Social issues can no longer be regarded as “soft” considerations, but should instead be seen as material financial factors shaping company valuations, risk management, and long-term resilience, the Defined Contribution (DC) Investment Forum (DCIF) has said.

In its guide to social factors, part of its environmental, social and governance (ESG) 2.0 research series, DCIF said that when it comes to ESG, S has “always been the trickiest aspect to get to grips with for pension schemes”.

The report suggested that climate is “clearly positioned and universally understood” due to the binding international agreement to address climate change and the ability to increasingly see its physical impacts.

Commenting in the report, Baillie Gifford head of ESG, Siobhan Cleary, noted that climate is something that can be quite clearly linked to fiduciary obligation, as governments have set this out as a direction of travel.

However, Cleary added that the same clarity doesn’t exist when it comes to social factors, as this includes inequality, data privacy, worker compensation, human rights, and supply chains.

Another barrier identified was a lack of data and a lack of consistency in reporting, as the DCIF acknowledged that while diversity data and employee turnover data are available, human rights data is hard to come by.

The report emphasised that, despite climate factors being tackled by investors first, social factors are also high on the agenda as there are ethical and financial reasons to include them in the investment decision-making process.

In addition, it found that investors often observe that of the three elements of ESG, getting the social element wrong is the most likely to result in reputational damage and a corresponding fall in the business's value.

The report said that pension scheme trustees and fiduciaries should understand what is important to their member base, such as executive pay, compensation, inequality, labour rights, and zero-hour contracts.

As many DC schemes invest in pooled funds, they will need to lean heavily on their investment managers to engage on their behalf, and different investment teams will take different approaches to social factors.

And due to social issues encompassing a very broad range of factors, the report suggested that pension schemes are likely to achieve better results if they break down the issues into manageable chunks, such as human rights.

Also commenting in the report, First Sentier Investors global head of responsible investment, Kate Truner, said managers should be able to explain what social issues they prioritise and why, with financial materiality and salience at the top of their minds.

DCIF executive director, Louise Farrand, said: “Social factors are about people, and they are at the heart of every investment decision. Getting the ‘S’ right isn’t just an ethical imperative, it’s a financial one too.”

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