Opperman to lead task force on ‘social factors’ in ESG

The government issued a call for evidence in March 2021 on the consideration of social risks and opportunities by UK pension schemes. It was particularly keen to learn whether trustees’ policies and practices with regard to “social factors” were “sufficiently robust”, and whether the government needed to aid trustees in meeting their legal obligations.

The government’s response, published on July 15, contained no new policy suggestions, holding that “it is up to schemes to determine how to consider financially material social risks and opportunities”. 

This was evidenced by the government’s response to the question of integrated versus standalone policies concerning social risks and opportunities, with the Department for Work and Pensions reiterating that schemes should include all elements of ESG, “to the extent these are considered by the trustees to be financially material, in so far as it is practical”.

It said having an integrated approach combining all ESG considerations “is an acceptable approach to take”, and standalone policies separating out ESG risks was “also an acceptable approach to take”, it being “up to trustees to decide how to factor in financially material social risks and opportunities as appropriate for their scheme”.

The response did, however, aim to convey the DWP’s thinking on a number of areas, including trustees’ legal duties, the primacy of fiduciary duty when considering social factors, how social factors should be accounted for, and where they constitute opportunities as opposed to risks.

The new task force

Acknowledging that trustees face difficulties as a result of the increasing scope and shifting definitions of the “S” in ESG, it proposed the creation of a minister-led task force to assist schemes in better incorporating social considerations in their ESG strategies.

The government’s response mentions three broad areas in which the task force might provide assistance — the first being the identification of “reliable data sources and other resources, which could be used by pension schemes to identify, assess and manage financially material social risks and opportunities, and which could be used to inform guidance on investment risks from social factors”.

The second would provide a steer on the monitoring and reporting of developments with the International Sustainability Standards Board and associated international standards, while the third area, more tentatively suggested, would look at the ESG implications of the war in Ukraine, especially with regard to the defence and nuclear sectors.

The response took care to clarify that the new body would not be equivalent in scope or in power to the Task Force on Climate-related Financial Disclosures, as “it would be difficult to set up a task force of this scale for social factors in the UK”.

Instead, the new task force will concern itself with “developing methodologies and data”.

‘More to do’ on stewardship

In the foreword to the government’s response, Opperman wrote: “The UK is a world leader in the occupational pension schemes industry. Our work on ESG factors is rightly lauded and we are the first country to introduce landmark regulations on climate change, which will require trustees of UK occupational pension schemes in scope of the regulations to consider, assess and report on the financial risks of climate change within their portfolios.

“It is important for schemes to also consider broader sustainability risks and opportunities. The ‘S’ of ESG is one area in which the risk management of pension schemes can be strengthened. In my view, trustees who do not factor in financially material social factors are at risk of not fulfilling their fiduciary duty.”

Opperman said he welcomed the evidence of “some strong examples of stewardship on social factors,” but noted that “these came from a minority of respondents and there is clearly more to do”. 

“To help drive improvement in this area I would encourage schemes to join the Occupational Pensions Stewardship Council, a forum that can move the dial on stewardship of social factors through collective engagement and the dissemination of best practice,” he said.

Avoid ‘woke capitalism’

Opperman acknowledged that global events “present new ESG risks”, and the government’s response generally admitted that these can in fact redefine what constitutes socially responsible investing, warning against political activism or what the response refers to as “woke capitalism” in associated investment decisions.

“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,” he wrote. 

“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.”

Opperman cited the war in Ukraine as potentially increasing risks associated with modern slavery, and encouraged investors to “consider the risks of investing in companies or portfolios that do not undertake adequate due diligence”. 

Measuring social factors ‘like catching smoke’

The proposed task force was welcomed by a number of industry commentators, with LCP’s head of responsible investment Claire Jones praising the “helpful analysis and commentary” of the government’s response, albeit noting that it “[stops] short of imposing new requirements” at a time when trustees “already face a significant regulatory burden”.

“The action that the DWP has decided to take — setting up a task force on social factors to improve the data available to trustees and monitoring international reporting developments — seeks to address one of the main barriers trustees face to more effective consideration of social factors,” she said.

"We support the DWP’s focus on active ownership and its encouragement for trustees to recognise the linkages between different ESG factors.”

Tom Selby, head of retirement policy at AJ Bell, noted that much of the focus of ESG has been on environmental concerns, in part because they are “easier to measure”, while social factors “are notoriously tricky to pin down and require assessments to be made about whether a company, sector or country is acting in a way that is ‘good’ for society in the short, medium and long term”.

“This can feel a bit like the investing equivalent of catching smoke,” he said.

“By creating and leading a task force focused specifically on the ‘S’ of ESG, Opperman is hoping to provide tools schemes can use to track the social impact of investments, share best industry practice and, perhaps most importantly, drive all aspects of ESG investing up the agenda of UK pension schemes.”