When I flew out of Edinburgh airport on holiday recently, I had several choices of where to eat breakfast. Some were places I’d deliberately avoided since well-publicised allegations of poor practices during Covid. These restaurants were still busy - so not everyone took the same view as me - but I’m sure many others have stopped using these or other brands who damaged their reputations through poor social practices in the dark days of 2020.

As an industry, we’ve done well on focusing on the “E” in ESG (Environmental, Social and Governance) policies over recent years. It’s been a priority for us, partly because of changes to the regulatory background which have required all schemes to up their game in this area and partly because climate change is seen as a real issue which will impact the value of investments in our pension schemes.

Even the “G” has received an increasing amount of attention from pension schemes, with more focus on areas like board diversity, gender pay and pensions gaps.

But to date, the “S” has only received a limited amount of attention in comparison, perhaps because it’s less tangible in many ways. Social factors include customer satisfaction, health and safety, employee wellbeing, diversity within the workforce and data protection. There are several key global themes on the Social side currently – including modern slavery, AI and the Just Transition. While it’s relatively easy to get data on diversity from published data (and the Asset Owners Diversity Charter is encouraging more disclosure on this by fund managers), by its very nature, data on areas like modern slavery is relatively limited.

In 2022, the DWP set up an industry-wide taskforce to support pension fund trustees, and the industry more widely, around some of the challenges of managing social factors in their portfolios. This included the identification of reliable data and metrics. In 2024, guidance was issued which set out how social factors align with trustees’ fiduciary responsibilities and why they may be considered as financially material. The guidance also set out frameworks for good practice and built on the idea of the assessment of materiality.

But with the challenges around measurement in this area, what can trustees realistically do? As a baseline, trustees should have in place a high-level policy around addressing Social factors and human rights issues. They should also undergo training in this area to gain a deeper understanding of the potential financial impacts of poor social practices and use their managers to report on how they engage with companies around aspects such as modern slavery and AI. After all, although a company may seem to have good social practices in their own business, what work are they doing with their suppliers to make sure they meet the same high standards?

At the “best practice” end of the spectrum, we’re seeing some schemes developing their own voting practices on social issues and others signing up directly to the UK’s Stewardship Code to advocate for policy improvements. A great example of this is the Railpen trustees’ view that modern slavery undermines fair market practices and would potentially lead to corporate costs such as reputational damage, shareholder action and trade sanctions. They therefore now integrate modern slavery considerations directly into their investment decision making. We expect more schemes to do this over time.

In terms of my own decision making, in the end I opted for a glass of fizz and a bacon sandwich at another of Edinburgh Airport’s finest drinking establishments. Cheers to great social practices!

If you have any questions, or would like to discuss anything further, please get in touch.