Addressing the complexity of social factors

Most pension trustees in the UK have been mandated since 2018 to develop and maintain an investment policy that includes environmental, social and governance considerations.

However, addressing social factors has proven rather difficult in practice.

It was the recognition of this need for greater support that led to the formation of the Taskforce on Social Factors by the Department for Work and Pensions (DWP).

By engaging a variety of stakeholders, including pension schemes, asset owners, asset managers, investment consultants, lawyers and industry membership associations, the taskforce sought to provide support to pension scheme trustees on how to incorporate social factor considerations into their investment decision-making and stewardship processes.

Defining social factors

Social factors are a deeply complex area to consider and address.

While the commonality between them is that they relate to people, it is a broad and varied set that could include factors such as payment terms for suppliers or public health, through to links to armed conflict, vaccine fairness, the just transition and broader issues of inequality.

The complexity of social factors makes them difficult to address and quantify. Given this, the taskforce decided to create three working groups to ensure we can best deliver on the DWP’s brief: setting out the case for social factors, exploring data considerations and materiality assessment, and modern slavery.

In addition, there was an overarching ask to the taskforce to coordinate with the International Sustainability Standards Board to help drive interoperability.

I chaired the first group where we delved into the detail of what social factors are, why they are important and how pension regulations and fiduciary duties apply in this area.

We also developed a framework for what good looks like so that trustees can measure themselves against a number of criteria to understand where they are on their social factor integration maturity.

The idea behind this framework was to encourage progress in this very important area over time. It is not expected that schemes should meet every suggested good or leading practice indicator – and progress and improvements may take a number of years – but progressing along this scale will help trustees to address serious, and in some cases systemic, risks that are relevant to their portfolios.

Digging out the data

Daniel Jarman, stewardship manager at the Pension Protection Fund, led on the data workstream, looking at how we might measure social factors.

This area is tricky in two key ways. First, there is perhaps too much data when it comes to social factors and it can be difficult to wade through to get what’s actually needed to support a thorough analysis.

Second, not all social measures can be easily added up at portfolio level unlike, for example, carbon emissions. Social issues are idiosyncratic and therefore it is often important to look at these at the asset level.

The overall conclusion was that some factors can be measured across the portfolio to help trustees arrive at a baseline view – for example, accident incidence rate or staff turnover. Others need to be looked at through heat mapping exercises and materiality assessment – for example, human rights or modern slavery.

By applying different metrics to different social factors, it is possible to see how improvements can be made.

Addressing modern slavery

The Taskforce on Social Factors’ modern slavery output, which was the focus of the third working group led by Aegon’s Hilkka Komulainen, could be seen as a case study of how this guide could be applied in practice.

The working group found that there are actionable steps pension scheme trustees can take that are beneficial to social outcomes and financial returns.

Given that the majority of schemes do not invest directly, a key lever that pension trustees can use when considering social factors is to ask questions of their service providers, such as investment consultants or asset managers.

A greater understanding of how these parties approach social factors can help trustees gain insights into financially material issues that are relevant to their portfolios and gain comfort that these are being thoroughly addressed.

These questions may be as simple as asking which social issues are key priorities to the asset manager, through to what extent they engage with public debates on social factors. This will help trustees gain a deeper understanding of the social metrics these firms monitor when assessing an investment.

The taskforce has also acknowledged that pension schemes are already subject to a great number of regulatory requirements. The recommendations we have made are not designed to add a further burden onto schemes but instead are designed to help trustees meet these existing regulatory requirements by providing practical advice and support.

Ultimately, the taskforce members are hoping to see the consideration of social factors becoming successfully embedded in the way schemes manage their investments, with the aim to improve member outcomes.

Maria Nazarova-Doyle is global head of sustainable investment at IFM Investors and a member of the Taskforce on Social Factors.