February 16, 2023

The power of climate-conscious pensions

Giving up flying, going vegetarian, and switching energy sources are often pointed to as impactful actions individuals can take to reduce their carbon footprints. Less often considered is the power of retirement savings.

Pension funds have a major influence on the kind of world we live in. Canada’s pension funds manage over $4 trillion, according to ShiftAction, and how that money is managed and invested has a tremendous impact on the planet, as well as the economy and personal long-term financial security.

Demand for climate action

That’s why many plan members or pension beneficiaries are increasingly calling for action. In some cases, they are asking for greater transparency about the climate considerations. Others are demanding decarbonization in order to protect their retirement savings against the impacts of climate change and ensure their money is being used to accelerate the transition to a net-zero economy.

Ontario teachers, for example, have questioned why the Ontario Teachers’ Pension Plan (OTPP) is investing their retirement savings in companies that are jeopardizing the future of the students they teach.

In Australia, a member of Rest, one of the country’s largest pension funds, sued the fiduciaries of the plan for failing to adequately consider the risks of climate change while managing investments and to implement a net-zero emission carbon footprint goal by 2050.

Pension plans have a fiduciary duty to consider climate change

While the case in Australia was settled out of court, a legal opinion by Randy Bauslaugh in 2021 concluded that pension fund fiduciaries do have a duty to take into account financial risks and opportunities related to climate change when managing plan assets.

Evaluating these “risks and opportunities goes beyond passive receipt of information, and instead means establishing a robust process to oversee and verify the funds’ progress in relation to these risk and opportunities,” wrote Dr. Janis Sarra in Plans & Trusts.

Work to be done

In theory, given their lengthy time horizons and aim to provide a secure retirement, pension funds have a clear interest in overseeing the financial risks posed by climate change, and managing them accordingly.

Yet a new report reveals that Canada’s major pension funds are not adequately managing climate-related risks. In Canada, only one major pension fund has phased out investments in fossil fuels to date – the Caisse de dépôt et placement du Québec (CDPQ), and only two funds have drawn a link between compensation and the achievement of climate targets.

According to the same report, “climate-related expertise should be a required competency for corporate directors, especially in the governance of pension funds, which have a long-term investment horizon.”

Recognizing that adopting and implementing effective climate plans is not easy, the report goes on to say that “institutions that develop internal expertise, capacity, experience and a culture of experimentation are likely to be rewarded in the long-term.”

How the Canada Climate Law Initiative can help

The Canada Climate Law Initiative speaks with trustees of pension funds, as well as boards of directors of Canadian businesses, to ensure they have the tools and knowledge to meet their fiduciary duties in relation to climate change. We also publish resources to support pension plan trustees and members of pension committees, and make policy recommendations.

Speak with an expert today.