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November 8, 2022 – Pension fund fiduciaries should not ignore climate change and other environmental, social, and governance (ESG) factors that are relevant to financial purposes, according to a new report from the C.D. Howe Institute. In “ESG and Climate Change: Pension Fund Do’s and Don’ts” author Randy Bauslaugh finds that while pension plan fiduciaries have no legal duty to make the world a better place, either socially or environmentally, such outcomes may be a legitimate by-product of prudent pension plan management for the purpose of providing lifetime retirement income.

However, when fiduciaries use climate change and other ESG factors to prioritize social or environmental concerns over financial factors—concerns materially relevant to financial opportunity, financial risk management and long-term financial sustainability—or to respond to the social or environmental concerns of plan members, they put themselves on shaky legal ground. 

Unlike corporate officers and directors who can safely navigate multiple lanes of interest in the best interest of a corporation, pension fiduciaries are legally required to adhere to the legislated ‘primary purpose’ of providing lifetime retirement income. Their duty is to manage the plan assets prudently to achieve that primary purpose.

“Fiduciaries can be held personally accountable if investment policy is not consistent with the primary financial purpose dictated by the Income Tax Act, pension standards legislation or the common law,” said Bauslaugh.

The author also recommends that regulators should resist any framework that imposes specific ESG metrics, considerations or financial approaches as this would discourage growth of Canada’s workplace pension system. Currently, despite tax incentives, pension coverage still remains inadequate with barely 39 percent of the workforce covered by registered pension plans, and most of that in the public sector. They should also resist any call to change from a ‘value’ approach with its focus on financial performance and metrics, to a ‘values’ approach that would give equivalent status to non-financial social or environmental goals of the fiduciary or the plan members.

“A values approach has the potential to further undermine the economic efficiencies of a workplace pension system already undercut by the transition away from cost-efficient defined-benefit plans to defined-contribution arrangements,” said Bauslaugh. “It is also fundamentally inconsistent with the policy rationale for encouraging tax-deferred pension savings.”

Read the Full Report

For more information, please contact: Randy Bauslaugh, Counsel and Co-Chair, Pensions and Employee Benefits, McCarthy Tétrault; and Laura Bouchard, Director of Communications, C.D. Howe Institute, 416-865-9935, lbouchard@cdhowe.org

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.