Defined benefit pension plans and defined contribution pension plans are uncertain about how to incorporate environmental, social and governance issues into their investment processes in a way that’s consistent with fiduciary duties, according to a new white paper from the Association of Canadian Pension Management.

“Sustainable investing, including ESG, is an area where some investment risks that have been acknowledged for decades are now becoming more acute (e.g., climate risk),” said the white paper. “How pension plans can, and should, account for ESG risks in light of the fiduciary duties applicable to pension fund investing is an issue that pension plan administrators globally are struggling to manage. This paper attempts to assist Canadian pension plan administrators understand their fiduciary duties relating to investments and ESG and how to implement an appropriate ESG strategy as fiduciaries.”

Under Canada’s existing legal framework, incorporating ESG considerations in investment decisions isn’t prohibited or required by existing legislation, nor is there an accepted definition of what constitutes ESG factors or considerations. The only pension plan sponsors that must unequivocally abstain from incorporating ESG factors is at plans where governance rules expressly prohibit or directly restrict the plan sponsor from divesting investments that are based on ESG factors or set parameters for the investment of the portfolio, which is a rarity in Canada.

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