Trustees’ legal duties

Most occupational pension schemes with 100+ members must prepare a Statement of Investment Principles (SIP), which should include trustees’ policies in relation to financially material considerations including ESG factors. Trustees also need to prepare and publish an implementation statement reporting on how, and the extent to which, the SIP has been followed during the year.

UK stewardship code

A new and more extensive UK Stewardship Code published in 2020, which sets out principles for the responsible allocation, management, and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, environment, and society. The principles urge signatories to consider corporate governance, environmental and social issues, including material ESG issues to fulfil responsibilities and systematically integrate stewardship and investment.

Social factors and financial materiality

The consideration of ESG factors has recently been dominated by climate change; however, it is crucial to consider other financially material ESG factors that pose investment risks, which will result in reduced returns in the long term. Social factors are wide-ranging, and trustees must evaluate financially material risks or opportunities to the pension scheme relating to practices within a company and its supply chain.

How trustees can take social factors into account

Investing in assets with good ESG credentials might help to increase an individual’s pension pot by approximately 2% at state pension age. Trustees can consider social factors through approaches such as screening, engagement, and stewardship, integrated assessments and thematic investing. However, there is no one right way to consider social factors, suggest that trustees can make comparisons and learn from each other.

Are trustees taking social factors into account?

A review of selected SIPs for 25 large defined benefit schemes and 15 large defined contribution master trusts indicates that social factors are given less attention than governance and environmental concerns. Only a minority of the SIPs reviewed differentiate between E, S, and G factors. Policies or objectives to address social factors are rare. Trustees should focus on specific social factors such as gender diversity, labour standards, and controversial weapons to manage risks and identify opportunities. Also, develop specific funds to cater the clear preferences expressed by some members.

Recommendation

The government seeks views on whether trustees can appropriately take account of financially material social risks and opportunities while making investment decisions for occupational pension schemes. Trustees should explore social factors through various approaches and make comparisons to learn better and develop funds based on expressed member preferences.