In July 2022, the government confirmed the launch of a new taskforce called the Social Factors Taskforce designed to help pension schemes "seize the opportunities" of the social element of environmental, social and governance (ESG) investing. This announcement was part of the government's response to its March 2021 Call for evidence on the "Consideration of social risks and opportunities by occupational pension schemes". 

The Social Factors Taskforce (the Taskforce) was formally established by the UK government's Department for Work and Pensions (DWP) in February 2023 and the Taskforce published its Issues Guide for consultation on 19 October 2023. The guide sets out 35 recommendations on how social factors can be better integrated into investment decision-making and stewardship, and is intended to provide pension trustees with the tools to identify and monitor social risks and opportunities, and to develop consensus in approaching these across the pension investment landscape. 

The Taskforce is seeking feedback by 1 December 2023 and will also be running a series of roundtable events as part of the consultation process. If you would like to read more about the governance aspect of ESG, and what the Pensions Regulator (TPR) has recommended in its equality, diversity and inclusion guidance, read our previous article here. 

The guide explores the relevant issues in three sections, before moving on to its recommendations. The three sections are:

• Social factors and pension funds: This section explores why material social factors are important from an investment perspective and how taking these into consideration aligns with pension trustees' fiduciary duties.
• Social factor data: This section discusses the data trustees can use to manage social factors in investment and suggests a materiality assessment framework to help prioritise areas for action.
• Addressing social factors in pension portfolios: This section sets out a framework for addressing social factors in pension schemes, providing baseline, good and leading practice indicators, with a deep dive into the issue of modern slavery and how trustees can approach this social factor in their investments.

The recommendations 

The guide makes 35 recommendations aimed at many different stakeholders, addressing the opportunities for improvement of social factor integration for each of them. The recommendations are aimed at stakeholders such as pension trustees, regulators, government, asset managers, legal advisers, investment consultants, data providers, civil society/non-governmental organisations (NGOs), and businesses and employers. We will take a look at the key recommendations for some of the targeted areas below. 

For pension scheme trustees, the Taskforce recommendations include that:

• Trustees should have a good understanding of the way their investment consultants approach social factors and should set them objectives related to such factors. This will help better alignment and understanding. The guide suggests example questions for trustees to ask investment consultants, such as how they consider a manager's approach to social issues and data in their evaluations and recommendations. This will allow trustees to understand the extent to which their consultants are truly on top of responsible investment.
• Trustees should ensure that their asset managers consider social factors and integrate them into their investment strategy and stewardship. There is an example of a request for proposal question and mandate terms appended to the guide. 

In terms of regulators, the guide recommends that:

• the DWP should consider formally setting out expectations on addressing social factors for pension funds, to then be overseen by TPR;
• the FCA should consider setting out expectations for social factor reporting by asset managers; and
• TPR should, alongside its climate change strategy, consider ways of raising awareness of social issues among pension trustees to help them integrate these factors into their investments. 

When discussing asset managers, the Taskforce states they should be making continued progress on taking account of social issues in their investment strategies and recommends that: 

• asset managers should operate clearly articulated stewardship, engagement and voting policies covering social issues that result in considered, structured engagement activity. This includes appropriate escalation strategies, such as co-filing relevant shareholder resolutions related to social factors;
• asset managers should be able to demonstrate that they have influenced social outcomes through transparent reporting on engagement, voting and investment outcomes, including any social investment metrics; and
• asset managers should conduct due diligence on human rights and modern slavery in their investment portfolio and disclose the results. 

Next steps

The consultation is set to close on 1 December 2023. When it closes, it will be followed by a series of roundtable events to discuss the draft guide and feedback received. This will then be tested in a focus-group-type environment before any required updates are incorporated into the final guide. 

Looking forward, trustees and others involved in making investment decisions should look to the guide when preparing policies on their own investment principles. They should also seek to engage with the consultation to help influence the final version. As the deputy director of the Pensions and Lifetime Savings Association (PSLA), Joe Dabrowkski, has said: "Social factors are becoming a much higher priority for schemes of all kinds when it comes to their engagement and stewardship activities. The taskforce's guide will help trustees understand their investee companies' impact on society and hold them accountable."