May 11, 2022

Enhancing Effective ESG and Climate Governance in Pension Fund Oversight

Remarks to the International Foundation of Employee Benefit Plans Canadian Legal & Legislative Conference by Dr. Janis Sarra, Professor of Law, University of British Columbia, and Principal Co-Investigator, Canada Climate Law Initiative

Imagine, for a moment, living in a region devastated by wildfires, a heat wave that kills hundreds, and atmospheric rivers hundreds of kilometres long and wide that flood entire regions. Well, it no longer takes imagination, because my home province of British Columbia has experienced all that in the past year. Ten months ago, the Lytton wildfire destroyed over 90% of the town in minutes the day after it reached temperatures of 49.6 °C (121.3°F), the highest temperature ever recorded in Canada. There were more than 1,600 fires in Canada in 2021, destroying 8,700 square kilometres. In June, a heat dome over Vancouver killed over 400 people in less than one week, according to the BC Coroner’s Office.1 A few months later, atmospheric rivers stretching 1,600 kilometres long and more than 640 kilometres wide, unleashed record-breaking rainfall, triggering devastating floods and mudslides, flooding a thousand farms, killing 640,000 livestock, and cutting off all land routes to Vancouver with significant disruption to supply chains.2

These events are occurring across Canada – even as we are meeting today, Manitoba is experiencing severe overland flooding, washing out roads and bridges.3 The Insurance Bureau of Canada reports that insured damage for severe weather events across Canada reached $2.1 billion last year.4 The United States (US) is faring even worse. The National Interagency Fire Center reported 58,985 wildfires in 2021, consuming 7.1 million acres – twice the size of Connecticut.5 The NOAA National Centers for Environmental Information reports that in 2021, the US experienced 20 separate billion-dollar weather climate disasters totalling approximately US$145 billion in damage.6 NASA predicts that by the mid-2030s, rising sea levels will cause coastal cities all around the US to experience dramatic increases in floods.7 Increasingly, worsening climate effects are leading a growing number of Americans to abandon homes and communities.8

The impacts of climate change are poignantly real – and they are not only being experienced in distant low-lying lands, they are core to our lives and our economies in North America. I start with this gloomy picture because environmental, social, and governance (ESG) issues and concerns can no longer be relegated to debates among pension fiduciaries about values investing or investment value (returns), but rather, need to be addressed holistically, given the place of pension funds in our society.

One of my first jobs during my university studies was as a pension clerk for the pension department of the Ontario public service – 51 years ago (I am really dating myself). While times were really different – it predates independent pension boards – two facts have stayed with me about that experience. First, pensions are critically important to employees as they represent financial security that allows them to grow old gracefully, a goal that has not changed, and if anything, has become even more important. Second, at that time, a staggering number of spouses of pensioners died within one year of the pensioner dying. A quick search reveals that these risks continue – a recent report found that older people who have lost a spouse have an increased risk of dying themselves shortly after, although it appears to have come down from 90% to 66% given better supports.9 For me, both facts point out the critical importance of the economic security and supports provided by pension funds.

As of June 2021, there are 6.5 million Canadians covered by more than 16,000 registered pension plans with over $2.18 trillion in assets.10 A mere 32 of those plans account for 50% of all plan membership.11 Given that there are many smaller pension funds, the vast majority of Canadian pension fund fiduciaries rely on a wide variety of service providers such as investment and asset managers, mutual fund and trust companies, and life insurance companies to establish and implement investment policies, which become important in thinking about how we approach ESG.

The Scope of Environmental, Social, and Governance Risks Considerations

ESG factors have become key to consumer and beneficiary preferences, investor expectations, and the ability to attract/retain a dynamic management team and workforce. Each of these factors are broad, and it does not mean pension funds or their portfolio companies need to address them all. That said, pension fiduciaries should be turn their minds to what aspects of E, S, and G may be important to their exercising their prudential duty to meet the pension promise.

A non-exhaustive list is:

ENVIRONMENT includes climate change mitigation and adaptation, energy management, air quality management, water management, toxic and hazardous materials management, and circular economy activity. Generally, it is how pension funds and their investments impact and are impacted by climate change and broader environmental issues such as protection of biodiversity. Global reporting standards are emerging, underpinned by international agreements on underlying climate policy and through initiatives like the Task Force on Nature-related Financial Disclosures (TNFD).

SOCIAL includes human capital management, equity, diversity and inclusion (EDI), health and safety, supply chain oversight, labour standards, human rights, community relations, and social acceptability. The easy issues are refusing to invest where child labour or slavery are used; but there are tough issues here at home, and there are few signs yet of inclusion and diversity in key roles. In 2021, only 5% of TSX-listed CEO are women, 22% of TSX-listed directors are women, 4% of TSX-listed directors are racialized, and less than 1% (0.3%) of TSX-listed directors are Indigenous.12 The systemic barriers are everywhere: the motherhood penalty, systemic biases, gender & racial devaluation, intersectionality. Inequities can be seen across core activities of companies and their supply and distribution chains.

GOVERNANCE is the effectiveness of risk management, strategic planning for long-term delivery of the pension promise, and accountability structures in place for pension fiduciaries, including trustees, administrators, and their service providers. It includes composition and effectiveness of the board of trustees and the boards of portfolio companies, accountability mechanisms, executive officer compensation, ethics and business practices, and cybersecurity risk management.

In my view, truth and reconciliation with Indigenous Peoples is an overriding factor that involves E, S, and G, and should be considered in exploring all these issues.

There are a wide range of approaches to considering ESG investments: negative or exclusionary investing based on ESG factors; ESG integration where the fund explicitly considers ESG-related factors that are material to the risk and return of the investment; best-in-class or inclusionary screening, aiming to invest in companies that perform better than their peers on one or more performance metrics related to ESG matters; thematic investing, investing in sectors expected to benefit from long-term macro or structural ESG-related trends; impact investing where the fund seeks to generate a positive, measurable social or environmental impact alongside a financial return; and then stewardship, proxy voting and engagement.13 Key is for pension funds to identify which of these strategies it is adopting, being clear about objectives, methods of assessing meeting objectives, and measuring and disclosing milestones achieved.

Accelerating trends in ESG

Transition Plans to Net-Zero Emissions – there is growing momentum globally for transition plans that focus company and pension fund efforts to decarbonize the business and investment portfolios, as recommended by the Taskforce on Climate-related Financial Disclosures (TCFD) and proposed under the new International Sustainability Standards Board (ISSB) exposure draft.

Diversity, Equity, and Inclusion – both intention and attention are required. For pension funds, it means dedicated-demonstrable inclusion practices in all aspects of employment and investment decisions and zero tolerance for discrimination.

Truth and Reconciliation – acquiring deep understanding, accepting responsibility, and creating new best practices in business and finance partnerships with Indigenous Peoples.

Picture a Venn diagram – each of E S and G interact to support future value – for example, diverse teams are more effective at problem solving and ensuring equitable outcomes, and thus climate risk and solutions teams should be diverse in experience, race, gender, and knowledge if we are to fashion a just transition that maximizes opportunities.

Pension Fiduciary Duties

So where are pension fiduciary duties in the context of these developments?

Pension fiduciaries have a duty to acquire an understanding of, and then balance their decisions in respect of, current and future intergenerational risk and return over periods that potentially exceed human lifetimes. Pension funds are large diversified institutional investors with long-term investment horizons, so they cannot diversify away from systemic risk such as climate change and income inequality, and that system-level investment lens needs to be keenly attuned to intergenerational responsibilities as part of their fiduciary duties.

The prudential obligation requires fiduciaries to act with the care, diligence, and skill in the administration and investment of the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person. The duty of loyalty requires pension fiduciaries to act in the best interests of plan members, and to avoid conflicts of interest. Fiduciaries have a duty of even handedness as between different classes of beneficiaries.

Evaluating ESG-related risks and opportunities goes beyond passive receipt of information, and instead means establishing a robust process to oversee and verify the fund’s progress in relation to these risks and opportunities.

ESG has evolved from a matter of principle where investors aligned in the 1970s around key social concerns such as apartheid in South Africa;14 to the notion of an investment product the 1980s;15 to development of social indices to track ESG and socially responsible investing in the 1990s;16 to this current moment in time, where we see some global convergence on the importance of sustainable development and effective ESG governance. The Principles for Responsible Investing (PRI) now have more than 2,500 signatories investing $90 trillion.17

In 2019, the United Nations Environment Program Finance Initiative (UNEPFI) and PRI updated their landmark document Fiduciary Duty in the 21st Century, reporting that the fiduciary duties of pension funds require them to:

The report cites three primary reasons why the fiduciary duties of loyalty and prudence require the incorporation of ESG issues: ESG issues are financially material, a source of investment value, and a mark of prudent investment; ESG incorporation is now an investment norm globally; and regulatory frameworks are changing to require ESG incorporation, with over 730 hard and soft-law policies that encourage or require investors to consider ESG as a long-term value driver.

From Voluntary to Mandatory

The most notable trend globally in the past year is the shift from voluntary to mandatory standards. United Kingdom (UK) law has set a target of cutting emissions by 78% by 2035 compared to 1990 levels, the government adopting an entire economy approach.19 In 2021, the UK Department for Work and Pensions (DWP) proposed legislation requiring a variety of pension schemes to make TCFD-aligned disclosures and effectively manage climate-related risks and opportunities. New legal duties for UK’s £2 trillion investments pension funds require pension trustees to assess and publish the financial risks of climate change within their portfolios. Regulations in effect 1 October 2022 will require trustees to report on how their investments align with the goals of COP26 net-zero emissions, the government stating that “it will not be enough for schemes to just passively report on and tick-box their way through climate change risks and to net zero”.20

The UK government has announced new Sustainability Disclosure Requirements (SDR) whereby pension schemes and other asset owners must disclose how they take sustainability into account,21 including governance of sustainability-related risks, opportunities and impacts, and the implications for investment policies, strategies and outcomes; processes used to identify and manage sustainability-related risks, opportunities and impacts, and the implications for the scheme’s investment policies, strategies, and outcomes; and metrics and targets used to assess and manage relevant risks, opportunities and impacts and performance against targets.22 The SDR will require disclosures of transition plans that align with the government’s net-zero commitment, taking an objective and science-based approach or provide an explanation if they have not done so. As standards for transition plans emerge, the government has stated it will incorporate them into UK regulation and strengthen disclosure requirements.23 It has also announced a mechanism to adopt International Sustainability Standards Board issued standards in the UK and will also require disclosure against the UK’s Green Taxonomy, which requires sustainable investments to satisfy minimum safeguards relating to basic good business practice.24

I highlight the UK, because it often signals future direction for regulators in Canada. Yet these efforts can be seen globally; in Hong Kong, Singapore, etc. For example, the European Union (EU) has a Taxonomy for Sustainable Activities,25 the EU Guidelines on Reporting Climate-related Information,26 the EU Sustainable Finance Disclosure Regulation,27 aimed at discouraging greenwashing in the financial sector, and the proposal for an EU Corporate Sustainability Reporting Directive.28 The EU also introduced ‘double materiality’, asking managers to assess how sustainability issues affect the company’s business and how the company’s actions impact people and the planet.29

There are also supply chain developments. In November 2021, the European Commission tabled its plan to introduce mandatory due diligence in the supply chain.30 Effective 2021, companies need to collect information about the products they have placed on the EU market to confirm they are not linked to deforestation, including taking “adequate and proportionate mitigation measures, such as using satellite monitoring tools, field audits, capacity building of suppliers or isotope testing” to confirm the product’s origin.31 France has enacted a corporate duty of vigilance law that places a due diligence duty on large French companies and requires them to publish an annual vigilance plan.32 The plan must include reasonable measures to allow for risk identification and prevention of severe violations of human rights and environmental damage resulting directly or indirectly from the operations of the company, its subcontractors, and suppliers with whom it maintains an established commercial relationship. Measures include risk mapping and a system to monitor the effectiveness of measures implemented. A court can order the company to comply with its vigilance obligations, including ordering it to develop a vigilance plan, improve its vigilance measures, and/or impose a penalty for each day of non-compliance. Germany’s legislation follows suit and there are already lawsuits pending alleging violations. While there is not yet any such legislation in Canada, a private member’s bill tabled this year is aimed at these issues.33

The new ISSB has two new exposure documents, Exposure Draft IFRS S2 Climate-related Disclosures and Exposure Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, which will require an entity to disclose information about its significant sustainability-related risks and opportunities that is useful to the primary users of general purpose financial reporting, including governance processes, controls and procedures used to monitor and manage sustainability-related risks and opportunities.34

The International Organization of Securities Commissions (IOSCO) recently published a report setting out recommendations for securities and other regulators to improve sustainability-related policies, procedures, and disclosure in the asset management industry.35 A number of regulators have developed and implemented regulatory requirements on ESG or sustainability-related disclosure for investment funds.36 IOSCO’s Product Disclosure Recommendation covers ten areas relating to product disclosure, including naming, labelling, and classification; investment objectives and strategies disclosure; proxy voting and engagement disclosure; risk disclosure; marketing materials; and monitoring of compliance and sustainability-related performance. The CFA Institute in 2021 published the CFA Institute Global ESG Disclosure Standards for Investment Products to provide greater transparency and comparability to investors by enabling asset managers to clearly communicate the ESG-related features of their investment products.37

In contrast, regulation on ESG in Canada is at a nascent stage. We know that the Regulation under the Ontario Pension Benefits Act specifies that “The statement of investment policies and procedures shall include information as to whether environmental, social and governance factors are incorporated into the plan’s investment policies and procedures and, if so, how those factors are incorporated.” Federally, similar regulation is being considered, although not yet in place.

The Canadian Association of Pension Supervisory Authorities (CAPSA) is developing a principles-based guideline on the integration of ESG factors in pension fund investment and risk management,38 a consultation draft expected to be released within the next month. The Office of the Superintendent of Financial Institutions (OSFI) is collaborating with the CAPSA in its effort to develop this guidance.39
In terms of pension funds managing their Canadian portfolio companies, it is important to take note of Canadian Securities Administrators’ (CSA) proposed National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107) which will implement TCFD-aligned disclosure for governance and risk management irrespective of materiality and require disclosure of strategy, metrics and targets based on materiality. The current draft has emissions disclosure on a comply or explain basis. Publicly-held portfolio companies will also have to take note of the 2022 CSA Staff Notice 81-334 ESG-Related Investment Fund Disclosure, which provides guidance on the disclosure practices of investment funds as they relate to ESG considerations.40 It reports that the value of “sustainable funds” in Canada was $18 billion at the end of the first quarter 2021, representing a 160% in the past year. The CSA reports that in responding to investor demand to create ESG-related funds and incorporate ESG considerations into existing funds, there has been an increased potential for “greenwashing”, whereby a fund’s disclosure or marketing intentionally or inadvertently misleads investors about the ESG-related aspects of the fund.

The CSA’s review of 32 ESG-related funds managed by 23 different investment fund managers reveals some real concerns:

In March 2022, OSFI, which supervises federally-regulated pension plans for financial condition and soundness, released a consultation paper on pension investment risk management,41 observing that “Good pension plan governance includes elements such as robust processes to identify and manage more complex investment risks, independent oversight of risk-taking activities and appropriate risk controls”, noting that an independent risk oversight function provides objective oversight of the quality and adequacy of the plan’s risk management practices, including establishing a risk management framework and policies, ensuring they are aligned with the risk appetite of the plan administrator; risk identification and assessment, setting and reviewing risk limits; and risk monitoring and reporting requirements, quantifying material investment risks to which the pension plan is exposed, including market risks, credit risk, and liquidity risk.42

In the US, pension funds have been hit with the revolving door policies of the Department of Labor (DOL), which under the Trump administration held retirement-plan fiduciaries to a “pecuniary” standard when selecting plan investment options, questioning the appropriateness of social investing in defined-benefit plans covered by the Employee Retirement Income Security Act of 1974 (ERISA). The Biden administration has suspended enforcement of that policy43 and the DOL has now proposed a new rule “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”, which states that when considering projected returns, a fiduciary’s duty of prudence may often require an evaluation of the economic effects of climate change and other ESG factors on the particular investment or investment course of action.44 The DOL received more than 900 submissions on the proposed rule and is moving to next steps. In the interim, it issued a request for information in February 2022 on in which the Employee Benefits Security Administration (EBSA) is asking for public input on its future work relating to retirement savings and climate-related financial risk and actions that can be taken under ERISA, the Federal Employees’ Retirement System Act of 1986 (FERSA), and any other relevant laws, to protect the life savings and pensions from the threats of climate-related financial risk.45

Climate Risk is Particularly Urgent

Foremost of ESG at this moment is addressing climate change. The Intergovernmental Panel on Climate Change (IPCC) , representing a broad consensus of more than 800 scientists representing 140 countries, is clear that immediate, rapid, and large-scale reductions in greenhouse gas (GHG) emissions are needed, which requires a significant shift of investment into sustainable projects and green technology. Focusing on climate risk as a particular urgent issue, as there is now broad-based acknowledgement that climate change is an existential threat. It poses business risks that extend to the long term. We know from the IPCC that the burning of fossil fuels is the main source of GHG emissions that have led to the current climate crisis.46 It cautions that the emissions from existing and planned fossil fuel infrastructure alone are higher than scenarios consistent with limiting warming to 1.5°C.47

The cumulative evidence from scientists, governments, and the courts suggests that pension fund trustees have a fiduciary obligation to pension beneficiaries to act prudently in their best interests in making climate-related investment decisions regarding fund portfolios.48 Pension funds and other institutional investors will potentially lose significant value of their investments if they do not act as prudent investors by recognizing climate change financial risk. In fulfilling their obligations to beneficiaries, pension trustees and their investment managers have an obligation to identify and address climate-related financial risks. Trustees can take climate change into account as a legitimate investment issue over the short, medium and long term. If trustees fail to act to address material climate-related risk, they may be personally liable for breach of their fiduciary obligation. Inaction is no longer acceptable, given all the evidence that climate change risk is material across the entire economy.

Trustees can also take climate change into account because they have duties as public fiduciaries additional to their financial duty to beneficiaries. Fiduciaries have a duty to act even where the potential costs and benefits of climate change cannot be fully quantified immediately. Fiduciary obligation also requires considering the benefits of investment in green adaption and mitigation technologies and other products and services that are likely to have upside financial potential for return on investment.

A legal opinion released by Randy Bauslaugh of McCarthy Tétrault in 2021 opines that pension fund fiduciaries have a duty to take into account financial risks and opportunities when managing plan assets.49 In view of widely accepted evidence of climate change and its financial implications, including evidence accepted by the Supreme Court of Canada, Bauslaugh suggests that pension fiduciaries ignore these matters at their peril. Duties include adequately assessing and managing climate-related financial risk, reporting to beneficiaries and other stakeholders on how these risks are being managed, and taking decisive action to mitigate these risks. Bauslaugh observes that in defined-benefit plans, positive financial performance results in greater financial security for plan participants and lower cost for employers, because the employer is directly responsible for funding shortfalls; and in defined-contribution plans, successful investment performance means greater retirement income for plan participants and less pressure on employers to improve contribution rates or top up pension accumulations to encourage a transition to retirement.50

Litigation risks: While there are not currently pending cases against Canadian pension funds, a couple of cases in jurisdictions similar to Canada are of note. In 2019, a member of an Australian pension plan brought a lawsuit against pension trustees for failure to identify, manage and disclose climate risks.51 It settled on the eve of the hearing, with the trustees acknowledging that climate change is a material, direct and current financial risk to the superannuation fund across many risk categories; committing to actively identifying and managing these issues, and to develop systems, policies and processes to ensure that the financial risks of climate change for assets and the fund’s portfolio as a whole are addressed; and ensuring that investment managers take active steps to consider, measure and manage financial risks posed by climate change and other relevant ESG risks.52

In the UK, a lawsuit is pending against trustees/directors of the University Superannuation Scheme, the UK’s largest private pension scheme, for alleged breach of fiduciary duties, conflicts of interest, and failure to create a credible plan for disinvestment from fossil fuel investments.53 In February 2022, the Court held that there was a prima facie case to answer, that the claimants were acting in good faith, and allowed their claim to go to an inter partes hearing seeking to bring a derivative claim against the directors.54 The lawsuit is pending.

In the Canadian Senate, Senator Galvez has introduced Bill S-243 An Act to enact the Climate-Aligned Finance Act (First reading was 22 March 2022) (2nd reading debate in progress as of 11 May 2022).55 Among its goals are: reduction of emissions on a pathway that respects the global carbon budget and is consistent with limiting global temperature increase to 1.5οC; elimination of dependence on and lock-in of emissions-intensive activities, including by avoiding new fossil fuel supply infrastructure and exploring for new fossil fuel reserves and instead planning for a fossil fuel–free future; preservation and restoration of natural carbon sinks, increasing climate resilience. It would require a climate commitments alignment report, including details on the entity’s progress on achieving targets and implementing its plans, measurable targets, emissions reductions within the value chain, and measures on operational and capital allocation for existing and new lines of business to ensure the achievement of targets. It calls for more stringent conflict of interest provisions. Senator Galvez’s Bill also seeks to clarify existing fiduciary duties by specifying:

When acting in their official capacities, directors, officers or administrators of reporting entities have a duty to exercise their powers and functions in a way that enables the entity for which they are officers, directors or administrators to be in alignment with climate commitments. (2) The duty must give precedence to that duty over all other duties and obligations of office, and, for that purpose, ensuring the entity is in alignment with climate commitments is deemed to be a superseding matter of public interest. However, this precedence does not supersede any requirement under the Income Tax Act or regulations made under that Act, nor does this precedence affect the eligibility of pension schemes under the Income Tax Act or its regulations.

The Bill would also amend Public Sector Pension Investment Board Act and Canada Pension Plan Investment Board Act. While not a government-sponsored bill, it is generating a lot of attention nationally about the need to legislate in order to make meaningful progress in the private sector on Canada’s climate commitments.

Equity, Diversity, and Inclusion

I understand that the topic for tomorrow’s conference sessions will be equity, diversity and inclusion, so I will make only brief remarks here. Fighting systemic racism in pension funds and their service providers requires both intention and attention. With respect to intention, unconscious bias is pervasive, and the challenge is taking individual ownership for systemic discrimination and questioning our assumptions. With respect to attention, it is not just policy statements (although they are helpful in building consensus on objectives and mechanisms to achieve them), it is intervening in a thousand different micro-moments to correct, reframe, create options, amplify and make ongoing and concerted efforts needed. So, as with all the “S” in ESG – we need to be clear about the objectives, however the trustees wish to set them; be transparent about these objectives; and then be transparent about the milestones and the unexpected barriers and challenges.

One visual I like to refer to is Dr Andrew Ibrahim’s “Becoming anti-racist” framework, which is a visual that talks about three zones of transition.56 The Fear Zone – not just those unaware of racism, but how we avoid the hard questions; the Learning Zone – recognizing that racism is a current and pervasive problem; understanding one’s own privilege in ignoring racism; and the Growth Zone – where we speak out when we see racism in action in all its forms and where we yield positions of power to those otherwise marginalized. There are many other questions posed in this framework, which helps us be mindful of the need to tackle racism at multiple levels simultaneously.

Tomorrow you will also hear from speakers on truth and reconciliation – I note here the changing legal framework that should inform views as fiduciaries – as pension fiduciaries we should consider Canada’s commitments under the United Nations Declaration on the Rights of Indigenous Peoples (UN DRIP) legislation federally and in British Columbia and what that means for our oversight for investment strategies – it means moving from a duty to consult and accommodate to inclusion and partnerships in sustainable investing.

What is the Direction of Travel for Pension Funds as Investment Fiduciaries?

Increasingly, we see alliances of pension funds in their commitments to ESG. In 2020, three of the largest pension funds globally: California State Teachers’ Retirement System (CalSTRS), the Japanese Government Pension Investment Fund (GPIF), and UK Universities Superannuation Scheme (USS) joined in a public statement that said: “if we were to focus purely on the short-term returns, we would be ignoring potentially catastrophic systemic risks to our portfolio” and that they will work with asset managers that integrate ESG factors throughout their entire investment process, vote according to the mandate to which they have pledged, and are transparent about their level of corporate engagement.57

The CEO of the eight largest Canadian pension funds “the Maple 8” made a pledge to create sustainable and inclusive growth by integrating ESG factors into their strategies and investment decisions as an integral part of their duty to contributors and beneficiaries, asking companies to measure and disclose their performance on material, industry-relevant ESG factors.

In terms of climate risk and opportunity, over US$40 trillion in global assets under management apply at least a partial restriction on investing in oil and gas.58 That includes than 180 pension funds that have divested globally.59 For example, pension fund ABP will stop investing in producers of fossil fuels and will divest from the fossil fuel producers in phases; the majority of which is expected to be sold by the first quarter of 2023, redirecting 15 billion euros in assets. The fund does not expect this decision to have a negative impact on long-term returns.60

In December 2021, the New York City Employees’ Retirement System (NYCERS) and the New York City Board of Education Retirement System (BERS) announced the successful divestment of securities related to fossil fuel companies, bringing the total divestment across all funds to an estimated US $3 billion.61 The New York City Teachers’ Retirement System’s divestment is underway with over $1 billion divested to date, expected to be complete divestment of the remaining $1 billion this year.62

In order to manage systemic risks, a pension fund needs a credible plan for transitioning its portfolio to net-zero emissions and annual reporting on achieving milestones to members and beneficiaries. Transition planning means assessing all high-carbon-emitting companies across all sectors of the economy. Direction of travel for investment is to reduce and then end financing new oil, gas, coal and pipeline projects, or any high-risk fossil fuel dependent infrastructure that would lock in new carbon pollution. This “lock-in” threshold is a key part of taxonomies for sustainable investment under development in the EU, UK , Singapore and other jurisdictions.

Ontario Teachers Pension Plan (OTPP), managing $241.6 billion, has demonstrated climate leadership by committing to achieve net-zero portfolio emissions by 2050 and reduce portfolio emissions intensity by two-thirds below a 2019 baseline by 2030.63 It states: “For the avoidance of doubt, any investment that increases the use of fossil fuels would not support a transition to a low carbon economy and would not be a green investment under our principles… Our expectation of significant reductions in emissions will consider sector decarbonization trajectories as outlined in the International Energy Agency’s Sustainable Development Scenario (SDS) and/or the EU Taxonomy.”

In September 2021, Caisse de dépôt et placement du Québec (CDPQ), with $420 billion in net assets, announced that it is divesting all of its oil production investments by end of 2022; aiming to achieve a 60% reduction in the carbon intensity of its total portfolio by 2030 compared to 2017; creating a $10-billion transition envelope to decarbonize the heaviest-emitting sectors; and it has grown its low-carbon investments to $39 billion in 2021, up 120% from 2017.64 It has reduced 49% of its portfolio’s carbon intensity compared to 2017.65 It has made equity, diversity and inclusion actions a priority. In 2021, it held discussions on ESG issues with 194 companies. It also voted on 57,008 proposals concerning these issues at 5,762 shareholder meetings.

However, a study released by ShiftAction in May 2022 notes that even as Canada’s public pension funds move to measure and manage the growing financial risks of climate change, their progress may be held back by their multi-layered connections to an incumbent fossil fuel industry. It found that Canada’s ten largest pension fund managers, together managing $2 trillion in assets, are deeply entangled with the oil, gas, coal, and pipeline industries through their boards of directors, executive teams, and senior staff.66 It identifies 80 individuals currently responsible for managing and overseeing Canada’s ten largest pension funds who currently hold or previously held 124 different roles with different fossil fuel companies.67 A key part of pension fiduciary duties is a duty of loyalty, which includes avoiding and properly managing conflicts of interest.68 The study reveals a lack of transparency to members and beneficiaries on how real or perceived conflicts of interest are being managed by these relationships and whether pension fund trustees/directors are recusing themselves from discussions on investment in the fossil fuel sector.69 It identifies some reputational and litigation risks, particularly where funds are, or are perceived to be, making decisions that may harm meeting the pension promise.

There are several issues here. In terms of fossil fuel executives sitting on pension boards – for years, this strategy made sense- they were attuned to investment risks and returns in a sector in which it made sense for pension funds to invest. But with the shift in capital flows and the changing regulatory environment, the question is whether board recruitment and retention needs to be refocused for new skills and expertise and greater diversity of views, including climate expertise, racial and gender diversity. At minimum, such trustees/directors need to be recusing themselves from discussions and decisions about fossil fuel investments.

Another way to look these interrelationships is that pension funds could use their positions on company boards to encourage those companies to adopt climate action plans that are transitioning to net-zero GHG emissions, but again, my caution would be that conflicts of interest need to be carefully managed, there should be transparency with beneficiaries as to the objectives, strategies and measurable progress in transitioning.70 There should be clear guidance on the role of the staff person on the board of a high-carbon-emitting portfolio company, and there should be action taken where progress in transition is not being made. Divestment is one of many strategies to be used, and while Canadians prefer engagement, that engagement must be deployed to generate action, and failure of portfolio companies to be responsive must have some consequences.

There are tremendous opportunities for companies to access new markets, new products and services that can report low-emissions, diversity and inclusion; and effective governance can improve competitive position. Design waste out at outset – circular economic activity can enhance productive output, minimize waste, and have positive reputational impacts. There are growing empirical studies out of Oxford University and Harvard University that have found that companies with strong ESG records are likely to be more resilient. There is a reason BlackRock is out in front on ESG.

Action Items for the Board of Trustees

You will be happy to know that I started out with 36 action items, but managed to focus it to the following 15 things to think about.

In conclusion, ESG has moved into line of sight in respect of fiduciary duties to meet the pension promise. That is not to say that the fund needs to concern itself with every factor that could come under the umbrella of prudential oversight – but it does mean the trustees need to identify the most critically important issues as part of their duties of prudence, care, and loyalty. They need to ensure their investment managers and other service providers are acting in a manner that aligns with the fund’s objectives for investment. The Canada Climate Law Initiative offers pension boards and their portfolio companies free and confidential sessions on getting started and/or on moving to next steps in climate governance based on changing regulation and best practices – please consider reaching out. Thank you.


1. Heat-Related Deaths in B.C. – Province of British Columbia (

2. How an ‘atmospheric river’ drenched British Columbia and led to floods and mudslides (; B.C. flood impact: 640,000 farm animals have died, officials say | CTV News.

3. CBC News, May 2022, Overland flooding wrecks roads, threatens bridges in western Manitoba | CBC News.

4. Insurance Bureau of Canada, (January 2022), Severe Weather in 2021 Caused $2.1 Billion in Insured Damage (

5. National Interagency Fire Center, National Interagency Coordination Center Wildland Fire Summary and Statistics Annual Report 2021, at 8, intro_summary21.pdf (

6. NOAA National Centers for Environmental Information, “2021 U.S. billion-dollar weather and climate disasters”, (24 January 2022), 2021 U.S. billion-dollar weather and climate disasters in historical context | NOAA

7. NASA, “Study Projects a Surge in Coastal Flooding, Starting in 2030s” (7 July 2021), Study Projects a Surge in Coastal Flooding, Starting in 2030s | NASA.

8. Jon Hurdle, As Climate Fears Mount, Some Are Relocating Within the US, (9 April 2022), Science Wired As Climate Fears Mount, Some Are Relocating Within the US | WIRED.

9. Dr L Holmes, “What Is the Widowhood Effect?” (12 June 2021), What Is the Widowhood Effect? (, citing Moon JR, Glymour MM, Vable AM, Liu SY, Subramanian SV. Short- and long-term associations between widowhood and mortality in the United States: longitudinal analyses. J Public Health (Oxf). 2014;36(3):382-9. doi:10.1093/pubmed/fdt101

10. Statistics Canada. Table 11-10-0106-02 Registered pension plans (RPPs) and members, by type of plan and sector, (2021), Registered pension plans (RPPs) and members, by type of plan and sector ( Statistics Canada (March 2022), The Daily — Employer pension plans (trusteed pension funds), third quarter 2021 (

11. Statistics Canada data base, Variable(s) – Surveys and statistical programs – Pension Plans in Canada – January 1, 2019 (, most recent data at May 2022. Statistics Canada. Table 11-10-0095-01 Registered Pension Plans (RPPs), active members and market value of assets by size of plan,

12. CSA, CSA Multilateral Staff Notice 58-313 Review of Disclosure Regarding Women on Boards and in Executive Officer Positions, (4 November 2021), 5977837-v6-CSA_SN_58-313_-_Year_7_WOB_Review.ashx (; and Government of Canada, Diversity of Boards of Directors and Senior Management of Federal Distributing Corporations – 2020 annual report – Corporations Canada (

13. CSA, Staff Notice 81-334 ESG-Related Investment Fund Disclosure, (19 January 2022).

14. Interfaith Center on Corporate Responsibility (ICCR),

15. Forum for Sustainable and Responsible Investment (USSIF)

16. Forum for Sustainable and Responsible Investment (USSIF)

17. Olivia Mitchell and Shankar Parameshwaran, “How Environmental, Social, and Governance (ESG) Criteria Have Evolved for Pension Investors”, (13 July 2021), How Environmental, Social, and Governance (ESG) Criteria Have Evolved for Pension Investors – Pension Research Council (
Global Impact Investing Network, or GIIN.

18. UNEPFI updated Fiduciary Duty in the 21st Century (2019), Fiduciary-duty-21st-century-final-report.pdf (

19. HM Treasury, Greening Finance: A Roadmap to Sustainable Investing, (18 October 2021), Greening Finance: A Roadmap to Sustainable Investing (

20. Department for Work and Pensions and The Rt Hon Thérèse Coffey MP, “Pensions, People, Planet: Saving for the future to save the future”, (10 March 2022), Pensions, People, Planet: Saving for the future to save the future – GOV.UK ( (hereafter DWP, Pensions)

21. DWP, Pensions, note 20 at 11.

22. DWP, Pensions, note 20 at 14.

23. DWP, Pensions, note 20 at 16.

24. DWP, Pensions, note 20 at 13.

25. EU Taxonomy for Sustainable Activities, into force on 12 July 2020, EU taxonomy for sustainable
activities | European Commission (

26. EU Guidelines on reporting climate-related information under the Non-Financial Reporting Directive,
EUR-Lex – 52019XC0620(01) – EN – EUR-Lex (

27. EU Sustainable Finance Disclosure Regulation, in force March 2021, requires fund managers to
evaluate and disclose the ESG features of their financial products, Regulation (EU) 2019/2088 of the
European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the
financial services sector.

28. EU Corporate Sustainability Reporting Directive, amending Directive 2013/34/EU, Directive
2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate
sustainability reporting, adopted April 2021, EUR-Lex – 52021PC0189 – EN – EUR-Lex (

29. EU, Non-Financial Reporting Directive, note 29.

30. Kira Taylor, “Europe proposes mandatory due diligence to stop deforestation in supply chains”, Euractiv,
(17 November 2021), Europe proposes mandatory due diligence to stop deforestation in supply chains –

31. Taylor, note 30.

32. La LOI n° 2017-399 du 27 mars 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre, LOI n° 2017-399 du 27 mars 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre (1) – Légifrance (

33. Private Member’s Bill C-243, An Act respecting the elimination of the use of forced labour and child labour in supply chains, First reading 8 February 2022.

34. ISSB/IFRS, IFRS – Exposure Draft and comment letters: General Sustainability-related Disclosures.

35. IOSCO, International Organization of Securities Commissions, “Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management: Final Report” (November 2021),

36. European Union’s “Sustainable Finance Disclosure Regulation” (Regulation 2019/2088,, France’s “Information to be Provided by Collective Investment Schemes Incorporating Non-Financial Approaches” (AMF Position DOC-2020-03,, Hong Kong’s “Circular to management companies of SFC-authorized unit trusts and mutual funds – ESG funds” (accessible at:; Malaysia, “Guidelines on Sustainable and Responsible Investment Funds” (SC-GL/4-2017, accessible at:

37. CFA Institute, “Global ESG Disclosure Standards for Investment Products” (2021), accessible at:

38. CAPSA, Committee on Integrating Environmental, Social and Governance Factors in Pension Plan Supervision (

39. Building Federally Regulated Financial Institution Awareness and Capability to Manage Climate-Related Financial Risks (

40. CSA, Staff Notice 81-334 ESG-Related Investment Fund Disclosure, (19 January 2022).

41. Office of the Superintendent of Financial Institutions, “Pension Investment Risk Management” (March 2022) at 1.1, Pension Investment Risk Management ( The consultation period ended May 13, 2022 (hereafter OSFI 2022).

42. OSFI 2022, note 41 at 4.1.

43. President Biden’s Executive Orders Executive Order 13990 “Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis”, signed 20 January 2021, directed federal agencies to review regulations promulgated, issued, or
adopted between 20 January 2017, and 20 January 2021, that are or may be inconsistent with, or present obstacles to, the policies set forth in the order. In March of 2021 the Department issued an enforcement policy statement under ERISA. The statement announces that, until the publication of further guidance, the Department will not enforce the 2020 Rules or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a QDIA, or investment course of action or with respect to an exercise of shareholder rights.

44. “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” Prop. 29 CFR 2550.404a-1(b)(2)(ii)(C

45. DOL, Request for Information on Possible Agency Actions to Protect Life Savings and Pensions from Threats of Climate-Related Financial Risk, A Notice by the Employee Benefits Security Administration on 02/14/2022, Federal Register :: Request for Information on Possible Agency Actions to Protect Life Savings and Pensions from Threats of Climate-Related Financial Risk. Consultation periods end 16 May 2022.

46. Intergovernmental Panel on Climate Change, Climate Change 2021: The Physical Science Basis (August 2021) at pp TS-46, 1-21, 3-100, 5-6.

47. F Harvey, IPCC report: ‘now or never’ if world is to stave off climate disaster, The Guardian, (4 April 2022),

48. Janis Sarra, Fiduciary Obligations in Business and Investment: Implications of Climate Change (2018),

49. Randy Bauslaugh, Climate Change Legal Implications for Canadian Pension Plan Fiduciaries and Policy-Makers, (2021), Bauslaugh-Pension-Opinion-1.pdf (

50. Bauslaugh, note 49 at 6.

51. Mark McVeigh v Retail Employees Superannuation Pty Limited ACN 001 987 739, NSD 1333 of 2018, Concise Statement filed September 21, 2019, McVeigh v. Retail Employees Superannuation Trust – Climate Change Litigation (

52. Mark McVeigh v Retail Employees Superannuation Pty Limited settlement statement, (2020), Microsoft Word – Statement from Rest 2 November 2020.docx (

53. McGaughey et al v Universities Superannuation Scheme Limited and individuals listed, Claim form, USS, 20211027_14857_petition.pdf (

54. King’s College London, “Lawyer’s crowdfunded case against pension scheme clears first hurdle”, (7 March 2022), Lawyer’s crowdfunded case against pension scheme clears first hurdle (

55. Bill S-243 An Act to enact the Climate-Aligned Finance Act, Public Bill (Senate) S-243 (44-1) – First Reading – Enacting Climate Commitments Act – Parliament of Canada.

56. Dr Andrew M Ibrahim, “Becoming Anti-Racist: Fear, Learning, Growth”, Current — A Surgeon’s Journey Through Research & Design (

57. Our_Partnership_for_Sustainable_Capital_Markets_Signatories.pdf (

58. New York State Common Retirement Fund. (9 February 2022). DiNapoli Restricts Investments in 21 Shale Oil & Gas Companies. Retrieved from
ABP, (26 October 2021), ABP stops investing in fossil fuel producers.

59. Global Fossil Fuel Divestments Database. (2022). The database of fossil fuel divestment commitments made by institutions worldwide,

60. ABP, “ABP stops investing in fossil fuel producers” (26 October 2021), ABP stops investing in fossil fuel producers | ABP.

61. New York City Comptroller, “Comptroller Stringer and Trustees Announce Successful $3 Billion Divestment from Fossil Fuels”, (22 December 2021), Comptroller Stringer and Trustees Announce Successful $3 Billion Divestment from Fossil Fuels : Office of the New York City Comptroller Brad Lander (

62. New York City Comptroller, note 61.

63. Ontario Teachers’ Pension Plan. (2021, September 16). Ontario Teachers’ Releases Ambitious Interim Net-zero Targets. Retrieved March 25, 2022 from Ontario Teachers’ Pension Plan. (2021). 2020 Annual Report Strong. Resilient. Ambitious. Pg 27. Retrieved March 25, 2022 from

64. CDPQ, 2021 Sustainable Investing Report (12 April 2022), at 2, 2021 Sustainable Investing Report – CDPQ (hereafter CDPQ 2022).

65. CDPQ 2022, note 64 at 4.

66. Shift Action, Canada’s Climate-Conflicted Pension Managers: The Oil and Gas Insiders Overseeing Canadians’ Retirement Savings, (May 2022), Canada’s Climate-Conflicted Pension Managers: The Oil and Gas Insiders Overseeing Canadians’ Retirement Savings, at 5.

67. Shift Action, note 62.

68. Bauslaugh, note 49. See also Commonwealth Climate and Law Initiative and Canadian Climate Law Initiative. (June 2021). Primer on Climate Change: Directors’ Duties and Disclosure Obligations: In support of the Principles of Effective Climate Governance.

69. Shift Action, note 66 at 9.

70. D Welsby et al, “Unextractable fossil fuels in a 1.5 °C world” (2021) Nature 597, 230–234.