The Canadian Association of Pension Supervisory Authorities' (CAPSA) draft guideline on ESG sets out three principles as guidance for pension plan administrators:
- consider ESG characteristics that may have material relevance to the financial risk-return profile of the pension fund’s investments;
- assess whether plan governance and practices are sufficient to identify and respond to material ESG information; and
- disclose information about the pension fund’s investment policies in relation to ESG considerations in its SIPP.
CAPSA's draft guideline for Environmental, Social and Governance Considerations in Pension Plan Management provides plan administrators with guidance as they consider ESG risks and opportunities when dealing with pension assets. It sets out three overarching principles and offers practical suggestions for plan administrators to consider. Comments on the draft guidance are due October 14, 2022.
The 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. I had the privilege to be a part of the working group.
Pension plan administrators (either directly or through their delegates) 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 DC 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.
Plan administrators, as part of their standard of care, need to assess whether their plan governance, risk management and investment decision-making practices are sufficient to identify and respond to material ESG information in a manner proportionate to their plans and appropriate for their investment beliefs.
- 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.
- Address whether plan administrators have the relevant skills, resources and experience, and/or need 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.
- Ensure 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.
- Consider the processes for identifying and taking into account material ESG considerations in adopting investment strategies (e.g. asset allocation decisions, benchmark selection, 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 (e.g. engagement with investee companies, voting at shareholder meetings, filing of shareholder resolutions/proposals, direct roles on investee boards and board committees).
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. Where appropriate, pension plan administrators should also provide reports on their stewardship activities as well as request companies in which they invest to disclose their ESG-related policies.
The guideline provides 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.
In addition to soliciting feedback on the draft ESG guidance, CAPSA is consulting on whether to incorporate its planned ESG guidance into a consolidated risk management guideline for pension plans (which would also address CAPSA's draft leverage and cyber security guidelines). The guidance is currently expected to be finalized in 2023.