The Department for Work and Pensions (DWP) has announced plans to establish a new minister-led taskforce to identify reliable data and metrics in an effort to raise focus on social factors throughout the investment chain.

In its response to its recent consultation, the DWP concluded 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 environmental, social and governance (ESG) or create standalone policies covering social factors.

However, it also clarified that, whichever approach is taken, trustees should be considering financially material social risks and "seize opportunities" in this space to help them fulfil their fiduciary obligations by mitigating against financial risk.

Indeed, commenting in the foreword, Pensions Minister, Guy Opperman, said that the social aspect of ESG could be "strengthened", warning that trustees who do not factor in financially material social factors "are at risk of not fulfilling their fiduciary duty".

According to the DWP's response, the call for evidence revealed that one of the main approaches to managing social factors currently is active ownership, which includes engagement with companies and others in the investment chain.

Although Opperman "welcomed" the strong examples of stewardship on social factors, he clarified that these came from a "minority of respondents" stressing that there is "clearly more to do".

The DWP also acknowledged that there is no equivalent to the Taskforce on Climate-related Financial Disclosures for social factors in the UK and that it would be "difficult" to set up a taskforce of this scale for social factors in the UK.

Instead, the DWP has announced plans to set up its own taskforce on social risks and opportunities, with the aim of developing methodologies and data.

This will be a cross-department working group, to be led by the Pensions Minister, with invitations extended to financial regulators.

The group is expected to lead work to identify reliable data sources and other resources, which could be used by pension schemes to identify, assess and manage financially material social risks and opportunities.

It will also look to monitor and report on developments with the International Sustainability Standards Board and other international standards.

In addition to this, the DWP noted that the war in Ukraine may have prompted some investors to rethink ESG, including and the defence and nuclear sectors, suggesting that this, and the potential impact of the Ukraine war on modern slavery, may be further topics the new taskforce wishes to consider.

Alongside the launch of the taskforce, the DWP has urged 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.

Commenting in the DWP response, Opperman stated: "Global events present new ESG risks. The war in Ukraine, for instance, may increase modern slavery risks and investors are encouraged to consider the risks of investing in companies or portfolios that do not undertake adequate due diligence.

"Modern slavery was a major theme emanating from this call for evidence and trustees care very much about this issue. In light of Ukraine, investors’ thinking about ESG is also evolving.

"This time last year, industries such as defence and nuclear (both civil and defence) were seen as no-go areas for ESG funds but the situation has changed and ESG investing should change with it.

"Recent events have reminded us – if such a reminder were needed – how vital these sectors are to the safety and security of our society. I would urge investors to recognise this – and of course the paramount importance of their fiduciary duty. ESG must look at objective outcomes and not be side-tracked by political activism.

“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.

“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.”

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