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Out of Obscurity

As landmark sustainability reporting standards come into force, a UK taskforce is working to make sure reporting on social factors is fit-for-purpose for investors.  

The ‘S’ or social has traditionally been the overshadowed factor in ESG, but this is quickly changing with workforce conditions, diversity and inclusion, and community engagement climbing up the agenda for investors, and regulations such as the UK Modern Slavery Act and EU Corporate Sustainability Due Diligence Directive being introduced which aim to eradicate modern slavery and safeguard human rights across supply chains.  

But a UK government investigation into pension schemes’ consideration of social risks and opportunities found that, while trustees deem the issue important for investment management, they lack a proactive approach to embedding social factors within pension schemes’ investment decisions and stewardship policies.  

This was the prompt for the creation of the Taskforce on Social Factors (TSF), which was launched on 28 February by the UK Department for Work and Pensions (DWP), explains its chair, Luba Nikulina, Chief Strategy Officer at IFM Investors.  

“Pension fund trustees consider social factors to be incredibly important for their decision making, but find it challenging to define what data sources to use and how to interpret this data to help them measure and manage social risks and opportunities in a sensible way,” she says.  

The Taskforce’s work will aim to encourage trustees and give them support and the right tools to elevate their approach to financially material social factors and improve their understanding of the social risks and opportunities that have direct impact on the retirement outcomes of their members. 

Nikulina also notes that some of the biggest social risks in society today, such as poor treatment of workforces, human rights infringements, modern slavery and rising inequalities, are economy-wide in nature and represent systemic risks for pension funds.  

“These are hard to quantify and address as an individual investor,” she says. “The best approach to seeking to address these issues is to collaborate with other investment institutions to safeguard and enhance returns.”  

This is especially relevant for IFM which is owned by pension funds, and has a history rooted in its collective ownership and joint action taken by pension funds to improve outcomes for their members. “Joining the taskforce was a natural extension of what we do,” says Nikulina.  

Data hurdles  

One key part of the Taskforce’s work will be to help identify reliable data sources and useful resources for pension schemes to assess and manage financially material social risks and opportunities. The work will contribute towards the development of wider principles, standards, and metrics.  

Nikulina says while the recent explosion in social data has greatly increased trustees’ ability to assess social risks and opportunities, the quickly evolving landscape also represents challenges.  

“The range, coverage and methodologies applied to social factors vary significantly and seeing the wood through the trees can quickly become an issue for investors,” she says.  

“Social data, like any other investment decision data, has to have a good ‘provenance’. In terms of evaluating a data source, pension funds and their advisors have to consider its objectivity, frequency, completeness, accuracy, ability to aggregate etc.”  

Stephen Barrie, Deputy Chief Responsible Investment Officer at the Church of England Pensions Board, also sits on the TSF and agrees that good quality investment-grade data is generally based on public disclosures which are updated regularly and supported by strong governance practices.  

He also notes, however, that there are key differences between climate and social data.  

“On the climate side we tend to consolidate around carbon equivalent emissions, whether that’s an intensity or an absolute basis. Whereas on the social side, it’s much more about identifying challenges. It’s more about guardrails rather than a unified portfolio score, for example.”  

Resources providing data and information on social factors, include the ShareAction-led Workforce Disclosure Initiative (WDI), which aims to improve corporate transparency and accountability on workforce issues, and the Business and Human Rights Resource Centre, which stores allegations relating to human rights harms against companies.    

Hilkka Komulainen, Head of Responsible Investment at Aegon UK, says the range, coverage and methodologies of these resources vary widely. “You’ve got some datasets that only look at a subset of companies globally for a very specific issue. So, what you get isn’t in quite the same as you might for environmental data such as a comprehensive greenhouse gas metric.”  

Komulainen co-chairs a working group on modern slavery as part of the Taskforce that will seek to provide clarity, context and understanding of what modern slavery is and why pension funds should be considering it, including frameworks, case studies and data sources.   

She says the Taskforce has had lots of conversations on the best approach to helping trustees get their head around social data. It has decided against a repository demonstrating existing tools and resources as this will not give trustees the tools to identify clearly what is material and relevant, and understand what sources are for context, frameworks or the raw data itself. She says the TSF is exploring guidance on how to approach a materiality analysis and how trustees can consider the materiality of social factors in their portfolios. 

The Taskforce met this week and Nikulina says discussions were had on draft recommendations.  

“The TSF members have done an absolutely amazing job developing the draft recommendations within the relatively short timeline since its establishment. Today’s discussion was focused on the review of the draft recommendations prepared by different TSF members, ensuring that different areas of the recommendations are aligned and form a coherent whole and, more importantly, that we are not missing something significant,” she says.  

She added that the Taskforce also discussed the timeline for its work delivery and how it plans to engage with the broader industry to ensure that its recommendations are, first and foremost, useful for pension fund trustees, but also “pragmatic, achievable” and help to better address social risks and opportunities in a more systematic way. 

Social progress 

The Taskforce’s work comes as progress on embedding the reporting of social factors into industry norms and standards gains traction.  

European Sustainability Reporting Standards (ESRS) were approved by the European Financial Reporting Advisory Group (EFRAG) last year, and outline ESG reporting requirements for corporates as part of the Corporate Sustainability Reporting Directive (CSRD), which covers reporting on workers and affected communities.

The International Sustainability Standards Board (ISSB), which recently launched its landmark inaugural sustainability standards on climate and general sustainability, is mooting further work around human capital and human rights.  

“One of the TSF’s objectives is to engage and monitor developments with ISSB and other international standard setting organisations which we have been doing from the outset and found useful for all the parties involved,” says Nikulina.  

“ISSB is running a consultation on human capital and human rights where the DWP’s taskforce could serve as a valuable input to facilitate a broader understanding how our thinking has been evolving in the UK pension funds industry.” 

Another key role the Taskforce will take is in assessing the role that pension fund trustees have in encouraging the reporting and dissemination of social data by companies.  

Komulainen says pension fund trustees need to play a leading role of providing accountability in the value chain.  

“There’s huge scope for investors to ask companies for better disclosure on social issues but it depends on a pension fund’s model,” she says.  

“It can be useful engaging with companies to ensure the asset owner voice is heard or for pension funds that are smaller asking questions of the investment consultants or asset managers.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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