16 June 2021
Trustees can improve the management of their pension schemes by taking better account of the social element of ESG according to LCP who have argued that the S shouldn’t be treated as the ‘poor relation’ in ESG.
In their response to the DWP’s call for evidence on Consideration of social risks and opportunities by occupational pension schemes, LCP points out that the data quality of social-related factors is not as good and less available than climate-related data and it may also be less clear cut when it comes to the impact on company performance. Clearer guidance for companies to report consistent and standardised data around their social practices would be a significant step forward.
Other points that LCP make in their submission are:
- The importance of the S in ESG has been overshadowed by the E and the G. Significant attention has been put on climate change and the spotlight has also been on governance issues because the potential for bad governance to impact a company’s value is more obvious.
- Attempting to tackle climate change without consideration of all the social factors that will be needed to transition to a low carbon society may ultimately lead to the process being delayed. This would have financial and social repercussions.
- Social issues are important for long term returns. Part of trustees’ fiduciary duty requires them to take account of financially material matters, including ESG and so social factors can’t be ignored.
- Trustees are a step removed from the companies their pension schemes invest in. This means they put a heavy reliance on fund managers to account for social issues and expect them to put pressure on supply chain companies to improve data quality and coverage.
- Better reporting on social factors by companies, and by fund managers in turn, would better equip trustees to provide effective oversight of the way the fund managers are addressing social risks and opportunities on their behalf.
Shyam Gharial, Consultant at LCP, commented:
“The S shouldn’t be the poor relation in ESG and we welcome that the DWP has recognised that S is the laggard when it comes to ESG priorities. With environmental and governance factors taking a front seat, and social factors being harder to quantify and measure, it is understandable that they have taken a backseat. However, it doesn’t make them any less important financially or ethically.”
“With greater policy momentum in this space, trustees will benefit by paying more attention. A great first step trustees can take is to probe their investment managers about how they consider and manage social risks and opportunities, and whether they incorporate these into their climate change policies.”