To ask Her Majesty's Government how many Environmental, Social and Governance (ESG) pension products are available for automatic enrolment pensions; what assessment they have made of the impact of financial services regulations on the number of ESG pension products available for automatic enrolment pensions; and what steps they are taking to increase the number of ESG pension products available for automatic enrolment purposes.
The department has introduced ESG-related legislation, including regulations aligned with the Taskforce on Climate-related Financial Disclosures (TCFD), requiring trustees to consider, assess and report on the financial risks of climate change within their portfolios.
These measures go beyond merely reporting a climate policy and how it is implemented. They require trustees to put in place climate-related governance and risk management, to assess the impact of climate change on their investment strategy, to conduct scenario analysis, to set targets.
This means that automatic enrolment schemes will be encouraged to consider climate-related risks and opportunities, and this is likely to influence their choice of products in their portfolio. The Government thinks that ESG factors and their impact should be taken into consideration where financially material, but the process of investing in individual products is down to the market and trustees working within their fiduciary duty.
I recognise the risk of ‘greenwashing’, where investors can be misled on the quality of a product described as being an ESG product and this must be tackled. To aid trustees in their decisions, the department participates in an advisory group which supports the Financial Conduct Authority in developing their proposed requirements that certain investment products display a label reflecting their sustainability characteristics.
Recent research carried out by Corporate Advisor in their ‘ESG in DC Pensions’ report found that 19 out of 21 pension providers surveyed deploy ESG tilts or screening overlays on their default funds excluding specific companies or sectors with poor ESG ratings. The report found that three years ago, just five master trust defaults took this approach, suggesting that schemes are increasingly turning to ESG-related products. I believe the steps the department has taken to put in place the regulatory framework for consideration of ESG factors will have contributed to the uptake here.