Industry

Canadian Pension Schemes Given Clarity on Climate Responsibilities

New legal opinion says trustees have obligation to consider climate change.

Canadian pension fund trustees have been warned they must consider climate change as part of their legal responsibilities. The Canada Climate Law Initiative, an inter-disciplinary research organisation, issued a legal opinion from pension lawyer Randy Bauslaugh that pension fund trustees have obligations to consider climate change as part of their fiduciary duty.

Similar advice has been issued during the past five years to pension fund trustees in the UK, Australia and South Africa.

In his opinion, Bauslaugh, a partner at Canadian law firm McCarthy Tétrault, stated: “In view of widely accepted evidence of climate change and its financial implications, including evidence recently accepted by the Supreme Court of Canada, pension fund fiduciaries ignore at their peril, the financial risks climate change poses to the investments they have a duty to manage.”

The Supreme Court’s decision, along with other mainstream scientific and financial evidence made it “easy to conclude” that pension fund fiduciaries who fail to consider or manage climate-related financial risks and opportunities, may become personally liable for economic, reputational or organisational loss resulting from that failure, Bauslaugh noted. “Pension fiduciaries may also have an obligation to disclose how they manage climate change financial risks and opportunities on an ongoing basis.”

Inter-generational risk

Pension plan fiduciaries must recognise and balance current and future inter-generational risk and return considerations over periods that potentially exceed human lifetimes, Bauslaugh stated. “Climate change gives rise to both immediate and long term economic and portfolio risk exposures and opportunities, and as a result, triggers a multi-generational oversight approach that unavoidably engages the duty of impartiality,” he said.

The issue of inter-generational risk came to the fore in Australia in November 2020 when the $A57 billion Retail Employees Superannuation Trust reached an out-of-court settlement with a 25-year-old pension fund member. The member, Mark McVeigh, charged that the fund had breached its fiduciary duties by not exercising diligence in protecting his retirement savings from the financial risks posed by climate change. In a statement, the Trust admitted that climate change represents a “a material, direct and current financial risk” to the fund and committed to a range of actions to address that risk.

PRI fiduciary duty report

In January 2016, the UN-supported Principles for Responsible Investment (PRI) and the United Nations Environment Programme Finance Initiative launched a four-year project to “end the debate on whether fiduciary duty is a legitimate barrier” to the integration of ESG in investment practice and decision making.

The project’s final report, ​‘Fiduciary Duty in the 21st Century’, ​concluded that investors that fail to incorporate ESG issues are “failing their fiduciary duties and are increasingly likely to be subject to legal challenge”. Incorporating ESG standards into regulatory conceptions of fiduciary duty is critically important, the report suggests.

With the exception of the US, most markets around the world have made progress on the incorporation of ESG issues into expectations around fiduciary duty, including the EU, UK, Canada and China, said the PRI.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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