Asset AllocationJune 15, 2022

Pension Advocate Calls for ESG Regulation and Legislation to Guide Canadian Plans

The Association of Canadian Pension Management says administrators are in the dark about ESG fiduciary duties.

Reported by Michael Katz

A new report from the Association of Canadian Pension Management, a pension advocacy group, aims to help pension plan administrators understand their fiduciary duties and implement an appropriate strategy relating to environmental, social and governance factors.

The ACPM report provides several recommendations for ESG legislation, regulation and reporting that it says would provide more clarity for pension plan administrators.

“The administrators of Canadian pension plans are fiduciaries with significant duties that include investing pension fund assets so that pensions are secure and provide the promised benefits,” says the report. “How pension plans can and should account for ESG risks in light of the fiduciary duties applicable to pension fund investing is an issue that pension plan administrators globally are struggling to manage.”

The report calls for regulatory guidance to be provided for plan fiduciaries on how and to what extent ESG should be considered regarding their legal fiduciary duties, and for minimum pension standards legislation to define ESG factors and expressly authorize ESG considerations in investment decisions.

The ACPM report also says that any ESG reporting guidance should be principles-based and that reporting should be clear, transparent, consistent and not too burdensome, particularly for small pension plans. The report adds that ESG reporting requirements should recognize that most Canadian pension plans do not invest assets directly and typically work with consultants to choose institutional asset managers.

“Detailed reporting on ESG by pension plan administrators will only be relevant and useful if downstream ESG reporting is uniform and consistent,” says the report. “Only once there is comparable disclosure across the investment industry will pension plans be able to effectively disclose appropriate sustainability metrics.”

The report says ESG reporting at the company level should follow consistent global standards, and calls for the creation of a sustainability disclosure framework for the investment industry that includes input from key stakeholders, including regulatory bodies and institutional investors such as pension plans. It also notes that there is a “significant disparity” among pension plans in Canada regarding how ESG decisions are made, as well as in their ability to effectively implement those decisions. Additionally, the report says, Canadian pension legislation provides no definition of ESG factors or considerations.

“A one-size-fits-all approach to regulation has the potential to impose a significant burden on the administrators of small plans, member directed DC plans or plans with limited ability to control or influence their asset manager’s implementation of a desired ESG approach,” says the report.

And for member-directed defined contribution pension plans, the report says, it is important for sponsors to identify investment options in each asset class on the DC platform, understand the level of ESG integration in their fund options and develop an ESG member communication strategy.

However, the report stresses, plan administrators must understand and assess the implications of addressing ESG factors; like all governance decisionmaking, they must be done prudently and in the context of the particular plan.

“Pension plan administrators may consider ESG factors in investment decisions provided that any such investment is in the best financial interest of the beneficiaries and that their decision is rationally based on evidence after appropriate due diligence,” said the report. “Such investments based on ESG factors would not be a breach of trust or a violation of the plan administrator’s fiduciary duties.”