The Principles for Responsible Investment (PRI) has called on the Canadian government to clarify how fiduciary duties for pension funds in the country relate to sustainability and climate change.

In a report making a series of recommendations on ESG and sustainability-related regulations, the PRI said there was a lack of legal clarity on investors’ duties and insufficient action by policymakers to encourage and enable responsible investment. It added that Canada was “a low-regulation jurisdiction by international standards”.

If Canadian investors are to contribute fully to the country’s long-term environmental and social sustainability, the report continued, then policy changes are required.

The recommendations build on the findings of the PRI-commissioned Legal Framework for Impact report from 2021, which examined the regulatory sphere in 11 jurisdictions in relation to investing for sustainability impact.

For Canada’s pension funds, the PRI said regulators should clarify when sustainability impacts “can or must be considered by pension administrators in discharging their legal duties”.

The organisation believes pension administrators should be required to invest for sustainability impact where it is relevant to achieving their purpose of providing retirement income. It has also asked regulators to clarify the scope of fiduciary duties in relation to climate and other sustainability risks.

Pension funds should be required to incorporate sustainability risk assessment into their investment policies, and should be required to report against the recommendations of the TCFD and ISSB standards, the PRI added.

It wants to see the recommendations into relevant guidance and statutes by the Canadian Association of Pension Supervisory Authorities (CAPSA) and the Office of the Superintendent of Financial Institutions.

CAPSA should also provide guidance to funds on “assessing the relevance of social and environmental goals in deciding how to invest in beneficiaries’ best interests”, the PRI said.

Wider reforms needed

The report also made recommendations on a number of other sustainability-related regulations.

It argued that the Sustainable Finance Action Council, which is currently developing Canada’s “Transition Finance Taxonomy”, should commit to developing science-based technical screening criteria, including technical experts from both industry and civil society, and defining transition activities as those that continually improve their environmental performance, in order to stay out of the significant harm category.

On stewardship, the PRI has called for the relevant national regulator to develop a stewardship code, building on stewardship principles from the Canadian Coalition of Good Government. Policymakers should also look to encourage collaborative engagement, such as by addressing barriers and ensuring stewardship activities are adequately resourced, it said.

Canada is already home to the first single-country offshoot from Climate Action 100+. Climate Engagement Canada, formed by 27 asset owners and managers, is looking to engage 40 firms across sectors, excluding companies already on the CA100+ focus list.

Other suggestions from the PRI include the introduction of sustainability disclosures for companies, and measures to allow investment firms to take into account the preferences of retail investors on how far their money should be managed in line with achieving positive sustainability impacts.

Senator Rosa Galvez, who introduced a bill to the Canadian senate seeking to address sustainability concerns in the financial sector in March last year, said the report confirmed the results of the consultation she had undertaken in preparation for the bill.

Galvez noted the sections of the report which mention a lack of action by policymakers. “It is time for Canada to go from laggard to leader on the climate and finance nexus,” she said.