Climate change: Legal implications for Canadian pension plan fiduciaries and policy-makers
This report outlines the legal obligations of Canadian pension plan fiduciaries to consider the financial risks and opportunities presented by climate change in their investments. It provides practical guidance, based on recent case law and expert recommendations, for fiduciaries to fulfill their responsibilities to plan beneficiaries.
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OVERVIEW
The report delves into the legal obligations of Canadian pension plan fiduciaries regarding climate risk management. Fiduciaries must adhere to their duty of managing plan assets based on financial risks and opportunities, with climate change carrying significant implications in these realms. The document offers practical advice and specific guidelines to assist fiduciaries in meeting these responsibilities.
Pension plan fiduciaries are legally obligated to monitor and manage investments in the best interests of beneficiaries. Current legal requirements mandate consideration of financial risks and opportunities, including those related to climate change. Fiduciaries must exercise their powers fairly and honestly to support the primary financial purpose of the plan—providing retirement benefits to beneficiaries.
Given the consensus on climate change’s financial impacts on markets, fiduciaries are advised to assess its implications on fund performance. They should engage with investee entities and managers for transparency and improved performance in dealing with climate-related risks and opportunities. Urgency, confidence in the investee company’s response, and fiduciary’s strategic investment objectives should be considered during engagement.
Climate change significantly influences investment decision-making and risk management, prompting fiduciaries to systematically address climate-related risks and opportunities. This involves developing long-term climate scenarios, stress-testing, and proactive engagement with regulators, industry groups, and stakeholders.
Climate-related risks and opportunities vary by sector, location, and timeframe, encompassing physical risks (natural disasters), transition risks (impact of moving to a low-carbon economy), and reputational risks (arising from unethical practices). Fiduciaries are encouraged to integrate climate change risk assessments into their overall risk management strategies.
Recent legal cases underscore the importance of fiduciaries considering climate change risks and opportunities, emphasising the duty to maximise returns while accounting for systemic risks. Implementing a comprehensive Environmental, Social, and Governance (ESG) policy, disclosing standards, proactive engagement practices, and internal metrics can help mitigate liability risks.
Large pension plans in Canada are leading in climate risk management practices, with well-developed ESG policies referencing the integration of climate factors. The report recommends smaller plans adopt best practices, such as regular climate scenario analysis and engagement with investee entities.
Liability risk concerning climate change is a growing concern for pension plan fiduciaries. The report advises adopting best practices and industry standards to mitigate potential claims, including transparency and disclosure standards, proactive engagement, and internal metrics.
Fiduciaries, while having a legal duty to manage investments based on financial risks, can benefit from engaging with policy-makers to address the systemic nature of climate change risk. This includes advocating for policy and regulatory frameworks supporting effective climate risk management, encompassing disclosure requirements, scenario analysis, and stress-testing.
In conclusion, Canadian pension plan fiduciaries must fulfil their legal duty to manage assets, considering financial risks and opportunities, including those related to climate change. The report offers practical guidance, advising fiduciaries to adopt comprehensive ESG policies, engage with regulators and stakeholders, and follow best practices from larger plans. Active engagement with policy-makers is also recommended to support effective climate risk management frameworks.