Consideration of social risks and opportunities: A call for evidence

Whilst environmental and climate change issues are rightly receiving a lot of attention currently, when we come to consider how trustees oversee their scheme assets on behalf of beneficiaries, social responsibilities can be equally important. Social factors and climate factors are often very closely related, or even overlapping, so while they need to be considered individually on their own merits, it is important to be aware of how they work in tandem. 

Just as we have seen with the climate agenda, the debate has now moved on from ethics to a generally accepted view that companies who uphold strong social values will outperform those that don’t.

Social factors are typically defined as those concerning the relationship between a company and people, from both inside and outside the workplace. There are many examples of how such factors could influence short and longer-term performance:

• Poor industrial relations can result in labour strikes and disruption, but can also lead to damaging PR for the company in question; this in turn could mean a loss of customers as consumers express dissatisfaction.
• Poor safety records might lead to claims and penalties, but this can also have a catastrophic impact on a company’s image and in turn, its performance and share values.
• Poor employment standards (child labour, low wages etc) can damage reputations, e.g. the challenges for the ‘fast fashion’ industry.

With these points in mind, there’s now an overwhelming case for pension scheme trustees to actively embrace social aspects into their approach to investment ensuring:

• they understand the risk and opportunities;
• set clear policies;
• embed these policies in their engagement with advisers and providers; and
• monitor the actual performance against the policies and hold parties accountable.

The first round of Implementation Statements, for accounts signed off after October 2020, has highlighted the challenges of obtaining relevant data relating to the topic of voting. Trustees will need to be supported in their endeavours with respect to social aspects by clear and consistent reporting by the investment community.

Dalriada has now responded to the DWP’s ‘Call for evidence[1]’ in relation to the ‘Consideration of social risks and opportunities by occupational pension schemes’. DWP is looking for views on how effective trustees’ current policies and practices are in relation to social factors, to what degree trustees understand social factors and how they integrate considerations of financially material social factors into their investment and stewardship activities.

In the past, trustees have typically considered ESG as a whole. Given the growing importance of responsible investment, we are now finding that more trustees are considering each area individually.

As a signatory to the UN’s Principles for Responsible Investment, all our professional trustees have either done or are doing the UN PRI Academy’s RI for Trustee module and continue to follow our Responsible Investment policy to ensure best practice in this area.

Following the consultation, we are hopeful that the DWP will provide guidance for trustees on how to take account of social issues.