Just 40 per cent of investment funds received an overall Green ESG rating in 2026, down from 43 per cent in 2025, as concerns remain over stewardship and climate-risk management in private markets, according to XPS Group.

The consultancy's sixth annual Investment Fund ESG Rating Review, covering 146 funds across 40 investment managers, found that overall progress on environmental, social and governance (ESG) practices had plateaued, despite improvements in the integration of ESG considerations into investment decisions.

The findings come as pension schemes and insurers increasingly allocate capital to private markets, raising questions over the effectiveness of ESG oversight in these investments.

In particular, the review found that 22 per cent of private market funds received a Red rating for stewardship, compared with just 3 per cent of listed market funds.

Over half (56 per cent) of private market funds did not undertake climate stress testing, while 31 per cent reported that they did not account for physical or transition climate risks.

XPS also identified gaps in ESG reporting, with 77 per cent of private market managers able to adequately report carbon data, compared with 99 per cent in listed markets.

Despite an overall increase in Green ratings for ESG integration among private market funds, 41 per cent could not demonstrate how they incorporated ESG considerations into investment decisions in practice.

The consultancy highlighted particular weaknesses among funds in run-off, warning that investors should not assume ESG risks were being managed consistently throughout a fund's lifecycle.

Meanwhile, firm-level ESG commitments also continued to weaken, with the proportion of funds receiving a Green rating for this criterion declining for the third consecutive year.

However, the review identified some positive developments, with a record proportion of funds achieving Green ratings for ESG integration, suggesting that sustainability considerations were becoming more embedded in day-to-day investment decisions.

The proportion of funds unable to provide a single example of ESG factors influencing an investment decision also fell from 26 per cent in 2025 to 17 per cent in 2026.

XPS Group head of ESG research, Alex Quant, said the findings highlighted the need for greater scrutiny of private market investments as pension schemes increased their exposure to the asset class.

"Private markets are attracting growing allocations from pension schemes and insurers, making robust ESG oversight increasingly important," Quant argued.

"Investors should not assume that ESG risks are being managed consistently throughout a fund's life. Stewardship, climate analysis and active monitoring, particularly in run-off funds, need much greater attention."

Quant also encouraged investors to maintain regular oversight of their investment managers.

"Investors should regularly review managers, agree stewardship priorities and assess preparedness for the growing physical risks of climate change," he added.

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