By Kate Granville Smith , Sophie Kirk and Luke Parry-Billings

The Taskforce on Social Factors (“TSF”), established by the Department for Work and Pensions (“DWP”), has recently launched an industry consultation on its guidance for pensions professionals. This features a number of recommendations designed to enable the pensions industry to integrate social factors into investment decisions in a more effective manner. The TSF aims to support scheme trustees and the wider pensions industry by addressing the risks and challenges of measuring and managing social factors, along with providing a structured approach on how to successfully seize the opportunities of the investing and satisfying the “social” element of Environmental, Social and Governance (“ESG”).

The “S” in ESG

Social factors are a pivotal aspect of ESG investing and pension trustees, as part of their fiduciary duty to act in the financial interests of their members, must integrate these factors into their investment decision-making and strategy for the scheme. Social factors encompass a wide range of issues, including workforce conditions, remuneration practices, bribery, health and safety, modern slavery and more. In recent years, social factors have arguably taken a back seat amidst a rising focus on environmental considerations, however the TSF aims to address this imbalance and ensure these factors are “fully embedded into pension scheme management”.

Addressing Social Factors in Pension Portfolios

The guidance provides a framework for trustees to address social factors in pension schemes and suggests a range of practices which could be adopted. The framework is divided into three tiers: baseline practice, good practice and leading practice. The guidance explains that trustees can advance through the tiers to achieve a progressive approach to managing financially material social risks and to benefit from opportunities. 

‘Baseline practice’ involves the following:

• creating a high-level investment and stewardship policy covering social factors,drawing out themes that are key to the scheme;
• asking investment consultants how social factors are integrated into their advice on asset allocation, fund research and selection;
• including social factors-related questions / requirements into their selection, appointment and monitoring;
• increasing their knowledge and understanding of social factors. 

‘Leading practice’ includes being signatories to the FRC's UK Stewardship Code, undertaking demonstrable policy advocacy and carrying out engagement on social factors with top portfolio companies (either directly or via collaborative initiatives). 

Although trustees often make decisions about investments in a broad context, rather than in relation to specific companies, there are still many opportunities for them to influence the fund managers and investment consultants they work with. This can be achieved by asking important questions, understanding what response to look for, and by including certain provisions in mandates and side letters. These steps will ensure that social factors are integrated effectively into investment and stewardship practices by both trustees and relevant third parties at all levels. 

The guidance also discusses data trustees can use to manage social factors in investment, along with a materiality assessment framework to help prioritise areas for action. 

Recommendations from the Taskforce

In addition to the trustee framework, the TSF has outlined recommendations to different stakeholders across the pensions sector to promote the integration of social factors, including: 

1. Pension Schemes: Pension trustees should understand their asset managers’ approach to social factors, set objectives in line with these factors and ensure these are integrated into their investment strategy and stewardship. The trustees should also consider their own practices regarding social considerations.
2. Regulators: The DWP should consider formally setting expectations for addressing social factors for pension funds, to then be overseen by The Pensions Regulator. The Financial Conduct Authority should also establish reporting expectations for asset managers related to social factors as well as environmental factors while the Financial Reporting Council should reiterate expectations for trustees’ stewardship. The Pensions Regulator should consider ways to raise awareness of social issues among pension trustees and consider doing this alongside their climate change strategy. 
3. Government: The UK Government should maintain a supportive policy environment for addressing social issues, encourage global standards-setters to incorporate social factors and ensure the temporary relaxation of certain requirements does not hamper social issue enforcement (for example, suspending the gender pay gap reporting during Covid).
4. Asset Managers: Asset managers should be able to demonstrate that they have established clear stewardship, regularly report on engagement and investment outcomes (including any social investment metrics) and support clients with gap analysis on stewardship.
5. Investment consultants: Investment consultants need to integrate social factor considerations into their advice and support managers of pension schemes with materiality mapping of their investment portfolios and help them develop strong stewardship and voting policies. 

Next steps

The TSF’s recommendations provide a useful roadmap for improving the integration of social factors in pension investments and trustees should consider how they can adopt these measures going forward. Importantly, the guidance highlights that by involving a diverse group of stakeholders, the pensions industry can contribute to creating a more socially responsible and sustainable investment landscape. In doing so, pension schemes play a positive role in addressing social issues and promoting responsible investment practices, ultimately benefiting both members and society as a whole.

It is recommended that trustees and pensions professionals familiarise themselves with this guide and then provide feedback to the TSF by 1 December 2023. To engage, click the following link. 

How can we help?

In order to ensure Trustees and sponsoring employers have a full understanding of Environmental, Social and Governance (“ESG”) requirements for pension schemes, we have launched the Pension Schemes ESG Tool, which can be accessed here.

We are well placed to advise on all aspects of ESG in relation to pension schemes. If you would like to explore this topic further, please contact Kate Granville Smith.