Putting social issues at the centre of scheme thinking

ESG investing is a broad topic, and some of its most important factors can get lost amid worthwhile work on climate change. The PLSA’s Karen Hurst explores social themes and how engagement and stewardship can further these aims.

In what seems like a short period, environmental, social and governance (ESG) factors have become a central tenet of pension scheme investment operations.

Responsible investment forms one of the PLSA’s top six regulatory policy areas of focus for 2022 and will be a key theme at our Annual Conference in Liverpool on 12 and 13 October.

Government regulations are pushing schemes to monitor and manage their portfolios in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and asset managers are innovating to offer new investment opportunities in line with ESG goals.

In addition, it’s clear from our research that pension schemes of all kinds are taking the initiative and playing a leading role in advancing ESG causes for the benefit of their investment portfolios and their members.

Socially responsible investing

But it isn’t all about climate change. Social factors such as modern slavery, health and safety, working conditions and remuneration are all important issues cited by pension schemes, as detailed in our June 2021 paper on social investment risks and opportunities.
One of the most important ways that schemes can achieve their ESG goals is through ensuring their voices are heard.

At the PLSA’s ESG Conference earlier this year, Thérèse Coffey – then the Secretary of State for Work and Pensions – declared it was “not enough for schemes just to passively report on their climate risks”, while panellists predicted a new and demanding minimum standard for stewardship.

Social factors are becoming a much higher priority for schemes of all kinds when it comes to their engagement and stewardship activities. However, these issues are often more difficult to measure and monitor, as they do not always lend themselves to a quantitative approach.

To have a meaningful impact, investors need a narrative as well as data to understand how social factors are being addressed and supported at company and manager levels.

Climate and biodiversity

Of course, the major regulatory focus remains on climate change.

Most schemes that responded to our most recent survey have net-zero plans in place or will have within the next two years. Many have also started working on TCFD reports, with more than half (55%) telling us they plan to publish one this year – and more than a quarter having already done so.

Setting up these reports is not a ‘set and forget’ process. It will require regular reviews of data sources to ensure schemes have the best possible information about their portfolios, and it will require trustees to keep abreast of developments in data and regulations.

Just as schemes are beginning to get to grips with TCFD reporting, there is another environmental theme emerging: biodiversity. This reflects the financial and investment impacts of a loss of biodiversity. Habitat destruction and extinctions can wreak havoc on food chains, the viability of land for agriculture, and give rise to new health risks – all of which have a knock-on economic effect.

The recently launched Taskforce on Nature-related Financial Disclosures (TNFD) aims to broadly replicate the TCFD’s work but with a focus on biodiversity and related issues such as deforestation. This chimes with the UN Sustainable Development Goals, in particular SDGs 14 and 15.

Familiarising ourselves with these issues and how to measure, monitor, and manage them will help trustees engage effectively with asset managers and portfolio companies.

Ultimately, we are all seeking to secure a healthy and sustainable retirement for scheme members, financially and in the wider world. At the PLSA, we strongly believe these two aims can go hand in hand for the benefit of current and future pensioners.

Join us in Liverpool on 12-13 October for the PLSA Annual Conference. Find more information about the conference, speakers, sessions, and book your place here.