What’s the context?

The “S” in ESG refers to social factors. This covers issues such as human rights, workforce conditions, diversity, supply chains, and community impact.

For pension schemes, this means considering how investments affect people and society, alongside financial returns. Trustees are encouraged to set clear policies, engage with managers, and report on social risks and opportunities to demonstrate responsible investment.

“The ‘S’ of ESG is one area in which the risk management of pension schemes can be strengthened.”
– Consultation outcome: Government response: Consideration of social risks and opportunities by occupational pension schemes, July 2022.

2019 was a turning point for a cascade of regulation in respect of ESG and climate change for pension scheme trustees. Changes to the Occupational Pension Schemes (Investment) Regulations 2005 imposed new requirements on trustees to set out their policies in their SIPs in relation to “financially material considerations” – defined to include ESG considerations and climate change – and stewardship.

By October 2020, additional changes to the regulations (implementing elements of the Shareholders Rights Directive II – Directive (EU) 2017/828) required trustees to also include details in relation to arrangements with asset managers. Trustees also have defined regulatory obligations to articulate and report their policies on voting, engagement and stewardship, bolstered by the Department for Work & Pensions (DWP) guidance on the statement of investment principles and implementation statement, published in 2022.

In July 2022, the Government published its response to a call for evidence (launched in March 2021) on the consideration of social factors by pension schemes.

The call for evidence sought to encourage a more proactive approach to embedding social factors within pension schemes’ investment decisions, separating out the S in ESG and stewardship policies for trustees, and suggesting themes that trustees might look at. These could be specific policies on human rights within the context of business practices, including modern slavery, as well as a more focused approach to workforce conditions, supply chains, community engagement and consumer protection.

The Government also announced a new minister-led taskforce to support pension scheme trustees and the wider pensions industry with some of the challenges around managing social factors, such as the identification of reliable data and metrics. The Taskforce on Social Factors (TSF) was launched on 28 February 2023 with the support of the DWP.

The TSF was made up of a wide variety of industry practitioners from pension funds, asset managers, insurers, relevant non-government organisations with a range of regulators, and government departments as observers.

The objective of the TSF is to raise awareness and develop a common understanding of social risks and opportunities that pension scheme trustees, industry and policymakers can address.

The final TSF guide on considering social factors in pension scheme investments was published in March 2024. Accompanying publications are intended to “provide frameworks of good practice and allow for the assessment of materiality”. These include:

  • a quick start guide  to support trustees with activities to begin to identify and monitor social risks and opportunities of their scheme’s investments
  • case studies on considering social factors, and
  • recommendations to improve the integration of social factors in pension scheme investment.

The TSF work is now integrated with the Transition Plan Taskforce’s materials into the International Sustainability Standards Board.

  • For details on transition plan requirements and the latest consultation, see Transition plans

What are my compliance obligations?

Trustees would be well advised to read the TSF guide’s suggestions on what good reporting from a manager looks like and may find some of the suggested approaches to manager questioning useful.

The guide provides a helpful focus on social issues. The appendices in particular provide useful suggestions on how trustees might provide oversight of both stewardship and use of data on social factors by managers and service providers, including investment consultants.

It suggests that trustees should “understand and consider incorporating the preferences of beneficiaries into [their] decision-making”. This should be approached with considerable caution. The law is restrictive on the extent to which trustees can base their investment decisions on member views. There are also obvious practical difficulties in doing so on complex matters.

It may be helpful for trustees to have a general understanding of the interests of their members in order to improve their reporting of ESG issues. But trustees should proceed carefully and take legal advice before embarking on member surveys or similar approaches aimed at garnering member views.