10 ‘S’ questions every trustee should ask their investment consultant

30 March 2022

The social ‘S’ of ESG can play a major part in the long-term sustainability and profitability of the businesses that pension funds invest in – from creating products that contribute to a better society, to providing a positive, productive workplace culture.

Getting to the heart of social factors means asking questions about how a company balances purpose with profit, how it treats its employees, manages relationships with the communities around it, and proactively addresses societal issues such as health, housing, or education through its products.

This is not always obvious from public documents such as annual reports and accounts, so trustees, investment consultants, and fund managers will need to look beyond surface-level information to really understand how well companies address the ‘S’ factor.

Here are ten questions that trustees should be asking:

1. What does ‘S’ mean for our scheme?

Start with a clear definition of what social factors mean for your pension scheme investments. This may cover the asset classes themselves – social housing, for example – the investments within an asset class, and all the advisers and managers in between. Your investment consultant and professional trustees should be able to help you develop a definition by sharing expertise from other schemes that have been through similar processes. If your scheme sponsor has a clear social purpose, it may want the scheme to share those same values.

2. What are our fund managers’ and investment consultants’ own social beliefs?

Have your consultants and fund managers defined their own beliefs or company purpose and do these align with your own? Are they able to demonstrate – rather than just articulate – those beliefs through their decision-making and reporting, and through their behaviour as an organisation?

3. How does our investment consultant find new ideas?

Investment consultants will have different approaches to finding innovative fund management ideas and including them in their portfolios. That could include funds focused on new products that improve a particular aspect of public life, for example. Trustees should challenge investment consultants to stretch their boundaries and consider ideas that are outside their comfort zones. Make sure that you are getting access to smaller, overlooked gems, and that your consultant is proactively looking for great fund management ideas that may not yet be on mainstream lists.

4. How does our consultant assess fund managers’ track record on social factors?

This space is evolving, with many different approaches being used to evaluate managers on ESG factors. Trustees should direct their consultants to employ consistent reporting that provides the assessment required. This is more difficult for ‘S’ factors, but investment consultants do need to evaluate how fund managers perform here – in areas such as commitment to preventing staff burnout, for example.

5. How do our fund managers evaluate workplace culture in the companies they invest in?

Corporate culture can have a huge impact on a company’s ability to attract and retain talented employees, its brand reputation, governance standards and therefore its ability to grow profits. Ask your investment consultant and fund managers how they look beyond traditional reports and accounts to find out more about the relationship between employee culture and long-term profitability.

6. Do our fund managers look at the whole of a company’s behaviour?

Sadly, there are still examples of businesses that use child or slave labour in their regional operations or supply chains, despite having a carefully prepared social responsibility statement at head office. Are fund managers exploring how a company with international presence operates in all its markets, across all its sectors, and business divisions and in its supply chains?

7. How do fund managers execute their voting rights?

Fund managers’ voting policies and practices can be a good indicator of their commitment to ESG factors in general. Some will be very hands-on in the way they vote, and will listen to investors’ beliefs, even in a pooled fund. Others outsource voting to a third-party service and are relatively disengaged. This can affect the amount of influence a fund manager really has on the way that a company is run.

8. What measures do our fund managers use to assess social factors?

At present, there are very few reporting frameworks or standards for ‘S’ factors. But fund managers who are genuinely committed will already be thinking about the criteria they use to assess, measure and report on it. Ask for evidence of how ‘S’ is being monitored, what you can expect to see in ongoing reports, and what action you can expect fund managers to take if a company in their portfolio falls below expectations.

9. How will our fund managers’ approach evolve over time?

Many fund managers and consultants are still developing their views on social factors and deciding how they will embed these in their investment approach. Are they transparent about future developments, and what new questions and measures will they use to better assess social factors? How will the answers to those questions affect their portfolio construction?

10. How do our other scheme providers approach social factors?

Other scheme providers such as fiduciary managers, buyout insurers, and professional trustees can all play a role in social factors. Understanding how fiduciary managers will support your ESG beliefs should be an important part of an appointment process. Buyout providers are becoming more transparent about their own ESG principles, and this may be a factor in trustees’ choice of an insurance partner. Professional trustees bring a wealth of experience from working with multiple trustee boards to help schemes define their own priorities, implement a social strategy that fits their beliefs and help deliver long-term returns.

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