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Trustee focus on social factors is increasing, but the amount of work underway around climate and the lack of a clear target for social improvement mean social factors are not top of the trustee agenda, despite a government consultation closing on Wednesday.
The Department for Work and Pensions has been consulting on the effectiveness of trustees’ current policies and practices in relation to social factors, and how they integrate these into their investment and stewardship activities. The consultation closes on Wednesday.
But unlike the DWP’s consultations relating to climate change, this call for input has created nowhere near a comparable level of activity and debate, despite pensions minister Guy Opperman’s recent assertions that he did not mean for trustees’ ESG efforts to focus purely on the environment but equally on social matters – so is there a mismatch between government intentions and industry appetite, and why? Will the department look to regulate integration of social factors?
Is climate crowding out other topics?
Trustees appear to feel either that social factors are already taken care of as part of ESG analysis, or that the climate issue is absorbing all their time – and takes precedence because of its potential impact on humanity if it is not addressed urgently.
“If you look at most engagement and voting activity, currently most of it is focused on ESG – i.e. across the spectrum not just climate change. The noise around climate is much louder than discussion on other topics, but the action when it comes to shareholder voting is balanced across all three and UN Global Compact violators are named, shamed and excluded from ESG tilted funds,” said Gerald Wellesley, client director, Punter Southall Governance Services.
There is growing pressure to incorporate views into the statement of investment principles drafting, he said, but admitted that “certain trustee boards will grasp this better” than others.
Equally the sponsor’s stance will influence trustees, he believes, “with larger listed companies finding their feet being held to the fire by their investors and consequently incorporating sustainable values into the workplace”.
‘The last thing we need is another lot of requirements’
There is an increasing understanding of the S in ESG, agreed Vassos Vassou, a professional trustee at Dalriada Trustees, and the issues covered are broadening, he said, away from just child labour and slavery to things like industrial relations, negative PR, safety records or penalties from relevant regulators.
However, he said the S in ESG is still “the poor relation of the three areas” and in particular compared with environmental issues, “probably because the wider industry doesn’t focus on the S as much”. Vassou said E, S and G are all interdependent, but this was not yet fully appreciated by investors.
The government itself has separated out the E of ESG and introduced a host of new requirements over the past two years, which is contributing to trustee fatigue at the thought of having to dedicate attention to social factors.
“Trustee time is so stretched, with the government pushing climate so hard, that’s where the time goes. You don’t spend enough time on [social factors], said Vassou. "Trustees themselves haven’t really had a steer or a chance to think this through. It’s a bit of a blank space," he said.
Most consultants are also currently “silent” on the issue, he noted, and are not giving trustees any steer on what potential requirements could be mandated by the DWP, if any. This could be because everyone is too busy with climate, or because they don’t have a view yet, he speculated.
Similarly, managers, while saying more than in the past about equal pay or board diversity, do not talk in depth about the S yet, “because they don’t think it’s what we as trustees want to hear”, he said, even though “it's not that we don’t want to hear about it, it’s just not quite hit the top of the list yet”.
He said this is because of the amount of work required to meet existing requirements – and that could also mean any new ones on social factors would not be welcomed right now.
“The last thing we need is another lot of requirements, another lot of objectives, targets and goals to meet when we’re still grappling with everything else," said Vassou, arguing that if such targets were indeed brought in, “everything won’t get done”. Another year or even two are needed to get on top of the climate issues trustees are working on at the moment, he suggested.
Advisers need to up their game, agreed Mike Clark, founder of ESG specialists Ario Advisory. “One of the challenges here is that investment consultants, the high priests of strategic investment risk advice to trustees, are rarely well-resourced to advise in this area. The common response – which is open to challenge – that they are hardly ever asked for such advice highlights the systemic issue,” he said.
Trustees can implement views on societal risks through their proxy and engagement activities, he advised, citing the collective investor engagement on tailings dams after the Brumadinho as an example. “The link between the investors’ capital, citizens’ savings, and all those deaths could not be ignored,” he said.
Social factors are not just an investment risk
How much attention the issue is getting by pension professionals and firms is currently still very varied, however. While there is not much of a focus on it on the whole, some have written social on their flag as a key risk to address. Covenant advisory Lincoln Pensions and its sister firm Cardano are saying that social issues must by assessed not just in investments, but in covenant advice and even on a pensions systemic level – and believe they are intrinsically linked to climate.
Michael Bushnell, managing director at Lincoln, said he wants to see covenant included in the DWP’s consultation on social factors – something the firm had already lobbied for in the climate consultations. This would allow funds to consider social factors on a holistic basis, across funding, investment and covenant, he argued.
Pension funds whose sponsor covenant is experiencing social issues can come under huge pressure; he cited examples of sponsors being located in countries that are under boycott, or where the core product has gone out of fashion. Schemes should deal with such risks as they do with corporate activity or any other risk, he advised.
“If you’re really exposed you should do something about it: a shorter recovery plan, aiming for more funding,” he said. "An ESG positive sponsor is a good covenant for the long term,” he said.
Is the lack of metrics and targets a barrier?
Unlike climate where metrics centre on emissions, social factors can be more difficult to quantify and therefore measure but assessing factors that can be verified externally – from human rights to taxation – can be used as a guide. “It is a qualitative area, there is going to be some judgment, but it is no different to management forecasts,” said Bushnell.
The lack of metrics is linked with the lack of targets. “There is no clear target set out that people can focus on”, he said. “It’s harder with social factors because there is no strong framework.”
Cardano’s group head of sustainability Will Martindale agreed there need to be metrics on social issues “so we can start to measure our footprint in a different way”. Master trust Now Pensions, another sister business, in its consultation response suggested the DWP should base its regulatory requirements for social factors on international frameworks, listing the International Labour Organisation, the OECD Multinational Enterprise Guidelines on Business and Human Rights, the UN Guiding Principles on Business and Human Rights or the UN Global Compact as contenders.
As well as a framework, there need to be influential investor groups driving the issue – and the development of metrics – in a collaborative way, as they did for climate, he noted.
The Pensions and Lifetime Savings Association appears to want to shape that debate as well, focusing on workforce factors. It has partnered with HR body the CIPD, RPMI Railpen and thinktank the High Pay Centre to look at investor expectations and how effectively the UK’s largest listed companies are discussing and responding to workforce factors.
The group aims to “explore what key workforce metrics are of most value to investors and examine the annual reports of FTSE 100 companies to assess how well they explain their employment models and practices in relation to company strategy”, it said, adding that “companies that look after their workforces tend to outperform their competitors”.
Joe Dabrowski, deputy director of policy, said: “Companies that are able to demonstrate the highest standards for measuring workplace factors like remuneration practices, workforce composition, stability and skills are more likely to be well run and deliver higher returns for shareholders. This new research will uncover the extent to which UK companies are serious about doing the right thing and attracting long-term, responsible investors. This is especially relevant as we look to build back better following the disruption to employment and society at large during wrought by the pandemic.”
How likely is it that we will see new requirements around social factors? Would new regulations have to wait until climate rules have bedded in?
