A new taskforce is being set up by the pensions minister to identify metrics and support trustees with the integration of social factors in pension investment. Is the ‘S’ of ESG becoming more prominent?

 

Responding to a call for evidence on social factors by the Department for Work and Pensions in spring 2021, pensions minister Guy Opperman said: “To support trustees and the wider pensions industry with some of the challenges around managing social factors, I will establish a new minister-led taskforce to identify reliable data and metrics and ensure that focus on social factors continues to grow throughout the investment chain.” 

 

The taskforce will be led by the pensions minister and be a cross-department working group, with invitations extended to financial regulators. 

 

 

Responses received to the government’s call for evidence highlighted a need for a proactive approach to embedding social factors within pension schemes’ investment decisions and stewardship policies, the DWP said. The work of the taskforce will contribute towards the development of wider principles, standards and metrics, it added. 

 

Social factors can include analysis of a range of issues, from workforce conditions and supply chains to community engagement, consumer protection and modern slavery, and are part of environmental, social and governance investing. However, unlike the E and G in ESG, such issues have so far received less attention from investors, aside from a workforce reporting initiative by the CIPD, the Pensions and Lifetime Savings Association and Railpen. 

 

   

The responses to the call for input highlighted that social factors are seen as a part of the overall ESG policy, and some respondents noted that E, S and G are often closely linked. The PLSA found its members are most focused on modern slavery, health and safety in supply chains, workforce conditions and remuneration practices. 

 

The absence of agreed data and guidelines for what can be designated and measured as ‘social’ has however been cited as reasons for investors’ weaker stance on the topic. 

 

The pensions minister, who has recently been driving regulations around climate, wants to change this. “I’m proud of the progress we have made in bringing environmental and climate issues up the pensions agenda, but climate change should not be trustees’ sole consideration,” Opperman said. 

  

“Financially material social factors also pose risks and provide opportunities to schemes’ investments, and our taskforce will help ensure that focus on social factors continues to grow among pension schemes and throughout the investment chain,” he added. 

 

 

The government acknowledged that “it is up to schemes to determine how to consider financially material social risks and opportunities and whether to take an integrated approach to ESG or create standalone policies covering specific social factors”. However, where trustees take an integrated approach to ESG, they should consider the risks and opportunities that might impact the performance of the scheme and communicate these to members, it noted. 

 

The department said the disincentives and barriers cited in the responses it received “do not add up to sufficient reasons for stewardship activities on social factors to be overlooked” or for such issues to be left solely to fund managers. “We expect data to improve over time and agree with the findings of the [Taskforce on Pension Scheme Voting Implementation] that asset owners can remain active stewards in pooled fund arrangements,” it added, referring to a previous taskforce on stewardship. 

 

The DWP is encouraging pension schemes to join the Occupational Pensions Stewardship Council – an industry-backed forum working to move the dial on stewardship through collective engagement and sharing best practice. 

 

Perhaps not surprisingly, the government also opined that the invasion of Ukraine “may have prompted some investors to rethink ESG, including and the defence and nuclear sectors” and that this, and the potential impact of the Ukraine war on modern slavery, could be topics the new taskforce might want to consider. 

 

Welcoming the publication of the DWP response, Maggie Rodger, co-chair of the Association of Member Nominated Trustees, said the AMNT had long campaigned for social factors to be properly taken into account in the investment process.

"Much of the thinking in the DWP consultation reflects the views we have been promoting in our groundbreaking Red Lines Voting Campaign," she said, adding: "We welcome the establishment of a
taskforce and expect to input substantially into the debate. The position of trustees must be explained and protected and we shall undoubtedly want to explore further the ways in which the wish of trustees can be better implemented by the asset management community."

The PLSA linked the social factors issue mainly to its workforce reporting framework. Joe Dabrowski, deputy director policy, said PLSA research has shown that social factors matter to pension schemes. 

"However, investors’ interest on material workforce issues has not been translated into consistent corporate reporting – as demonstrated by our joint report into the FTSE100 published this spring," he said, which concluded that there should be an agreed baseline workforce reporting framework. 

"We are pleased to see our recommendation being taken forward by the Minister and look forward to contributing to the efforts to address this vital issue," he added.

 

The government response contains a number of resources and refers to international developments on social factors. 

 

In February, the European Commission’s Platform on Sustainable Finance group proposed a social taxonomy which was expected to increase the visibility of these risks and could find its way into EU legislation. 

 

The EC’s proposed social taxonomy has three objectives, one each for workers, consumers and communities:  

 

The suggested structure mirrors aspects of the environmental taxonomy, centering on the development of social objectives, the types of substantial contributions, ‘do no significant harm’ criteria and minimum safeguards.