ESG can be compatible with fiduciary duty, says Canada pension regulators association

Pension plans should also consider what constitutes an appropriate stewardship approach given investment strategy, fund structure and size.

Using ESG information as a deciding factor between otherwise equivalent investment options can be compatible with pension plan administrators’ fiduciary duty, a new guidance document from the Canadian Association of Pension Supervisory Authorities has suggested.

The document – open for consultation until 15 September – aims to help pension fund managers fulfil their fiduciary obligations while giving appropriate consideration to ESG factors that may have financial relevance to their plans’ investments and risk management frameworks.

Published on Thursday, it was developed by CAPSA’s ESG Committee, with support from an industry working group composed of pension industry and ESG experts from a variety of sectors and jurisdictions.

As well as suggesting ESG information could be used to decide on investment options with equivalent expected risk-return results, CAPSA warned that “ignoring or failing to consider ESG factors that may be potentially material to the fund’s financial performance could be a breach of fiduciary duty”, noting that such factors should not be considered differently than any other types of risk.

Stewardship also received attention in the guidance.

When considering a plan’s approach to ESG-related stewardship, administrators are advised to consider:

  • Whether and how effective stewardship with respect to ESG can contribute to value creation for the plan, keeping in mind any relevant characteristics of ESG factors;
  • What constitutes an appropriate stewardship approach for the plan given its investment strategy, fund structure, size, and other circumstances;
  • Whether stewardship can be performed on a cost-effective basis, including whether plan administrators might benefit from collective stewardship activities.

For plans relying on third-party investment, managers are advised to articulate and document the plan’s ESG stewardship expectations in the service provider agreement and monitor the effectiveness of delivery over time.

When Responsible Investor recently spoke with Actiam’s senior responsible investment officer Greta Fearman, she argued that investors should focus their energy and resources to achieve high-quality engagement, as well as measuring outcomes and being prepared to divest.

Returning to CAPSA’s guidance, more broadly plan administrators are called on to consider whether and how ESG considerations are integrated into the investment decision-making process of any third-party managers and the extent to which that may affect the financial performance of the plan.

On Thursday, Responsible Investor reported that Climate Engagement Canada had named 40 Toronto Stock Exchange-listed companies that will be targeted for engagement by investors. 

Launched in October 2021, the aim of the initiative is to drive dialogue between the financial community and corporate issuers to promote a just transition to a net-zero economy.