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Cardano responds to the DWP call for evidence on social risks and opportunities

The UK department for work and pensions has turned its attention to social risks and opportunities, issuing a consultation which closed in June 2021.

In responding, we called for the “TCFD for social risks”.

To date, there has been less regulatory attention to social risks and opportunities. In our experience, it is not common practice for pension schemes to have a standalone policy on social factors, indeed, nor for most pension schemes to specifically mention social issues (other than within the context of ESG factors more broadly).

Rather, most pension schemes have focused their sustainability efforts on climate change first. This is, perhaps in part, because social risks and opportunities are more difficult, and in some cases impossible, to quantify. When it comes to social issues, there is not the same political urgency; nor is there the same consensus on the problems we’re trying to solve. Social issues are often context specific.

This, however, doesn’t lessen their importance.

We favour regulation because terminology, implementation and disclosures are fast-evolving, and, in our experience, often incomplete. This leads to inefficiencies. We are unable to consider social risks and opportunities to their fullest extent. Effective regulation can help resolve this.

Regulation also rewards first-movers, levels the playing field and – most importantly – raises minimum standards. By implementing their commitments to social risks and opportunities with sufficient scale and depth, UK pension funds can accelerate the attention to social issues through the investment chain – here in the UK, and indeed, in the international markets in which we invest.

We believe the DWP should introduce similar regulatory structures to those used for climate change.

In addition to the questions asked, we believe there are three important additions to the DWP’s consultation:

  1. There is no mention of 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. The employer covenant is likely to be a DB pension scheme’s most material single asset and brings significant idiosyncratic risks to every scheme (including in relation to social risks). We believe that it is essential that the exercise of understanding an in-scope DB pension scheme’s social risks and opportunities are extended to also cover the impact of social risks on the employer covenant[1].
  2. We encourage the DWP to work with other UK regulators to support corporate disclosure requirements on social risks and opportunities. We want harmonised (standardised, comparable and audited) information flows (downstream and upstream) through the intermediation chain on social risks and opportunities. We recommend disclosures include a look through to supply chains: the scope 3 ‘equivalent’ of social risks.
  3. We encourage the DWP to work with investment groups (such as the UN PRI or Walk Free[2]) to facilitate a “Net Zero” pledge equivalent on social risks and a “Climate Action 100+” initiative equivalent on social risks, where UK pension funds can collaborate to engage companies with the largest social risks and opportunities.

Regarding the issues themselves, we focus our resources where we are passionate, knowledgeable and can have an impact. The social risks and opportunities we are prioritising include human rights, modern slavery, diversity and inclusion, including, but not limited to gender, and working conditions.

We are also looking into the social areas closely tied to pension provision, including but not limited to: social housing, financial inclusion, provision of older age care, health care, including health science, wellness, and mental health. These are new topics to us (and the investment industry more broadly) but they are topics where we believe we can practically make a difference.

In our beliefs, we commit to a fairer society. Our beliefs set out our support for the ideals of western liberal democracies. We will look for ways to improve societal outcomes in the UK and the Netherlands, promoting diversity and inclusion and enhancing the wellbeing and financial security of our clients’ beneficiaries and their families. We respect and support human rights and avoid human rights abuses.

As such, we welcome the DWP’s attention to social risks and opportunities. We hope the DWP takes the steps necessary to ensure social risks and opportunities are given the attention they deserve.

[1] See Cardano Advisory response to the consultation for more details