” to meet these commitments.

It said: “There has been a significant rise in the number of fund managers making net-zero commitments across 2021. However, fund managers need a concrete plan to turn these commitments into action.”

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XPS Pensions also found that integrating environmental, social and governance (ESG) analysis into the investment process has stagnated this year, with 24% of managers scoring green ESG ratings on XPS’s “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,” the consultancy said.

One-third of fund managers could not provide any examples of how they integrated ESG into their funds.

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“This raises legitimate doubts over whether the ESG processes described are being applied in practice by managers across their funds,” XPS Pensions noted.

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.”

In the research, XPS Pensions Group 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.

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As part of its research process, it assesses and rates funds green, amber or red across eight 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.

ESG investing has soared in popularity in recent years. There is now £91 billion invested in “responsible” investment funds in Britain, according to the latest data from industry group the Investment Association (IA). This represents about 6% of all fund investments.