UK pensions and finance players call for ‘TCFD for social risks’

Pension fund tells regulator to create disclosure framework, as UK trade body eyes global agreement

UK pension funds and finance bodies are pushing for the creation of a “TCFD for social risks” as the country’s regulator closes a consultation on how trustees consider social issues in investment policies.

In its feedback to the Department for Work and Pensions (DWP), £2.5bn pension scheme Now: Pensions said that creating such a framework would be the best solution for current gaps in disclosure on social risks, and should include “key metric requirements” for companies. 

Similar calls were made in a report last week from the UK’s International Regulatory Strategy Group (IRSG) – a new trade body created by the City of London and industry group TheCityUK – whose members include Aviva, the Investment Association, London Stock Exchange Group, JP Morgan and Willis Towers Watson. 

The report, entitled Accelerating the S in ESG, was developed through IRSG’s ESG workstream, in partnership with KPMG. Speaking to RI, Michael Collins, Director of Government Relations at asset manager M&G and workstream chair, said the group had chosen to focus on social issues because it wanted to “provide thought leadership on issues that were not getting the airtime they needed and deserved”.

He said that social factors require a disclosure framework comparable to the TCFD to help generate consistent, reliable data for the financial services sector.

‘Rather than introduce yet more regulation at this stage our preference would be for the DWP and the Pensions Regulator to monitor the impact of these developments before taking further action’ – LCP’s Claire Jones

The IRSG will now engage with stakeholders including the International Organisation of Securities Commissions (IOSCO) and the Financial Stability Board – the host of the TCFD – to take up the report’s recommendations, he explained. Other recommendations include a global agreement on ‘social principles’, including minimum standards, and focus on a “single social principle”, such as modern slavery. 

“In the environmental space climate change has really focused people’s minds and attention,” said Collins. “And coming quickly behind that you’ve got other environmental issues garnering attention such as biodiversity. So we thought we should try something similar in the social space.” 

“We chose modern slavery because it’s an issue that spans economies. It’s a problem everywhere and, interestingly, it’s a problem where, in terms of law, quite a lot has already been done – there is already a legal framework so we felt it is something we could build a coalition around and build support for quickly.”

A growing number of countries have introduced legislation forcing companies to report on preventing modern slavery in their supply chains, including the UK and Australia. 

There are mixed views on the need for further regulatory intervention to promote the integration of social factors into investment decisions, though. Claire Jones, Partner and Head of Responsible Investment at consultancy Lane, Clark & Peacock, said that more regulation was not the answer, pointing to the raft of new rules already being introduced for UK pension funds, such as requirements for schemes to report on their stewardship and voting activities, and the addition of a stewardship module to the Pension Regulator’s new code of practice.

“Rather than introduce yet more regulation at this stage”, she said, “our preference would be for the DWP and the Pensions Regulator to monitor the impact of these developments before taking further action”.

The government opened the consultation on social issues after Pensions Minister Guy Opperman found “mixed” performance among the UK’s 40 largest pension schemes.

Yesterday, the country’s Pension and Lifetime Savings Association announced a partnership with pension fund RPMI Railpen, the Chartered Institute of Personnel and Development and think tank the High Pay Centre to understand investor expectations on social factors, and how the UK’s largest listed companies are disclosing on workforce issues. 

The partnership will explore what workplace metrics are most valuable to investors, and the quality of disclosure by FTSE 100 companies on metrics including gender and ethnicity pay gaps, mental health sickness rates and aggregated turnover rates.

Will Martindale, Group Head of Sustainability at asset manager Cardano – Now: Pensions’ parent group – said in feedback to the DWP consultation that social issues had attracted less regulatory attention than climate change, “perhaps in part because social risks and opportunities are more difficult, and in some cases impossible, to quantify”.

Research published this week in a report titled Data for investor action on modern slavery, found there is scarce actionable information on corporate exposure to, and management of, modern slavery risks, and that data is often reported in ways that are difficult to integrate into investment processes. 

Michael Bushnell, Managing Director of covenant adviser Lincoln Pensions, said in his consultation response that “social risks cannot be considered the ‘poor cousin’ of ESG”, but criticised the DWP for not mentioning the “the need for trustees of DB pension schemes to also understand the potential impact of social risks on the employer covenant provided by the sponsoring company”.

“We would strongly recommend that an approach to assessing social risks and opportunities facing employer covenant is adopted […] Trustees should feel enfranchised to request necessary information as they would for a standard assessment of their employer covenant – or for assessing the impact of climate change risk”, he said.