Act on social factors now, regulator urges

The Taskforce on Social Factors has set out a series of recommendations and considerations for pension scheme trustees on understanding risks and opportunities related to social factors.

The Pensions Regulator (TPR) has urged trustees to engage with new guidelines on incorporating social factors into investment strategies.

The Taskforce on Social Factors, set up last year by the Department for Work and Pensions (DWP), has published new guidance and recommendations for pension scheme trustees on how to account for risk and opportunities linked to issues such as supply chains, health, workers’ rights and inequality.

The guidance includes definitions of social factors and explanations of why they are important to consider when establishing an investment strategy. It also includes a materiality assessment framework to help identify the issues that are most likely to have a financial impact on scheme investments, and guidance on data collection and metrics.

The taskforce also set out examples of questions to ask asset managers and draft mandate terms to include in asset management agreements.

In response to the guidance, the regulator emphasised the importance of social factors for trustees and schemes. Louise Davey, TPR’s interim director of regulatory policy, analysis and advice, said trustees should not ignore such factors if they are financially material.

“We urge trustees to use the guidance to help them to get to grips with key issues as part of their investment stewardship and risk management,” Davey said. “It’s also important that trustees are in active dialogue with their asset managers so social factors are integrated into their investment objectives and can help drive good outcomes for savers.”

Social factors in focus
Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association and a member of the taskforce, said social factors had been brought into “sharp focus” in recent years through issues such as the Covid-19 pandemic, growing awareness of the importance of diversity and inequality, the impact of modern slavery, health and safety, supply chain issues, and wider workforce conditions.

“The guidance… marks a significant step change in the support provided to pension funds, and their efforts to better incorporate social factors into investment decisions,” Dabrowski added.

Stephen Barrie, deputy chief responsible investment officer at the Church of England Pensions Board and also member of the taskforce, said: “Pension funds have a responsibility to understand and act on social factors that affect our investments and ultimately outcomes for members. Failing to do so can increase risks and social injustice, because from human rights to fair pay, these issues are at the heart of a flourishing society and economy.”

The taskforce also made recommendations for other organisations including asset managers and data providers.

“Asset managers should be able to demonstrate that they have influenced social outcomes through transparent reporting on engagement, voting and investment outcomes, including any social investment metrics,” the taskforce said in a statement.

Data providers, meanwhile, should “consider strong mark-downs of ratings for the absence of key data”.

Government support
The taskforce called on the DWP to “consider formally setting out expectations on addressing social factors”, and urged the Financial Conduct Authority to consider introducing new reporting expectations for regulated firms similar to the existing requirements for environmental factors.

Pensions minister Paul Maynard expressed support for the taskforce’s work, saying that the guide “provides useful assistance in the form of good practice frameworks, ensures greater accountability among advisers and providers and should allow pensions schemes to be better equipped in considering and integrating social factors in their investment strategy”.

The Taskforce on Social Factors’ membership includes representatives of pensions schemes, asset managers, data providers, trade bodies and civil society organisations.