The Department for Work and Pensions’ (DWP) Taskforce on Social Factors has launched a new guide to help pension schemes trustees better understand and assess social factors in their investment decisions and stewardship.

Recognising that schemes will have different circumstances, resource levels and time horizons, the guide aims to provide a starting point for trustees to better understand and assess social factors, with the help of their advisers and in-house teams, providing trustees with the tools to identify and monitor social risks and opportunities of investments.

In particular, the guide sets out the importance of embedding social factors within schemes’ investment decisions and stewardship policies in four key areas: Social factors and pension funds, addressing social factors, materiality assessment frameworks, and social factor data.

Social factors and pension funds explores why social factors are important from an investment perspective, and how taking account of these considerations aligns with pension trustees’ fiduciary duties, while addressing social factors in pension portfolios provides a framework with baseline, good and leading practice indicators, along with a deep dive into modern slavery.

Meanwhile the materiality assessment framework provides an example top-down approach for pension scheme, whilst the social factor data discusses data trustees can use to manage social factors in investment.

Room for improvement

In addition to the guide itself, the taskforce shared a set of nearly 40 recommendations for the pensions industry, government, and regulators.

As part of this, the group urged pension scheme trustees to ensure their asset managers consider social factors and integrate them into their investment strategy and stewardship, also providing example request for proposal (RFP) questions and mandate terms.

It also said that managers should be able to demonstrate that they have influenced social outcomes through transparent reporting on engagement, voting and investment outcomes, including any social investment metrics.

The taskforce also made a number of regulatory recommendations, encouraging the DWP to consider formally setting out expectations on addressing social factors, to then be overseen by The Pensions Regulator (TPR).

Alongside this, it encouraged the Financial Conduct Authority (FCA) to also consider setting out reporting expectations, alongside those required for environmental factors.

The taskforce also recommended that TPR consider broader ways to raise awareness of social issues among pension trustees to help them integrate these factors into their investments.

More broadly, the taskforce said that the government should continue facilitating a supportive policy environment for action on social (not just environmental and governance) issues and ensure implementation and effective enforcement of regulation.

It also said that the government should continue work on introducing enhanced economy-wide disclosures and encouraging global standards-setters to incorporate social factors.

In addition to this, the taskforce said that, where scoring methodologies focus on controversies or disclosures, data providers should consider strong mark-downs of ratings for the absence of key data, to encourage enhanced disclosures from issuers of investments.

It also said that environmental, social and governance (ESG) data and service providers need to work closely with investors and other groups to find common ground on methodologies and metrics for social factors.

Commenting on the guide, Pensions Minister, Paul Maynard, stated: “The UK is already a world-leader in tackling climate risk, so it is right that we take a similar proactive approach towards the social factors of environmental, social, and corporate governance investing and embedding these within pension schemes’ investment decisions and stewardship policies.

“I am therefore grateful to all those who contributed to the guide which provides useful assistance in the form of good practice frameworks, ensures greater accountability among advisers and providers and should allow pensions schemes to be better equipped in considering and integrating social factors in their investment strategy.”

Chair of the taskforce and IFM Investors chief strategy officer, Luba Nikulina, added: “The creation of this practical and valuable guide is another example of the strong collaborative approach the UK pensions industry is so well known for. I hope the guide will play a meaningful role in better understanding social factors, both here and globally.”

Adding to this, TPR interim director of regulatory policy, analysis and advice, Louise Davey, said: “Social factors present both risks and opportunities to schemes. Trustees can’t ignore social factors they consider to be financially material.

“We urge trustees to use the guidance to help them to get to grips with key issues as part of their investment stewardship and risk management.

“It’s also important that trustees are in active dialogue with their asset managers so social factors are integrated into their investment objectives and can help drive good outcomes for savers.”

Pensions and Lifetime Savings Association (PLSA)) deputy director of policy, Joe Dabrowski, also highlighted the guidance as a “significant step change” in the support provided to pension funds, and their efforts to better incorporate social factors into investment decisions.

“In recent years, the impact of social factors has been brought into sharp focus – the impact of the pandemic, growing awareness of issues such as diversity and inequality, the impact of modern slavery, health and safety, supply chain issues, and wider workforce conditions. Social Factors can however be more difficult to monitor in terms of both data and impact,” he stated.

“We are delighted to have supported the work of DWP's Social Factors Taskforce in tackling these challenges.”

Adding to this, Church of England Pensions Board deputy chief responsible investment officer, Stephen Barrie, said: “Pension funds have a responsibility to understand and act on social factors that affect our investments and ultimately outcomes for members.

“Failing to do so can increase risks and social injustice, because from human rights to fair pay, these issues are at the heart of a flourishing society and economy. We welcome the launch of the Taskforce’s guide which identifies practical ways investors can approach these topics.”

The guide and recommendations were also shared alongside a quick start guide for trustees, a data sources directory, an effective stewardship, investment and advice services guide, and case studies of the examples in practice.

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