Pandemic throws spotlight on social and governance issues

The Covid-19 pandemic has resulted in the focus on social and governance issues increasing amid heightened awareness of labour rights and public health, according to the Pensions Policy Institute (PPI).

A briefing note from the organisation, which examined the history of the environmental, social and governance (ESG) landscape, commented that environmental issues, particularly climate change, had traditionally received more focus than the other facets of ESG investing.

The PPI noted that, alongside the pandemic, the social and governance facets have also been pushed to further prominence by factors such as The Workforce Disclosure Initiative, which is run by ShareAction and part-funded by the Department for International Development, and seeks to improve the social element by encouraging companies to increase disclosure of workforce data.

The briefing note, which is planned to be the first in a series of three publications that explore the attitudes and approaches currently being implemented in relation to ESG, said there was “still a long way to go before all schemes have fully integrated ESG into their investment strategies”.

It continued: “Although regulation has strongly encouraged trustees, providers and IGCs to become more informed on ESG issues, there are concerns that some trustees have treated the changes in regulation relating to ESG risk factors as a ‘tick box exercise’ rather than engaging with it in a meaningful way.”

The PPI noted that, following regulation changes in 2019, 57 per cent of pension professionals said the most common approach taken to ESG was no changes yet taken to the investment portfolio, but a genuine interest shown in the issue.

This is despite the fact that ESG integration strategies have shifted away from negative disinvestment screening approaches to plans that involve increased engagement and stewardship.

PPI said that, historically, many schemes did not recognise the financial nature of ESG risk-factors and were to heavily focused on short-term asset performance, which has highlighted the need to consider long-term risks.

The briefing note concluded: “As focus on all areas of ESG grows, it is increasingly important that schemes of all size and type consider and engage on these issues where they represent a financially material risk. While some schemes are doing a lot on ESG, others are earlier in the integration process and some may need greater support to overcome challenges.

“The following reports in this series will explore the approaches available to schemes and the opportunities and barriers they may face in choosing and implementing an approach. The series will also identify areas where there may be a role for increased support from government and industry to enable greater engagement with ESG issues.”

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