The pensions industry has welcomed the government’s recent consultation on pension scheme trustees' consideration of social issues, although some have raised concerns over the resources and barriers involved, and the impact on the employer covenant.

The consultation, which was launched in March, looked to assess how pension schemes trustees understand social factors and how they integrate considerations of financially material social factors into their investment and stewardship activities.

The UK Sustainable Investment and Finance Association (UKSIF) welcomed the call for evidence, emphasising that whilst climate change has been "by far" the most high-profile environmental, social and governance (ESG) issues, some are now taking action to address social risks and opportunities.

The potential shift to a more holistic approach towards ESG has also been praised by many in the industry, with LCP arguing that trustees can improve the management of their pension schemes by taking better account of the social element of ESG.

“The S shouldn’t be the poor relation in ESG and we welcome that the DWP has recognised that S is the laggard when it comes to ESG priorities," LCP consultant, Shyam Gharial, stressed.

She continued: “With environmental and governance factors taking a front seat, and social factors being harder to quantify and measure, it is understandable that they have taken a backseat. However, it doesn’t make them any less important financially or ethically.

“With greater policy momentum in this space, trustees will benefit by paying more attention.

"A great first step trustees can take is to probe their investment managers about how they consider and manage social risks and opportunities, and whether they incorporate these into their climate change policies.”

This was echoed by Mercer UK ESG integration lead, Vanessa Hodge, who welcomed the focus on social factors, noting that such issues came to the fore amid the pandemic, with investors prioritising different factors, including modern slavery, workforce health and safety, and diversity, equity and inclusion.

“Often trustee boards that do have an explicit focus on a particular social issue do so because of a specific investment belief or ethical belief of the trustees or their corporate sponsor,” she added, however.

“This makes it challenging for asset managers to be able to integrate all their clients’ social investment beliefs into pooled funds. Most UK pension schemes will rely on asset managers to integrate their beliefs through investment products and via their asset managers’ stewardship activity.

“We are increasingly seeing inclusion of social issues in engagement strategies as a differentiator of manager approaches to stewardship.”

Indeed, the Association of Consulting Actuaries (ACA) also noted that whilst it is important for trustees to take financially material social factors into account, the majority of schemes rely on fund managers to integrate their house views rather than having a scheme specific view, which could present a challenge.

Commenting in her role as ACA Investment Committee chair, Hodge added: “Unlike climate change, which is a systemic environmental financial factor, there are many different social factors that can be considered.

“The trustee boards that have an explicit focus on a social factor will tend to do so because of a specific investment belief or ethical belief of the trustees or their corporate sponsor.

“This makes it challenging for asset managers to be able to integrate all their client’s social investment beliefs into pooled funds.

“Most UK pension trustees do not have in-house teams with a responsible investment function and therefore do not have the resource to be able to specifically focus on social factors.

“They will rely on asset managers to integrate their beliefs through investment products and via asset managers’ stewardship activity.”

UKSIF also raised concerns around this, noting that whilst pension schemes regularly engaged with managers on social factors, there are some barriers in place, such as difficulty in agreeing on the priority social issues of focus across the investment chain.

It highlighted a number of barriers which could prevent effective evaluation of companies' performance on social factors, including the diversity of KPIs, methodologies and metrics on social factors, and the lack of consistent 'S' data.

Considering this, it suggested that investors work with ESG data providers to find consensus on methodologies, stating that the government could play a supporting role here, as well as encouraging investee companies to better disclose social risks and opportunities.

UKSIF also suggested that The Pensions Regulator could consider ways to educate, and raise awareness among, trustees on social issues following on from the recently published climate change strategy.

Lincoln Pensions managing director, Michael Bushnell, argued that, given the materiality of DB pension schemes’ continuing reliance on their sponsors, it is “essential” that trustees work to understand the potential impact of social risks and opportunities on their employer covenant, and how this might in turn influence investment choices.

“Understanding the impact on invested assets alone will ignore a material risk for DB scheme members,” he warned. “We would strongly recommend that an approach to assessing social risks and opportunities facing employer covenant is adopted.

“The assessment of these risks can be undertaken with public information, the knowledge of trustees and management, and professional advice (where relevant and necessary).

“Social risks cannot be considered the ‘poor cousin’ of ESG and trustees should feel enfranchised to request necessary information as they would for a standard assessment of their employer covenant – or for assessing the impact of climate change risk.”

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