Focus on climate change leaves social and governance factors 'overlooked'

The pensions industry has been urged to consider social and governance considerations when shaping their investment approach, after research from the Pensions Policy Institute (PPI) suggested that a "heavy focus" on climate change has left other areas "overlooked".

This is despite almost two-thirds (65 per cent) of UK pension schemes stating that they felt they were doing enough to account for environmental, social and governance (ESG) risks in their investment strategy.

In particular, the report, which was sponsored by Newton Investment Management, found that climate change was a top priority for 21 per cent of schemes, whilst environmental risks, including climate change, were prioritised by a further 12 per cent of schemes.

Considering this, the PPI emphasised that in order to ensure ESG risks have been appropriately mitigated, schemes must ensure a full range of factors is being considered.

In addition to to this, however, the report acknowledged that the focus on the integration of climate change risks offers lessons for the integration of other ESG factors, and can serve as a “blueprint” for increasing the integration of other ESG risks.

PPI senior policy researcher, Lauren Wilkinson, also noted that events over the course of 2020 and so far in 2021 have emphasised how rapidly social and governance factors and societal attitudes surrounding them can evolve and come to the fore.

"Issues around public health, equality and labour practices have received increasing attention, accelerated by the Covid-19 pandemic, equality movements such as Black Lives Matter, and corporate insolvencies and court rulings against companies such as Asda and Uber," she explained.

"These social movements emphasise the importance of pension schemes’ investment strategies being flexible and proactive in the way that they approach ESG considerations.

"All those who are involved in designing and implementing schemes’ investment strategies need to have a good understanding of the way in which these factors can have a financially material effect on outcomes, if they want to avoid putting member contributions at financial risk."

However, she warned that schemes may need more support to improve their knowledge and understanding, especially regarding social factors and the way in which available data relates to their own investment strategy.

Indeed, the report revealed that barriers still remain around ESG, with 53 per cent of respondents facing obstacles when implementing an appropriate ESG strategy.

These included the large quantities of data and inconsistent quality of information being available on ESG risks, ESG data issues such as availability and costs, and a divergence between measures across the industry.

Previous research from the PPI has also called for a"harmonised" approach to ESG, amid concerns that schemes were facing too much information when designing their ESG strategies.

However, today's report has highlighted five further areas where progress is needed to help support pension schemes, including increasing knowledge, engagement and stewardship, innovation in products and data provision, and standardised data and definitions.

Alongside this, the building of a consensus amongst stakeholders about ESG-focused goals was also highlighted as a fifth area that could help support pension schemes.

Commenting on the findings, Newton head of sustainable investment, Andrew Parry, said: “The world of ESG data is incredibly broad and at times complex, and it is understandable therefore that so many of those surveyed cited this as a major barrier to formulating their ESG strategy.

“Our role as asset managers is to support our clients in demystifying how data is used, and to provide clarity on the data available, costs involved, and the underlying exposures in their portfolios and the motivations behind them in order to promote the best outcomes possible for them.”

However, the provider also emphasised that success in these areas is dependent upon collaboration between the various parties across the industry, with asset managers urged to work "purposefully" to engage with schemes on ESG issues.

"Active asset managers like Newton, and others in the industry, need to work purposefully to engage with schemes and help them not simply to meet their ESG-related obligations, but to do so in the context of achieving strong outcomes too, explained Newton chief commercial officer, Julian Lyne.

He added: “2020 was a year when attention towards environmental, social and governance issues were accelerated amid the global pandemic.

“ESG factors have a direct impact on investment strategies, and understanding them better will support schemes to exploit opportunities and mitigate risks appropriately. The pensions industry has clearly built up its knowledge of climate-change risk successfully.

“We believe it needs to adopt the same process for social and governance factors in order to provide a more holistic view to mitigate risk. This will enable trustees to make more informed decisions, which should lead to improved pension scheme outcomes."

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