The Department for Work and Pensions (DWP) has issued a consultation to understand how occupational pension scheme trustees fulfil their duty to assess social factors in their stewardship activities, following ministerial concerns that implementation is ‘mixed’.
Pushing the focus of scrutiny of ESG implementation beyond climate change factors, a call for evidence issued today has asked stakeholders for details of whether schemes have a policy on financially material social factors and whether this is factored into stewardship decisions.
It also seeks to determine the sorts of social factors that are taken into account and the reasons for doing so, and whether the management of these factors is delegated to asset managers.
Publishing the consultation, minister for pensions and financial inclusion Guy Opperman MP said he is ‘concerned’ that social factors are not well understood, and that trustees are ill-equipped to deal with financially material social factors in their investments.
Opperman’s concerns were raised following an information gathering exercise with 40 of the largest schemes last month, seeking information on their ESG policies and their stewardship policies and practices, which presented ‘mixed results’, according to the DWP.
The vast majority of schemes of more than two members are required to have a Statement of Investment Principles (SIP) that set out their policy on the extent to which, if at all, they take into account non-financial matters, which may include wider considerations relevant to members’ and beneficiaries’ views on non-financially material social factors. In contrast to financially material social factors, trustees are not required to take account of these non-financial matters when making investment decisions.
Opperman says: “It has never been my intention that climate change should be trustees’ sole ESG consideration – not least because action on climate change is often linked to action on wider social factors. Equally, poor governance in a company may contribute to poor performance on environmental and social considerations. Whilst we have an understanding of what good governance entails, as set out in the Corporate Governance Code, I am concerned that social factors are not well understood.
“Many pension scheme trustees’ policies in relation to social factors are high level and unilluminating. There is a concern that trustees are ill-equipped to deal with financially material social factors in their investments. How well do they, and those acting on their behalf, understand what is happening in the supply chains? How exposed are they to the risks posed by action on these issues? And what are they doing in response?
“In February 2021, I wrote to forty of the largest schemes seeking information about their ESG policies and their stewardship policies and practices. I found performance to be mixed. I am therefore launching this Call for Evidence to seek views on trustees’ approach to social factors and to understand whether Government needs to do anything to ensure trustees are better able to meet their legal obligations. I encourage respondents to share their views openly and make pensions fit for 21st century challenges.”
Aviva head of savings & retirement Alistair McQueen says: “With more than £3 trillion invested in pensions, their potential to be a force for good is huge. Aviva has demonstrated its commitment to climate action with its goal of achieving “net zero” by 2040 – ten years ahead of the Paris Climate Accord goal of 2050. This consultation recognises that the potential for good goes beyond the environment, towards social and governance considerations. The timing is positive as it aligns with the expansion of independent governance committee remits to include all elements of ESG investing from 2021. Aviva supports this expansion. Our investment arm, Aviva Investors, considers all elements of ESG in its fund management activities. This consideration echoes into our pension operations. We look forward to working with the government in this important area.”
Nico Aspinall, chief investment officer at B&CE, provider of The People’s Pension, says: “The consultation presents us with the opportunity to shape the future of what is a key issue for the industry. We know from listening to our members that they are interested in all aspects of ESG when it comes to how their pension savings are invested.”
Call for Evidence Questions
- Does your pension scheme, or do schemes you advise, have a policy on financially material social factors? In this policy, are social factors discussed separately to ESG factors in general?
- Does your scheme, or do schemes you advise, have (a) a stewardship policy and/or (b) a voting policy that specify covering social factors?
- On which social factors do your scheme’s investment and stewardship policies focus? What was the rationale for deciding to focus on these particular social factors? Do you refer to any international standards, such as those relating to human rights or labour rights?
- Which resources have you found useful when seeking to understand and evaluate social factors either for your scheme or a scheme you advise? Do you feel that you have sufficient understanding of how companies perform on social issues?
- What approach do you, or the trustees you advise, take to managing the (a) risks and (b) opportunities associated with social factors? Why have you chosen this approach?
- If this is delegated to asset managers, how do you ensure and monitor that they manage the risks and opportunities associated with social factors?
- (a) Have the trustees of your scheme, or a scheme you advise, undertaken stewardship (engagement or voting) with an investee company on a social factor in the past 5 years, whether directly or through an asset manager?
(b) If yes, please provide details including why you felt this was necessary, what was done and the impact of your intervention.
(c) If no, then please provide details including what disincentives and barriers you faced in undertaking stewardship activities (engagement or voting) with an investee company?