Social factors guidance aims to help trustees tackle 'S' of ESG

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The Taskforce on Social Factors, an industry group set up by the Department for Work and Pensions, has published guidance for the pensions sector to identify and monitor social risks and opportunities in investments.

The guidance aims to provide a framework for trustees and follows a consultation by the taskforce from last October with 30 recommendations, including six for pension trustees. The taskforce was set up by the DWP in 2022, following a call for evidence by the DWP in 2021.
“The 'S' in ESG tends to be less high profile, due to social factors being sometimes more challenging to measure, varying from scheme to scheme or with changing priorities,” said pensions minister Paul Maynard. 

Taskforce chair Luba Nikulina said the impacts of the low carbon transition and the physical impacts of climate change needed to be addressed, but that “it goes far beyond that, particularly for pension funds and their trustees”. 

“It is also clear that the reason why social factors matter is because they can be material for investment decision-making. Supporting pension fund trustees [to] navigate such decisions was central to the work of the taskforce, which has now created a user-friendly guide, so trustees are better able to understand and assess these factors,” Nikulina, who is also chief strategy officer at IFM Investors, added. 

The guide has four sections:  

  1. social factors and pension funds, on why social factors are important from an investment perspective, and how taking account of these considerations aligns with pension trustees’ fiduciary duties.  
  2. addressing social factors in pension portfolios, which provides a framework with Baseline, Good and Leading practice indicators, along with a deep dive into modern slavery and how trustees can approach this social factor in their investments 
  3. materiality assessment framework, which provides an example top-down approach for pension schemes; and 
  4. social factor data, which discusses data trustees can use to manage social factors in investment.  
Alongside the guidance, the taskforce has published supporting documents, including: 

The Pensions Regulator has welcomed new guidance. Louise Davey, interim director of regulatory policy, analysis and advice, said trustees cannot ignore social factors they consider to be financially material.

“We urge trustees to use the guidance to help them to get to grips with key issues as part of their investment stewardship and risk management,” she said. 

Davey stressed the need for trustees to speak to asset managers: “It’s also important that trustees are in active dialogue with their asset managers so social factors are integrated into their investment objectives and can help drive good outcomes for savers.”

Trustees of pension schemes with at least 100 members must prepare a statement of investment principles which includes their policies around environmental, social and governance considerations. TPR’s climate and sustainability lead Mark Hill outlined the regulator’s view around social factors in a blog last month

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