Climate-related financial risks are not addressed sufficiently by auto-enrolment default funds, according to research from ShareAction.
The responsible investment charity surveyed ten auto-enrolment providers in the UK entrusted with the savings of nearly nine million savers.
Government backed provider National Employment Savings Trust (Nest) is the only scheme that incorporates climate-related financial risks when setting the default funds’ investment managers’ performance objectives and requirements for reporting.
It is also the only provider to have a measurable and time-bound target to reduce the portfolio’s exposure to climate-related financial risks, the research found.
ShareAction ranked the providers on their approaches to responsible investment, including on their response to climate change risk, proxy voting and engagement with companies, and ethics.
It also scored them on how well they engage and communicate with their own members.
Nine out of the ten providers responded to the survey.
Scored out of a possible 352, the top five performers are: Nest (260), The People’s Pension (204), Legal & General (contract-based: 200, master trust: 195), Aviva (193), Standard Life (contract-based: 193, master trust: 192).
The bottom five performers are: Scottish Widows (187), Royal London (166), NOW: Pensions (139), Aegon (90), and Smart Pension (who withdrew from the survey).
Investment risks posed by climate change are an increasing force behind decision-making in investment management.
Legal and General Investment Management (LGIM) announced today (11 June) that it will take action against companies that are not addressing the risks of climate change, including removing them altogether from its main investment index.
Elsewhere in the ShareAction findings, Nest obtained the highest score on responsible investment - 30 per cent above second placed Aviva’s contract-based scheme – but fell down on the second half of the survey, as did the majority of its peers, which assessed how they communicate and engage with members.
The People’s Pension led this table, even though there is only a 13 points difference to the worst provider, Aegon’s contract-based scheme.
ShareAction concluded there is little to separate providers in how they communicate and engage with members.
Despite pockets of good practice and innovation, it stated there is a lack of evidence pension providers are actively reaching out to savers to engage on important issues that really matter to them.
ShareAction is calling on providers to produce a statement of responsible investment principles, which includes a commitment to engage with underlining investments to promote better practice on financially material issues like climate change and tax.
This should apply as much to the default fund as ethical choices. The document should clarify which ethical concerns they consider, for example, controversial weapons exclusions, it said.
The charity also called on the Department for Work and Pensions, the Financial Conduct Authority and The Pensions Regulator (TPR) to encourage climate risk assessments in default funds, gender diversity targets, and member engagement.
According to Paul Britton, research officer at ShareAction and author of the report, the “strong incorporation of responsible investment principles is good for our savings and good for society”.
“Of course, auto-enrolment pension providers cannot be solely blamed for Britain’s retirement cliff-edge, but they do need to act on their key position to engage the nine million new workers with their pension savings.
“Hoping members don’t opt-out as the minimum contributes rates rise is not enough - people need compelling reasons to save.”
Anthony Raymond, acting executive director at TPR, said: “These providers are all in the market for automatic enrolment business, so it is disappointing that their member communication and engagement strategies seem built on the presumption that those who join a scheme through automatic enrolment then suddenly become proactive and engaged and come looking for information.”
Earlier this year, ShareAction called into question the effectiveness of independent governance committees (IGCs), as it ranked providers' committees based on their quality and transparency.
maria.espadinha@ft.com
