A new taskforce led by new Under-Secretary of State at the Department for Work and Pensions (DWP) Guy Opperman will help pension schemes address the risks and seize the opportunities of the “social” element in ESG investing. These include issues ranging from workforce conditions, pay equality to supply chains and consumer protection.
The taskforce – led by the Minister for Pensions – will support pension scheme trustees and the wider pensions industry with some of the challenges around managing social factors, including the identification of reliable data and metrics.
UK pension funds to report on performance in line with Paris goals
This is increasingly important, especially given the fact that from October 2022, 80% of UK pension funds will be required to measure and report on the extent to which their investments to support the Paris Agreement climate goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels.
To date, the social aspect of investment has received perhaps the least focus in terms of visibility, in part due to issues around measurement and performance. Social factors can include issues ranging from workforce conditions and supply chains to community engagement, consumer protection and modern slavery, among others.
There continue to be debates about how to measure social return on investment (SROI), for example, which are often accused of using arbitrarily estimated costs and paybacks, which can have a significant impact on final calculated value.
Challenges with social impact measurement
Even aside from issues around how to value such activities, there are other challenges around measurement. While simple factors like diversity and employee education can be measured quite easily, it is less clear how such performance should be assessed or valued.
At the same time, many companies have commitments to avoid modern slavery, driven by the introduction of the 2015 Modern Slavery Act, but it’s less clear how they are ensuring their supply chains are slavery free.
There is work being done in the development of metrics and instruments for investment in, and tracking the impact of, social dimensions but there is a long way to do. For example, early 2022 saw the publication of a report, Eliminating Poverty: The Importance of a Multidimensional Approach in Tackling SDG 1, from investment bank Citigroup (NYSE: C) and non-profit Oxford University spin-out SOPHIA Oxford.
The report provides an overview of measures of poverty in the global economy and then addresses how the MPI methodology allows for more nuanced and effective interventions, which can drive both social inclusion and economic growth.
Overall, it demonstrated how multidimensional social factors can be used by both companies and investors to reduce poverty, lower risk and open up new investment opportunities – according to the report this is a $1.6 trillion private sector opportunity.
Pension funds need help in understanding social impact
In terms of the UK taskforce, responses to the government’s 2021 Consideration of social risks and opportunities by occupational pension schemes Call for Evidence highlighted the need for a proactive approach to embedding social factors within pension schemes’ investment decisions and stewardship policies. It was clear that trustees and investors alike face challenges over how to account for social factors in their investment and stewardship approaches.
DWP is also encouraging pension schemes to join the Occupational Pensions Stewardship Council – an industry-backed forum working to move the dial on stewardship, through collaborative approaches such as collective engagement and sharing best practice.
One of the goals of the new taskforce will be to help identify reliable data sources and useful resources for pension schemes to assess and manage financially material social risks and opportunities. This work will contribute towards the development of wider principles, standards and metrics.
Focus on social impact in finance expected to accelerate
This focus on investment considering social impact is a sign that as understanding develops around impact, investors and companies are going to need to look beyond GHG emissions and net zero in terms both of behaviour and operations, but also in terms of reputation and access to capital.
Opperman is “proud of the progress we have made in bringing environmental and climate issues up the pensions agenda, but climate change should not be trustees’ sole consideration. Financially material social factors also pose risks and provide opportunities to schemes’ investments, and our taskforce will help ensure that focus on social factors continues to grow among pension schemes and throughout the investment chain.”