In this blog, we review the recent draft guidance from the Taskforce on Social Factors. We also explore why it’s not only important for asset owners and other industry participants to understand social factors, but also why they should take the chance to respond to the consultation. 

What’s the purpose of the guidance? 

Environmental, social and governance (ESG) considerations have been increasingly supported by well-defined reporting and decision-making frameworks, such as TCFD. However, social factors aren’t always as well addressed, one reason being the lack of an equivalent robust, established framework of assessment. 

The recent guidance from the Taskforce on Social Factors aims to provide pension scheme trustees with the tools to help identify and monitor social risks and opportunities. The goal is for trustees to embed social factors within their investment decision-making processes and stewardship policies. 

What does the guidance cover? 

Issues including modern slavery, anti-corruption and bribery are market-wide risks that, unfortunately, cannot be readily avoided. The draft guidance explains what constitutes social factors and shows how these are interconnected with climate change, such as the just transition and displacement effects. Recognising and then taking action to address such issues helps in the mitigation of these long-term risks. 

Other aspects of the guidance include: 

• A progressive framework 

The guidance provides a framework for trustees to consider social issues. As with other practices in this area, this framework sets out a baseline that should be achievable for most asset owners. Further steps representing good and then leading practice allow decision-makers to build their approach, recognising that some schemes don't have as many resources or as much governance capacity to consider all the factors. 

• Stewardship 

The guidance also helps to support the consideration of social issues in stewardship. It explores how trustees can incorporate social issues into their stewardship policies and how they might challenge managers about how they use and understand data on social issues – down to more detailed questions about the data quality. 

• Modern slavery is a focus 

An issue addressed by the guidance is the need for trustees to be aware of modern slavery. Exposure to modern slavery in portfolios is also addressed, with a focus on encouraging investor engagement to reduce the stigma of modern slavery risk and encourage investee companies to disclose. Greater transparency should allow managers to put the necessary practices in place. 

There is a distinct possibility that consideration of social factors could become mandatory, in the same way TCFD has already become a requirement. Policy-makers are already beginning to act on issues such as modern slavery, which has direct implications for investment in companies with complex supply chains. The consultation is therefore, an opportunity to add input on what good practice looks like but also to think about what may or may not be realistic. 

Ultimately, this guidance, like the Taskforce itself, is very much focused on the ‘S’ in ESG. The guidance is clear and easy to follow, with a progressive and flexible approach – no matter what stage or level or competency level you're at with social issues, everyone can stretch themselves as best as they can. And the suggested framework with an achievable baseline means that everyone can at least do something. 

What should asset owners do? 

Pension funds represent a significant proportion of global assets. As asset owners, trustees should take the opportunity to influence how market-wide risks are being addressed. Social factors have perhaps been less well addressed to date, so the publication of this draft guidance is welcome. The guidance has been written with trustees and other asset owners in mind, but it also needs to be practical and useful. We believe it strikes a reasonable balance. 

At Hymans Robertson, we’re seeking to encourage all to be Better Stewards of the assets that they control or influence. Given social issues intrinsically affect people, we could all, in some way, be affected by the issues that this guidance seeks to address. We would encourage all to at least read the guidance as a way to increase their education and to consider joining one of the Taskforce’s discussion forums, or responding to the consultation. 

As part of our own stewardship efforts, we’ll be focusing on several social issues over the course of 2024 and beyond, and we’d welcome dialogue on this subject. 

If you have any questions, please get in touch.