Integrating environmental, social and governance credentials into pensions has become increasingly common, yet deciding whether schemes should adopt a specific policy on social matters has become a point of contention.
In a recent Twitter poll, run by Pensions Expert, a majority (40 per cent) of respondents said their scheme does not have a social policy to address the risks and opportunities in their portfolio, and neither do they see the need for one.
Yet another 20 per cent responded saying that they either have an established policy or are in the process of creating one, while a further 20 per cent said they do not know where to begin.
Focusing social efforts
To date, social factors have not been high on the agenda of governments and policymakers, and I think this naturally then is replicated in schemes
Penny Cogher, Irwin Mitchell
Penny Cogher, pensions partner at Irwin Mitchell, says that if these results are representative of the industry at large, “it would be a surprising declaration of how unfocused schemes are towards promoting all aspects of ESG investment, including the extremely important social part”.
“Arguably, this is what has the most impact on members as part of their day-to-day lives,” she adds.
Yet a defined social policy is not essential to delivering social change on behalf of members. This is according to Angela Winchester, trustee director at 2020 Trustees, who says that the “integral” nature of social factors within a broader ESG strategy means that “separate policies are not the answer”.
Even within the most robust ESG strategies, there is a tendency to lean towards the environmental aspects, with the climate focus having been “magnified” in the wake of COP26, Winchester notes.
“To date, social factors have not been high on the agenda of governments and policymakers, and I think this naturally then is replicated in schemes,” she says.
“However, the climate is the emergency — without a functioning planet to live on, society no longer exists. So while that should not undermine the importance of the ‘S’ factors, it does at least partly explain why the focus has been on ‘E’.”
Another contributing factor is that societal issues impacts are harder to comprehend in data than environmental factors, Winchester notes.
“The E feels a bit more binary — you are either destroying the planet, helping the planet, or having a limited impact — and as a company you expect to be assessed and rewarded as such,” she says.
“The S, a bit like the ‘G’, means that you expect that business to do better, make better decisions, empower staff to perform well, and be additive to your local community, but those inputs have a less direct effect on asset valuations.”
Social specifics
Caroline Escott, senior investment manager at Railpen — investment manager and administrator of the Railways Pension Scheme — agrees that social issues have been “relatively underexplored”, particularly in comparison to issues like climate change and executive remuneration.
She says this is a factor that has led to the focus of workforce issues as a “thematic priority” for the scheme over the next four years.
Railpen has been “actively engaging with portfolio companies on social issues such as workforce fatalities, modern slavery, treatment of indigenous communities, and supply chain management for many years,” Escott notes.
Under their thematic policy, the scheme has outlined its expectations of portfolio companies on workforce treatment and fair pay practices. It is now undertaking research on the quality of workforce disclosures in the UK.
Putting the S before the E
All the while, a greater emphasis is being placed on how best to implement social aspects of ESG within the pensions industry.
In March, the Department for Work and Pensions launched a call for evidence on the social element of ESG investing in the wake of the coronavirus pandemic and the need to make “pensions fit for 21stcentury challenges”, according to pensions minister Guy Opperman,
At the same time, the social aspect of ESG investing is garnering greater attention from institutional investors, who are equating social impact with investment outcomes.
A survey from Create Research and DWS found that 59 per cent of respondents believed the need to tackle the disparities exposed by the pandemic is a key reason for their allocations to socially conscious investments.
Nearly half (48 per cent) of respondents also recognised the materiality of social issues in business performance and investment outcomes. Meanwhile, 58 per cent stated that they are seeking risk-adjusted returns by allocating to investments that factor in social considerations.
Yet there remains an “untapped opportunity” for defined contribution schemes, whereby they can enhance member engagement by making socially conscious investment decisions, argues Stephen Muers, chief executive of Big Society Capital.
UN goals can act as guide for schemes making societal impact
The UN’s Sustainable Development Goals list 17 ambitions to improve the lives of people globally, spanning matters of poverty, equality, environmentalism and health. Much of the focus of the SDGs is on the developing world, yet lessons can be taken from the ambitions and used to improve the lives of people in the UK.
He says that outcomes of this can be most prevalent “among the younger generation where engagement and contributions are historically low”, as identifying and tackling social issues “offers something different and relatable to younger savers to engage with the potential to promote higher contributions earlier in life”.
“Social impact investment can therefore have a huge impact, not only through the investments themselves, but on the long-term financial wellbeing of future pensioners by encouraging contributions,” he notes.
Whether as part of a social policy or not, Muers says that embracing ESG has “the potential of attractive risk-adjusted financial returns combined with tangible social impact” — resulting in good for members and society at the same time.
