Industry focus shifts toward the ‘S’ in ESG

The PLSA, which surveyed its members while composing its response, found that around half of schemes have actively undertaken engagement or stewardship activities on social factors, with one in five (20 per cent) doing so up to 20 times within the past five years. 

Around a quarter (24 per cent) of respondents had undertaken engagement or stewardship activities up to 30 times within the same period.

It is possibly fair to say that social factors are less well understood and that more could be done to raise awareness and support the efforts of pension schemes to identify and quantify social risks and opportunities

Fred Emden and David Will, SPP

Almost three-quarters (73 per cent) of those schemes that had undertaken such activities felt they have had a fair amount of impact, though only one in 10 reported feeling they have had a great deal of impact.

Modern slavery, health and safety in supply chains, workforce conditions, and remuneration practices top the list of issues schemes are concerned about.

However, two-thirds of schemes reported a lack of data on company behaviour, which the PLSA called a “significant barrier”. It intends to carry out another research project later in the year to assess progress in this area.

Joe Dabrowski, deputy director of policy at the PLSA, said: “Social factors have always been prominent in the minds of pension schemes’ trustees and are a growing consideration amid increased awareness of workforce matters since the Covid-19 emergency started.

“In a recent survey, 75 per cent of PLSA members told us they plan to review their social policy within the next year, with almost a third planning on doing so within the next six months. We would expect the percentage of schemes with a specific social policy to continue to grow in the coming months and years.

“Even more encouraging is that pension schemes are increasingly exercising their responsibilities as stewards by engaging with investee companies and voting on resolutions. The majority who have done so say their action is having a positive impact,” he continued.

“We are currently working with the [Chartered Institute of Personnel and Development], RPMI Railpen and the High Pay Centre to further explore which ‘S’ factors matter most to investors and how well FTSE 100 companies are disclosing against metrics related to their workforce.”

‘S’ should not be the ‘poor relation’ in ESG

In its response to the consultation, LCP warned that focus on the ‘E’ and the ‘G’ in environmental, social and governance factors had distracted from the ‘S’, in part because of issues around the availability of data the PLSA highlighted.

“Attempting to tackle climate change without consideration of all the social factors that will be needed to transition to a low-carbon society may ultimately lead to the process being delayed. This would have financial and social repercussions,” the consultancy warned.

It highlighted that social issues form part of a trustee’s fiduciary responsibility, and are important when considering long-term returns.

Because trustees are “a step removed” from the companies their pension schemes invest in, they “put a heavy reliance on fund managers to account for social issues and expect them to put pressure on supply chain companies to improve data quality and coverage” LCP continued.

“Better reporting on social factors by companies, and by fund managers in turn, would better equip trustees to provide effective oversight of the way the fund managers are addressing social risks and opportunities on their behalf.”

Shyam Gharial, consultant at LCP, said: “The ‘S’ shouldn’t be the poor relation in ESG and we welcome that the [Department for Work and Pensions] has recognised that ‘S’ is the laggard when it comes to ESG priorities.

“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 back seat. However, it doesn’t make them any less important financially or ethically.”

Gharial continued: “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.” 

DC schemes lack opportunities

Fred Emden and David Will, chief executive and member of the investment committee, respectively, at the Society of Pension Professionals, cautioned that while most ESG focus has indeed been given to the environmental aspect, that does not mean it has completely monopolised trustees’ attention. 

“Simply because trustees’ social policies are not elaborated on in the statement of investment principles to the same extent that their environmental policies are, does not mean that social factors are ignored altogether,” they wrote.

The SPP called attention to the fact that investing in social issues in developing and emerging markets is “in its infancy”, and so most readily available to larger defined benefit schemes due to minimum investment limits and governance limits. 

Such investments are often available in non-public markets, and therefore less liquid, which can also limit the scope for defined contribution schemes to invest, its response noted.

“It is possibly fair to say that social factors are less well understood and that more could be done to raise awareness and support the efforts of pension schemes to identify and quantify social risks and opportunities, which are arguably more complex, less well defined, and therefore harder to measure than environmental factors,” Emden and Will wrote.

“Furthermore, while companies have made considerable progress in terms of their environmental and governance disclosures, social factors have been slower to receive the same level of attention.”