On the go: The Pensions Policy Institute is urging pension schemes to put more emphasis on social and governance factors when considering socially responsible investment.
In its report, ‘Engaging with ESG: Environmental, social and governance factors’, the PPI explores the ways in which pension scheme investment strategies take ESG factors into account, and considers future opportunities, challenges and proposals for effective support to encourage evolution and improve risk mitigation.
The report highlights that for some time, much of the focus on ESG has been skewed towards climate change. This is perhaps unsurprising given that climate change has been at the forefront for both policymakers and society more broadly, as the frequency of extreme climate events and climate change protest movements increase and the pressure to take action on climate change grows.
However, the focus on climate change has, at times, left other ESG factors overlooked. In order to ensure that ESG risks have been appropriately mitigated, the PPI states that schemes, and those acting on their behalf, must ensure that the full range of ESG risk factors have been considered, not just climate change.
Issues around measurement may have hindered investment in the past. For instance, measuring a company’s carbon emission for the ‘E’ is more straightforward, than quantifying social factors that have historically been more complex to track beyond some narrow points around a living wage and compliance.
It does seem that the issue might have been addressed. Writing for Pensions Expert in April, Stephen Muers, interim chief executive at Big Society Capital, pointed out that the government was taking a leading role in driving greater consensus about what constitutes social factors, and how risks and opportunities associated with them can be managed.
Lauren Wilkinson, senior policy researcher at the PPI, pointed to how events in 2020 and so far in 2021 have emphasised how rapidly social and governance factors and societal attitudes surrounding them can evolve and come to the fore.
Emphasising how issues around public health, equality and labour practices have received increasing attention, accelerated by the Covid-19 pandemic and highlighting equality movements such as Black Lives Matter, and corporate insolvencies and court rulings against companies such as Asda and Uber, she said: “These social movements emphasise the importance of pension schemes’ investment strategies being flexible and proactive in the way that they approach ESG considerations.
“All those who are involved in designing and implementing schemes’ investment strategies need to have a good understanding of the way in which these factors can have a financially material effect on outcomes, if they want to avoid putting member contributions at financial risk.”
Julian Lyne, chief commercial officer at Newton Investment Management, which co-sponsored the report, commented: “There is no better time than now for schemes to build on the work they have done around climate change when considering ESG factors more broadly in their investment strategy.”
