Social factors in ESG reporting

It seems that the Minister for Pensions and Financial Inclusion is not too impressed by the way “Social Factors” in ESG investments are being handled by investors. In a recent consultation, he states:

“I am concerned that social factors are not well understood.

“Many pension scheme trustees’ policies in relation to social factors are high level and unilluminating. There is a concern that trustees are ill-equipped to deal with financially material social factors in their investments. How well do they, and those acting on their behalf, understand what is happening in the supply chains? How exposed are they to the risks posed by action on these issues? And what are they doing in response?

“In February 2021, I wrote to forty of the largest schemes seeking information about their ESG policies and their stewardship policies and practices. I found performance to be mixed.”[1]

Guidance on ESG reporting is via the UK Stewardship code. The Department of Work and Pensions (DWP) highlight that one of the intentions of the Code is to “create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.”

In our environmental reporting work, we follow the adage that “you can only manage what you measure”. Having carried out a lot of research on social value/wellbeing, we see that this same adage can be applied to social factors. The first thing to note is, despite views to the contrary, measuring wellbeing is possible and established as a scientific method. Most work by positive psychologist’s measure something called “subjective wellbeing” which is essentially asking people to rate their own life satisfaction. This approach has proven remarkably good. Lord Richard Layard summarises this eloquently via the “Action For Happiness” organisation which he founded, “although it is a subjective phenomenon – measured using people’s own reports of their lived experience – there is now growing evidence that our subjective experiences have an objective reality.”[2]

Points we noted on our suggested metrics:

Metrics based on the established science of measuring “Wellbeing”
Has significant financial benefits to companies
Has an inherent definition of “what good looks like”
Helps identify new risks and opportunities for large organisations
Using metrics devised by OECD and its member states since 2007
Uses Office of National Statistics data
Allows benchmarking
Identifies crucial factors that improve customer and staff wellbeing
Relies on simple, staff and end-customer surveys only (max 4 questions) – no other data needed

Hopefully, this will provide some ideas for streamlining social value measurement and helping organisations more quickly improve wellbeing for their customers, staff and the wider community.

In the meantime, if you are interested in the “E” part of ESG reporting, then please consider our services.