It’s not just about climate - tackling social risk in investments

It’s not just about climate - tackling social risk in investments

It’s pretty hard to miss the fact that climate change is one of the biggest issues facing society today. Extreme weather events are happening more often, general weather patterns are changing, and nature is struggling to adapt. So, it’s understandable that when most people think about Responsible Investment, they think about investing to protect the environment. Many pension providers and investment companies too have focused on ‘greening’ over the last few years.

Why do social factors matter?

To meet net zero targets, we need social stability and an inclusive and ‘just’ transition to a low carbon future that leaves no-one behind and considers the impact on workers, communities, and consumers. But integrating social factors into investments is not only important to effectively address climate change, it’s vital in its own right.  

Social factors cover a range of issues that can affect businesses, people and property. They can affect employees, customers, suppliers and the broader community. Examples could include companies ensuring that suppliers aren’t breaching human rights in their operations, or that the raw materials they use aren’t disadvantaging indigenous communities.  

Other examples are businesses having policies and taking action to protect employees or potential employees against discrimination. 

Many of us will have seen high profile cases of companies that have failed to address these social factors. Ones that have broken health and safety or employment law, or whose supply chains breach human rights. And the consequences can be far-reaching, including fines, bad publicity, and damage to a company’s value and share price. For investors, the financial risks are clear.

Increased spotlight on social risks

But it’s not just about the bottom-line investment risk, investor sentiment is also an important consideration. When we asked our customers about what’s important to them in choosing investments or considering who manages their investments, worker pay and conditions, human rights disclosures, and diversity and inclusion all polled highly.  

Regulators too are taking more of an interest, reflecting the importance that social factors present to economic stability and long-term prosperity.  

Here in the UK, for example, last year saw the launch of the Taskforce on Social Factors. It followed a consultation on how occupational pension schemes consider social risks and opportunities, which we were proud to be part of.  

The taskforce published its guidance to assessing investment portfolio exposure to social risks earlier this year. This includes a three-step process assessing country, sector and business risk, which covers a company’s workforce, its supply chain, the wider community, and its consumers.

How we’re developing our approach

By launching our Approach to Social Factors^*, we recognise this growing interest, as well as the importance of social factors in managing investment risk and helping to protect investor returns in the long term. 

We’ve undertaken analysis that helped us identify 13 different human rights risks across 29 sectors within our portfolio. This resulted in identifying 325 instances of human rights risk exposures including modern slavery, discrimination, and health and safety.  

We are drawing on our well-established stewardship approach to social factors by engaging with companies directly and alongside other investors to support them to change. One example of this is our ongoing engagement with Starbucks. As well as engaging directly with them in relation to human rights, modern slavery and working conditions at the company, in 2023 we voted in favour of a shareholder resolution request that the board assess its workers’ rights commitments. 

We’re also considering the integration of social factors into investments in different ways, such as increasing exposure to companies that do well on certain social factors. The use of ESG (environmental, social and governance) tilts, where funds tilt away from or towards companies in a benchmark index based on E, S and G factors, or thematic funds which have a stronger focus on ESG factors, are aspects of our approach that are evolving over time. 

Meanwhile, we continue to work with our appointed investment managers to review and develop products, and with wider industry and government to develop guidance and frameworks and support change.

Our focus areas

Our current focus is on human rights, human capital management, and diversity, equity and inclusion, drawing on recognised international conventions and guidelines. Here at Scottish Widows and the wider Lloyds Banking Group, we’re proud to have a strong track record in these areas, so we can lead by example and share our experience. In 2023, for example, we were recognised in the Bloomberg Gender-Equality Index for the fifth year running.

Addressing gender inequalities

But our ambitions don’t stop there. By 2025, we aspire to have 50% of senior roles filled by women, and we continue to narrow the gender pay gap. Closing that gap and supporting women to fulfil their potential is crucial, not just during their working lives but to ensure they have a sustainable retirement.  

Our latest Women & Retirement report^** shows just how important that support is for long-term pension outcomes. Lower wages, and time out from work undertaking caring responsibilities weigh heavily on women’s pension pots.  

This is not only a priority focus for us as a company, but also in our stewardship activities where diversity and inclusion, and particularly cognitive diversity on boards, are focus areas. In 2022, for example, we engaged with the South Korean semiconductors company, SK Hynix to support it to grow the number of women on its board from 11%.

We recognise the challenges facing businesses in such male-dominated industries but were pleased when SK Hynix set an ambitious target for 30% of women on its board by 2030. In our 2023 review, it had achieved 20%, and we will continue to monitor its progress.  

Pay gaps, living wages, diversity, equity and inclusion, are all social factors that can create risks and opportunities for businesses, economies and investors. Yes, it’s about listening to what our customers and investors want, and about what regulators need, but it’s also about creating a better, fairer society to deliver a sustainable future. 

Sources

* Our Approach to Social Factors (PDF, 3MB) 

** Women & Retirement Report 2023 (PDF, 4MB)