As the global impact of climate change grows, environmental, social and governance (ESG) factors have become a core consideration for pension funds.

ESG issues and concerns can no longer be relegated to debates among pension fiduciaries about values investing or investment returns and instead require a holistic approach, author Janis Sarra noted in her article “Protecting Pensions Through Effective Governance of Climate and ESG Risks” in the July/August issue of Plans & Trusts.

Sarra, a professor of law at the University of British Columbia (UBC) Peter A. Allard School of Law, discusses the potential financial advantages and challenges pension fund fiduciaries face when managing plan assets and influencing positive change in the uncertain future.

“Evaluating ESG-related 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 risks and opportunities,” she wrote.

ESG and Fiduciary Duties

Pension fiduciary duties require diligence and skill in the administration and investment of the pension fund that a person of ordinary prudence would exercise in dealing with another person’s property. Part of their responsibility obligates fiduciaries to act in the best interest of plan members now and well into the future.

“Pension funds are large diversified institutional investors with long-term investment horizons, so they cannot diversify away from systemic risks 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,” Sarra explained.

As part of their responsibility, pension fund trustees need to actively consider climate change as a legitimate investment issue, weighing the consequences across various time frames, Sarra wrote.

If trustees, administrators and their service providers fail to act to address material climate-related matters, they may be held personally liable for breach of their fiduciary obligations. Without taking prudent action to mitigate climate-related risks, pension funds could potentially lose significant value.

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, she added.

Actionable Items

Sarra provided the following action steps for pension fiduciaries seeking to incorporate ESG principles.

• Oversee the responsible investing program and approve ESG-related investment policies (e.g. statement of investment policy principles), drilling down to the most ESG urgent concerns.

• Integrate ESG factors at all stages of the investment process, including a due diligence process for new investments and active engagement with portfolio companies on ESG matters, including meetings, use of proxy-voting and election of directors.

• Develop a policy to transition portfolio investments and in-house pension plan operations to net-zero carbon emissions with interim and longer term targets, with processes to measure annual achievement of goals.

• Provide guidance regarding ESG expectations for staff appointed to sit on boards of portfolio companies, including a robust, time-bound, escalatory policy that sets expectations on ESG priorities.

• Ensure processes are in place for executives to manage material ESG risks across investment portfolios, with clear accountability and regular reporting to the board.

• Review and approve annual ESG-related objectives and milestones reached, including how they are used to assess performance and determine annual compensation.

• Set milestones for enhancing diversity, equity and inclusion within the pension fund workforce, and create similar expectations for service providers and portfolio companies.

• Carefully examine recommendations of the Truth and Reconciliation Commission and recent federal and British Columbia legislation incorporating commitments under the United Nations Declaration on the Rights of Indigenous peoples to develop strategies for partnerships with Indigenous Peoples.

• Disclose to beneficiaries exactly how the financial success of ESG investment strategies aligns with their long-term interests.

• Ensure all actuaries, consultants and accountants hired to provide independent reviews of financial risks have adequate climate expertise.

Tim Hennessy
Editor at the International Foundation

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