Trustees urged to evaluate fiduciary managers amid ESG shortcomings

Pension scheme trustees have been urged to take proactive oversight of fiduciary managers’ (FM) approach to environmental, social and governance (ESG) issues, after research from XPS Pensions found that 33 per cent of FMs don’t exclude the lowest ESG-rated funds.

XPS’s report, Progression of the UK Fiduciary Management Market’s Approach to ESG Integration, found that whilst fiduciary managers have made progress in implementing ESG approaches across their offerings, there are still shortcomings.

The survey revealed that 83 per cent of FMs now explicitly reference ESG policies in investment policy documents or exclude underlying managers who are assigned the FM’s lowest ESG rating.

However, it also found that 10 per cent of FMs do not have the capability to report their carbon footprint, despite having made commitments as part of the Net Zero Asset Managers Initiative.

A further 17 per cent are also not yet able to provide reporting at a strategy level to support investors specifically with the upcoming Taskforce on Climate-related Financial Disclosures (TCFD) reporting requirements.

In addition to this, the survey found that the majority of standard client reporting provides little information against ESG factors, with the exception of climate change, which tended to be covered in more detail.

Furthermore, whilst all of the respondents monitored the voting and engagement activity of underlying managers, only 58 per cent actively influenced these voting activities.

In light of the findings, the group urged pension trustees to evaluate their FMs ESG credentials to identify any gaps between their expectations and what manager’s deliver, and to address these gaps.

It also argued that such work is increasingly important in light of the fact that around 1 in 5 defined benefit (DB) schemes are now under fiduciary management of some kind.

XPS Pensions Group partner, André Kerr, 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 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.”

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