Europe

Holistic ESG Strategies Raise Resilience

Knowledge on social factors and integration approaches lags climate factors, report finds.

To mitigate ESG risks as effectively as possible, pension funds must recognise the interconnectedness of the environmental, social and governance factors, a report by the Pensions Policy Institute (PPI) has said.

Lauren Wilkinson, Senior Policy Researcher at the UK not-for-profit research organisation PPI, and author of the report, explained that the linkage between the factors “needs a lot more knowledge and understanding from investors”.

While admitting that there isn’t a correct answer to a holistic approach, she said that investors need to make sure “all of the different aspects and risks have been taken into account rather than just pushing for something that reduces the climate risks”.

The report, titled ‘Engaging with ESG: Environmental, Social and Governance Factors’, is the third and last in a series and examines ESG investment approaches and areas for improvement.

It is based on a survey, carried out in November 2020, and qualitative interviews, including 62 responses from pension schemes, consultants and asset managers.

The report finds that if investors focus too heavily on environmental or social factors to the neglect of governance considerations, they are less likely to appreciate and benefit from the link between investee companies with good governance and environmental and social practices.

The report also noted that failure to recognise how environmental and social factors interact may lead to more fragmented ESG approaches.

Consistency, on the other hand, “is likely to yield a greater protection for members against these risks”, it said, adding that lessons from integrating climate change risks can be adapted to other ESG risk factors.

Wilkinson also explained that pension funds’ efforts to successfully integrate climate risks are eased by the fact that climate change is supported by already agreed upon definitions and goals.

“Across the world, there is a lot of common ground and less disagreement then maybe on social areas,” she added, proposing the creation of a task force for social topics, similar to the Task Force on Climate-related Financial Disclosures (TCFD) to align opinions.

The report also found a recognition among many pension schemes that ESG strategies are a work in progress.

In particular, it highlighted a lack of knowledge of the “financially-material nature of social risk factors, and how to account for them in investment strategies”.

“The broader scope and qualitative nature of social factors can make it hard to measure impact and understand how to integrate these risks effectively,” the report said.

A report published last week by the Principles for Responsible Investment advised pension funds on how best to incorporate beneficiaries’ sustainability interests into their ESG investment strategies.

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