Fund managers welcome ESG back into fold, but gaps remain

New commentary from Lonsec Research & Ratings has confirmed fund managers have regained ground when it comes to several environmental, social and governance (ESG) considerations, but gaps remain in whole-of-firm “maturity”.

Tony Adams, Head of Sustainable Investment Research at Lonsec Research and Ratings, praised fund managers for their improvements over the past two years on several fronts, including investment strategies, underlying assets, governance structures, policy frameworks, transparency and stewardship.

However, the areas of proxy voting and policy framework detail left something to be desired, and Adams said fund managers were more likely to leverage ESG as a risk management tool rather than its “use in driving opportunity or investment differentiation”.

“Encouragingly, internal ESG scores for managers have improved. These scores reflect several key indicators, including the strength of ESG commitment, the clarity of policy frameworks, and the accessibility and usefulness of ESG reporting. Firms are also assessed on their approach to active ownership – specifically, the quality of engagement and transparency of voting outcomes,” he said.

“A key driver of improvement has been increased transparency and wider publication of ESG and stewardship disclosures. More managers now publish policies that articulate both principles and their practical applications. Many global managers have also embraced frameworks like the UK Stewardship Code, which promotes outcome-focused reporting and real-world case studies that demonstrate impact. This has contributed to a more standardised expectation of what constitutes quality ESG and stewardship communication.

“This alignment with stewardship standards has driven a shift in reporting practices. Rather than providing generic descriptions, managers now present narrative-rich reports with detailed examples of how ESG considerations influence corporate behaviour. Case studies are becoming commonplace, illustrating how engagement or proxy voting has led to observable change. These narratives provide clients with a more concrete sense of how ESG efforts are translated into action.

“The frequency of stewardship reporting has also improved. Quarterly updates are becoming standard among leading firms. ESG is now treated as a core aspect of investment communication, enhancing transparency and investor confidence. Regular reporting also allows firms to reflect emerging ESG issues in near real time and to communicate progress more dynamically.”

According to Adams, more exclusionary approaches such as screening have become more commonly used by fund managers to provide further detail to investors on what is not invested in, which has since caused a decline in the robustness of ESG integration within the managers’ investment choices and “risks creating a disconnect”.

“Lonsec’s review of proxy voting reveals a more mixed picture. While many firms have established baseline policies stating that votes should be in clients’ best interests, this is a minimum standard. Stronger policies offer detailed frameworks and issue-specific criteria and provide transparency over voting direction and rationale. Investors are increasingly scrutinising not just whether firms vote, but how and why,” he said.

“A growing number of firms disclose votes via dashboards or downloadable summaries, often covering all resolutions. These efforts support accountability. Yet, gaps remain. Voting directions are frequently accompanied by limited explanations, especially when relying on third-party advisors. While outsourcing provides consistency, it can reduce transparency in ESG-sensitive or controversial proposals and erode client confidence in the authenticity of stewardship.

“In contrast to the gains in transparency, Lonsec has noted a slight weakening in the substance of ESG policy frameworks. While firms still express strong commitment—often with board-approved ESG policies, exclusion criteria, and designated ESG leads—there has been a move toward generic statements and reduced detail in execution.

“Previously, many firms articulated comprehensive ESG integration processes, using proprietary scoring models, materiality maps, and performance-linked targets. Some even linked ESG to remuneration or investment decision checkpoints. These practices are now less common.

“Instead, ESG is increasingly framed as a risk management tool, with less attention given to its use in driving opportunity or investment differentiation. Many firms cite frameworks like PRI without demonstrating how these principles are embedded in investment processes. ESG application is often delegated to individual teams, resulting in inconsistent implementation across asset classes and investment styles.”

However, Adams also emphasised that fund managers had managed to overcome several challenges and improve overall, confirming Lonsec’s view that “ESG maturity” is one the rise.

“Lonsec continues to emphasise the importance of integrating Environmental, Social, and Governance factors alongside traditional financial indicators in assessing long-term investment risk and opportunity. Better ESG practices can enhance a manager’s ability to identify emerging risks and long-term value drivers,” he said.

“For investors, these developments matter. A manager’s ESG policy and stewardship transparency are key indicators of how well ESG risks and opportunities are managed at both the asset and portfolio levels. Improved ESG practices can reduce exposure to governance failures, environmental liabilities, and social controversies – any of which may lead to financial underperformance or reputational harm.

“Clearer reporting also empowers investors to assess whether their capital is being used to influence corporate behaviour in a positive, measurable way. As ESG data becomes more real-time and detailed, investors are better placed to hold managers accountable and align portfolios with sustainability goals. In a crowded market, credible ESG integration and transparent stewardship differentiate managers and increase confidence in strategy execution.

“Increased ESG maturity also reduces the risk of greenwashing. High-quality reporting and strong firm-level policies help investors identify truly responsible managers.  Managers with clear, well-executed ESG strategies will be better positioned to meet these expectations and maintain trust.

“Investors should also recognise the potential for strong ESG and stewardship practices to enhance long-term value creation. Firms with thoughtful, well-articulated ESG policies are more likely to anticipate shifts in consumer preferences, regulatory expectations, and reputational pressures. This can serve as a signal of broader investment competence. Over time, ESG maturity at the firm level may increasingly correlate with performance resilience and stronger alignment with long-term investor values.

“Ultimately, meaningful ESG practices are not just about regulatory compliance – they are a sign of investment quality and institutional integrity. As the market matures, it will be those managers with a transparent, evidence-based and consistently applied approach to ESG that are most likely to retain investor trust and capital.”