People want to know that their retirement savings are contributing towards a greener future, and are not invested in companies which are not a part of that journey. Social factors (the ‘S’ in ESG) are a lesser-known part of responsible investing, inside and outside of the financial services industry. Here, Zoe Pope discusses social factors and the opportunities to influence positive change.
Recent events, such as the invasion of Ukraine and the overturning of Roe v. Wade, have brought social issues to the forefront more than ever. We know that environmental concerns (the ‘E’ in ESG) are increasingly important to retirement savers as the UK heads towards a Net Zero future.
People want to know that their retirement savings are contributing towards a greener future, and are not invested in companies which are not a part of that journey. Social factors (the ‘S’ in ESG) are a lesser-known part of responsible investing, inside and outside of the financial services industry. This is partly because it is harder to measure how investee companies act with social responsibility in mind, especially compared to the more widely available scientific estimates that measure an investee company’s impact on the climate.
DWP recently announced a taskforce on social factors to bring together industry and government expertise to support a common framework for Asset Managers (AMs) and Asset Owners (AOs). They will aim to identify reliable data sources in which to base investment decisions, as well as monitoring and reporting on the development of international standards with regards to social factors. None of this is possible without pension providers creating stewardship principles and diligently working to ensure that they (or their AMs) are acting in line with the principles they have committed to.
There are common themes across ABI members’ policies on stewardship and social factors. These include, but are not limited to, human rights, gender and ethnic diversity on boards, and health and safety. Our members assess many issues that make a company unique; believing that challenging a company to meet providers’ stewardship principles is the best way to drive change and encourage positive behaviours. This way, pension providers can balance optimal investment returns for customers, with their duty to act socially responsibly. Divestment is often a last resort.
In the current political and social climate, the industry has worked with regulators and government to ensure that sanctioned Russian and Belarusian assets are separated from the rest of a fund. This gives investors confidence that their investments are not supporting the invasion of Ukraine, and that they do not lose returns as a result of international sanctions.
The industry increasingly shines a light on the work it is undertaking to make firms meet higher social standards. This work is ongoing, and involves a lot of resource to ensure that its stewardship principles are being met. Current social and political events could be a catalyst for providers to engage customers with their pension, and show the real life changes that can be made as a result of their investment decisions.
Pension providers however cannot drive consistent stewardship practices alone. They need ways to measure and define social factors fully, to allow for direct comparisons between providers and schemes, as well as between different products. The taskforce should focus on ensuring that UK and international standards for social factors are clear and standardised, and that there are workplace disclosure initiatives to guarantee transparency of a company’s operations for all of its employees throughout the supply chain.
If we can get this right, the power of pensions can provide people with the opportunity to ensure their investments match their values and their money influences positive change.