LPPI welcomes the opportunity to provide input to the Department for Work and Pensions (DWP) call for evidence on the consideration of social risks and opportunities by occupational pension schemes.

The observations shared below present organisational views which reflect our experience supporting client Pension Funds in their capacity as Administering Authorities for Local Government Pension Schemes.

The Call for Evidence outlines the duty under law for UK Pension Fund trustees to consider material environmental, social and governance (ESG) considerations. It expresses concern that, to date, climate change has dominated to the detriment of other considerations and observes that “many pension scheme trustees’ policies in relation to social factors are high level and unilluminating”.

The action of consulting on this important theme speaks directly to its stated aim which is “to understand whether Government needs to do anything to ensure trustees are better able to meet their legal obligations”. A clear answer to this question will hopefully emerge through a reasonable weight of responses which recognise:

• there is an observable imbalance
• there are benefits to strengthening current approaches and it is timely to address this issue now
• the correct onus is on industry participants (pension fund trustees, their advisors and asset managers) to voluntarily develop, agree and implement practice standards
• DWP can best facilitate change by convening practitioners, encouraging them to evolve practice in this area and ensuring government policy is aligned with and assistive of progress.

The following observations offer further insights on the broader themes of the review.

Climate change poses a systematic risk which will affect every company and every sector globally. Acknowledging this reality has been a catalyst for the rise of ESG as a relevant and necessary investment discipline and a lens for evaluating financially material risks and opportunities. ESG policies heavily focused on climate change respond to a palpable threat for which an agreed thinking framework (the Taskforce on Climate Related Financial Disclosure) has emerged as a clear guide to the identification of material issues, and as a recommended approach to measurement, management and reporting. Pension Funds lack an equivalent frame of reference, universal set of standards and agreed approach for considering social issues. No single theme has unified experience and placed social factors under the intense formative pressure needed to catalyse change until recent experience of the global pandemic.

Pension Fund Trustees have developed greater confidence in considering climate issues through experience of its building prominence over time, via the significant weight of material dedicated to it, and because the risks faced can be conceived logically and strategically, prompting obvious questions, and options for addressing them. Social issues are multitude and context specific. Tending to be amorphous, complex, and interconnected they are naturally harder to exemplify within headline policies than concepts of value destruction due to physical peril or asset stranding through the transition from fossil fuels to renewables.

It is important to highlight that climate change is not restricted to consideration merely as part of the E of ESG. It involves and incorporates E, S and G considerations simultaneously. It spans whether governance is appropriately focused on identifying, planning for, and addressing the risks and opportunities posed by climate change and leading a business forward. The assessment of sustainability involves determining whether products and services (which underpin corporate success) are evolving sufficiently to exceed regulatory requirements and will continue to meet societal needs (including the demand for climate solutions) in a way which builds value and skills into the workforce, works effectively with a broad community of stakeholders, secures quality, reliability and timeliness from supply chains and maintains a strong social license to operate. The challenges posed by climate change have developed ESG analysis as a holistic discipline and created insights portable to a variety of contexts and problems.

Climate change has the benefit of what has developed to become an established framework for identifying financial risks (TCFD). Without equivalent coverage for social issues it is unsurprising that the articulation of how pension funds are supporting good practice is relatively underdeveloped as part of formal policy statements. When a practical, useful, accepted approach and standard for social factors is available, articulation, disclosure, measurement, and reporting will improve in response.

Drawing attention to the deficit is a positive step if it is interpreted as the DWP encouraging practitioners to collectively develop good practice around a common agreed standard, rather than a warning that a prescriptive approach determined centrally is already under consideration, which is unlikely to accommodate the critical nuances of investment context.

Experience and insights from Covid-19 include a strong spotlight on existing social inequalities and imbalances, the vulnerability of the social care sector, new concepts of social value, emphasis on the importance of relatively poorly paid “key workers”, and the power of community cohesion. There is already recognition that experience of Covid-19 is prompting the rise of S within ESG. The opportunity to build recent learning into investment thinking, and to evolve the evaluation of investment risks and opportunities to address corporate resilience and sustainability is available to all investors, but a greater benefit would flow from a new standard adoptable by pension funds which lack the resources to develop practices locally.

The Government’s most productive role and actions going forward would be as:

• a facilitator using influence to encourage the investment sector to convene and develop standards that will solve perceived issues in a resource efficient way
• an advocate for the good practice being called for
• an exemplar of the processes and outcomes being urged on pension fund trustees by incorporating due consideration for material social factors within Covid recovery planning, and by directly supporting the ability of investors to hold companies to account and set high standards for corporate governance via routes including listing rules.

Should you wish to discuss any of the observations shared within this response, please contact our Head of Responsible Investment, Frances Deakin.