ESG progress declines for second consecutive year amid political uncertainty

Written by Callum Conway

25/11/2025

Investment firms' progress on environmental, social and governance (ESG) and climate strategies has declined for the second year running, with the proportion rated ‘green’ falling to 64%, down from 72% last year and 85% in 2023, according to XPS' fifth annual Investment Fund ESG Rating Review.

The review, which assessed 170 investment funds across 41 asset managers, found that although headline ESG scores continued to edge slightly higher, underlying progress has slowed sharply, and significant gaps remain across climate strategy, stewardship, and the day-to-day integration of ESG risks.

Indeed, XPS downgraded a number of asset managers after identifying weakened or softened climate commitments, warning that political uncertainty around sustainability should not deter firms from setting “clear, credible climate strategies”.

While 90% of asset managers had a diversity and inclusion (D&I) policy in place, only 61% had firm-level D&I targets, highlighting further inconsistency in commitment.

Stewardship results painted a similarly uneven picture.

Overall, 45% of funds achieved a ‘green’ stewardship rating, up from 33% in 2024, driven by improvements in listed equity and fixed income.

Engagement activity, however, remained heavily skewed: across equity, fixed income and multi-asset strategies, 42% of holdings were engaged on environmental issues, compared with just 17% on social issues such as labour rights and health and safety.

Private markets continued to lag furthest behind, with 53% of diversified private markets funds rated ‘red’ for stewardship due to weak evidence of engagement and limited oversight, linked to structural issues such as restricted disclosure and the absence of voting cycles.

The findings point to a growing “bifurcation” in the market, XPS warned, with some managers continuing to invest in ESG capability while others retreat.

This divergence is contributing to what the consultancy described as a broader risk of “stagnation” across the industry.

Even on overall ESG performance at fund level, progress appeared to be plateauing.

The proportion of funds receiving an overall ‘green’ ESG rating increased only marginally to 43%, up from 40% last year, a rise XPS said indicated a noticeable levelling off in momentum compared with earlier years.

Meanwhile, despite stronger responses from active equity managers, 26% of all funds were still unable to provide examples of integrating ESG risks into their investment decisions, unchanged year-on-year.

XPS warned that this suggests “a material portion of managers are not fully capturing the full spectrum of investment risks” in their day-to-day approach.

XPS head of research, Alex Quant, said this year’s results reveal a "troubling pattern of stagnation.”

“While some managers continue to advance their ESG capabilities, we’re seeing a clear divergence in the industry, with others retreating on climate commitments, and more than a quarter of funds still unable to demonstrate evidence of basic integration of ESG risks into their investment processes,” he added.

Consequently, Quant urged schemes to hold managers more firmly to account.

“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,” he stressed.

Over the next year, XPS warned it will be closely monitoring the strength of managers’ updated climate commitments following the revised Net Zero Asset Managers Initiative (NZAMI) statement, as well as evidence of ESG integration - particularly among the 26% of funds still showing none.

It will also assess whether stewardship and policy advocacy are producing meaningful, outcome-driven engagement across all asset classes.

Due to rising political pressures, withdrawals from collaborative sustainability initiatives have increased, with signatories to the NZAMI decreasing from 63% in 2024 to 57% in 2025.

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