Institutional investors are playing an important role in shaping environmental, social and governance models in Canada.
So are their regulators.
On June 9, the Canadian Association of Pension Supervisory Authorities (CAPSA) released its draft guideline for environmental, social and governance (ESG) considerations in pension plan management.
It sets out three overarching principles for plan administrators to consider when integrating ESG factors into pension fund investment and risk management.
The first big takeaway is that pension plan administrators should consider ESG characteristics that may have material relevance to the financial risk-return profile of the pension fund’s investments.
Administrators should consider whether any particular ESG factors are relevant to investment performance and take appropriate action based on that determination. 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.
Plan administrators may determine it is consistent with their fiduciary duty to use ESG information, including ethical or impact investing considerations, as a deciding factor between otherwise financially equivalent investment options.
In defined contribution plans that provide members with choice in selecting investments, plan administrators may determine it is consistent with their fiduciary duty to include in the plan’s investment line-up an “ESG fund” where doing so is consistent with the plan's purpose of providing retirement income.
The second overarching principle laid out in the guidelines speaks to plan administrators and their need to assess whether plan governance and practices are sufficient to identify and respond to material ESG information.
CAPSA's draft ESG guideline provides practical suggestions to plan administrators in several key areas: governance, risk management and investment decision making.
With respect to governance, administrators must ensure that proper structures and processes are in place to facilitate the oversight of ESG risks and opportunities that may have a material impact on the plan.
There may be a need to address whether plan administrators have the relevant skills, resources and experience, and/or a plan to obtain third-party expertise to meet their standard of care.
It may be useful to develop, and record in written policies, a set of investment beliefs or principles about ESG factors and their application to investment performance.
Risk management policies require proper consideration of potentially relevant ESG considerations in a risk management framework. Both the plan administrator and plan sponsor may benefit from better understanding the ESG risks impacting each other.
Throughout the investment decision-making phase, consider the processes for identifying and taking into account material ESG considerations in adopting investment strategies. Some of those key talking points include asset allocation decisions, benchmark selection or use of external investment managers.
Consider whether and how ESG considerations are integrated into the investment decision-making process of any third-party managers and if this affects the financial performance of the plan.
ESG issues can create opportunities for plan administrators to engage in stewardship as part of their investment decision-making in a few different areas: engagement with investee companies, voting at shareholder meetings, or direct roles on investee boards and board committees.
The third and final talking point laid out in the guidelines center around transparency. Pension plan administrators should disclose in their statement of investment policies and procedures (SIPP) information about the pension fund’s investment policies in relation to ESG considerations.
The guideline offers a number of best practices for plan administrators:
- When taking ESG factors into account for purposes of assessing investment risk or opportunity.
- If ESG factors are considered for risk management and investment purposes.
- If relying on a third-party investment manager to take ESG factors into account in managing plan assets.
- If a DC plan’s investment line-up includes an “ESG fund.”
- In keeping pace with changes in disclosure developments and industry best practices.
The draft ESG Guideline was developed by CAPSA's committee on integrating ESG factors in pension plan supervision in consultation with the ESG industry working group. The group consisted of individuals noted for their expertise, comprising plan administrators, actuaries, consultants and lawyers, including Radha D. Curpen, vice chair, Vancouver managing partner and national leader, ESG strategy and solutions at Bennett Jones.
In addition to soliciting feedback on the draft ESG guidance, CAPSA is consulting on whether to incorporate the guidance into a consolidated risk management guideline for pension plans. This would also address CAPSA's draft leverage and cyber security guidelines.
It is currently expected to be finalized in 2023.
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