DWP-commissioned taskforce’s recommendations aim to increase focus, alignment and transparency between asset owners and managers on social factors.
The Taskforce on Social Factors’ (TSF) new guide to integrating social-related factors into investment decisions could prompt a “step change ” for the UK pensions industry, but only if its recommendations are fully implemented.
The guide contains a total of 35 recommendations for pensions industry stakeholders, including six for trustees, five for regulators, three for governments and five for asset managers.
Through the recommendations, the Taskforce aims to identify “what good looks like” to improve the integration of social factors, as well as providing tools for trustees to identify and monitor risks and opportunities.
This includes the development of strong data flows, social factor frameworks, robust disclosures, supportive regulations, and collaboration to bolster social factor practices in the economy.
Shipra Gupta, Investments Stewardship Lead at Scottish Widows, told ESG Investor that the TSF guidance calls on the UK pensions industry to “better understand” its role in integrating social factors into investment decision-making.
“Social factors have arguably been around for much longer than climate change became an issue,” she added. “Yet they have not been given the importance they deserve by the industry.
“We can no longer afford to manage E and S in silos.”
The TSF was formally established by the UK Government’s Department for Work and Pensions (DWP) in February with the goal of supporting pension scheme trustees and the wider pensions industry in navigating the risks, opportunities, and key challenges surrounding the management of social factors, including the identification of reliable data and metrics.
The Taskforce’s members are comprised of representatives from pensions schemes, asset managers, and cross-industry collaboration groups, including from Aegon, IFM Investors, the UK Sustainable Investment and Finance Association (UKSIF), Pension Protection Fund (PPF) and ShareAction.
Understanding and interaction
Maria Nazarova-Doyle, Co-chair of the Taskforce and Global Head of Sustainable Investment at IFM Investors, said a key aim of the new guide is to “increase transparency and alignment” between asset owners and managers on social factors.
“I hope that this guide will provide actionable help for UK pension trustees to make a step change in integrating social factor considerations into their work, ultimately making their investment and stewardship strategies more robust, leading to more positive real-world outcomes,” she added.
Daniel Jarman, Stewardship Manager at the PPF, said that providing pension trustees with a document that “offers structure” to conversations with asset managers “should result in an increased focus on social factors”.
The TSF guidance for pension trustees included recommending that pension trustees have a “good understanding” of their investment consultants’ social factor approach and to set them objectives related to these factors.
It also suggested that trustees make sure that asset managers already consider social factors prior to appointing them to ensure they are integrated into the investment strategy and stewardship activities.
Claire Brinn, UK Policy Manager at ShareAction, said that if fully adopted, this recommendation should ensure asset managers consider social factors when devising investment strategies which will “create better accountability for pension funds”.
The Taskforce said that trustees should “consider their own practices” in relation to social considerations. This includes paying fair wages, inclusion and diversity, and improving their understanding of key social factors such as human rights and modern slavery.
Pension trustees are already required to develop and maintain an investment policy which includes financially material social factors by law.
The TSF guide’s recommendations for asset managers included being able to demonstrate influence on social outcomes through transparent reporting on engagement, voting and investment outcomes.
It also suggested that managers should support clients with gap analysis on stewardship and voting policies and activity to help increase alignment and understanding between them, as well as actively participating in engagement collaborations, developing and inputting to public policy and best practice debates.
Brinn said ShareAction was “particularly pleased” about the TSF’s recommendation that asset managers actively participate in engagement collaborations.
Gupta said that asset owners should “feel more empowered” to prioritise social risk factors and opportunities in their investments, while appointed asset managers should “dial up their focus” on integrating social risk management practices and seeking social-related opportunities into their strategies.
Regulation and policy
The TSF’s recommendations for regulators included the suggestion that the DWP consider “formally setting out expectations” for pension funds to address social factors, which would be overseen by The Pensions Regulator (TPR).
It called for the UK Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) to “continue to build momentum” on the back of the TSF’s work by reiterating their stewardship and engagement expectations with companies on social factors by trustees.
The guide also said that the TPR needs to consider ways of raising social issues awareness among pension trustees, alongside their climate change strategy, to help them integrate these factors into their investments.
Oscar Warwick Thompson, Head of Policy and Communications at UKSIF, said that it “fully supports” the TSF’s recommendation for the DWP to set out expectations for how social factors should be addressed, and for the FCA to consider how these factors should be reported on.
The TSF’s governments recommendations included the continued facilitation of a “supportive policy environment” for action on social issues and ensuring the implementation and “effective enforcement” of regulation.
The Taskforce urged that work continue on the introduction of “enhanced economy-wide disclosures”, encouraging global standards-setters, such as the International Sustainability Standards Board (ISSB), to incorporate social factors.
Respondents to the ISSB’s two-year work plan consultation noted the need to make a start on social and human rights-related reporting standards, which the European Securities and Markets Authority said are “as important and pressing as environmental standards”.
The TSF also said it supports the development of a social taxonomy in addition to the UK green taxonomy.
Nazarova-Doyle said that a supportive policy environment could “unlock further improvements” in addressing social issues, citing how the implementation of a social taxonomy could “bolster investment approaches looking to better mitigate social risks and target positive social impacts”.
Warwick Thompson said that “clear guidance” is required from government and industry for pension schemes on “how to interpret fiduciary duty for this guide to be as effective as it can be”.
“In time we would like to see government draw on the TSF’s work, and to consider how corporate reporting on social factors could be consistent, decision-useful, and streamlined where appropriate for issuers and investors,” he added.
Postive first impressions impressions, next steps
Nazarova-Doyle said the initial reaction she had seen was “positive”, with Scottish Widow’s Gupta agreeing that the market has “clearly welcomed” the work of the TSF.
ShareAction’s Brinn described the guidance as a “welcome step in the right direction” with the recognition that social factors are equally important as environmental concerns.
However, she also said that the ShareAction would like to see “more detailed guidance” on health factors included in the final report, beyond the current examples of social factors such as anti-microbial resistance and social unrest due to inequality presenting systemic risks.
The consultation opened last week and is set to close on 1 December.
Nazarova-Doyle said that when the consultation closes it will be followed by a series of roundtable events to discuss the draft guide and feedback received. This will then be tested in a focus group-type environment before any required updates are incorporated into the final guide.
“If there are any limitations or relevant considerations that are uncovered during the consultation process, we will aim to deal with those before the guide is finalised,” she added.
Gupta said that wider industry feedback is necessary at this stage to strengthen the guidance, the credibility of the recommendations, and to ensure they are “practicable and fit for purpose”.