“The ideas of intergenerational equity (in the context of the long term investment objectives of pension funds) may result in a broadening of the scope of pension fund trustees’ fiduciary duties.”

Ed Waitzer (Partner, Stikeman Elliott)

Drivers for Action

Interviewees commented that there has been some increase in the level of market interest in responsible investment over the past five years. This has been driven by a number of factors:

  • Growing awareness of the potential investment value resulting from a focus on ESG issues.
  • Market demand. That many of the largest asset owners in Canada have now signed the PRI was identified as a particularly important signal about the importance of responsible investment to asset owners.
  • PRI reporting requirements. Signatories to the PRI commented that the PRI reporting requirements and the fact that these reports are made publicly available has meant that they have needed to strengthen their systems and processes.
  • Regulatory change. Interviewees pointed to Ontario’s pension standards legislation as having a catalytic effect. It has resulted in pension fund administrators – both within Ontario and elsewhere in Canada – having explicit conversations about ESG issues, and seeking advice from their consultants and legal advisers on modern interpretations of fiduciary duty.
  • International practices. Interviewees commented that Canadian investors tend to evaluate themselves against leading European investment organisations, and often look to Europe for ideas on how they might strengthen their approach to responsible investment.

Barriers to Progress

Interviewees identified a number of distinct barriers to progress:

  • The lack of regulatory guidance or court decisions on how responsible investment aligns with fiduciary duty. Some interviewees pointed to the value of having clarity on timeframes (or the definition of ‘long-term’), the specific activities that should form part of investors’ approach to responsible investment, and the issues that should be considered in investment research and decision-making processes.
  • Legal advisers and investment consultants continuing to argue for very narrow interpretations of fiduciary duty, perhaps in part because of the lack of explicit guidance. This has acted as a brake on asset owners’ willingness to adopt responsible investment.
  • The lack of robust evidence on the relationship between environmental and social issues and investment performance. Interviewees commented that this contrasts with corporate governance where there is good academic research on the investment relevance of these issues, and there has been legal clarification (e.g. in the Enron case, in the SEC decisions about the rating agencies) of governance expectations.
  • The weaknesses and inconsistencies in corporate reporting on environmental and social issues. This makes it difficult for investors to take account of these issues in their investment processes.
  • Many trustees continuing to equate responsible investment with negative screening and thereby limiting their investment universe with consequent negative effects on investment performance.
  • The relatively small number of individuals in Canada with deep expertise in areas such as ESG integration and active ownership. Some interviewees commented that this capacity is primarily a function of market demand. They suggested that, if general market demand was stronger and the investment case for responsible investment clearer, any capacity gaps would probably be addressed relatively quickly.

Recommendations

In addition to the global recommendations, we recommend that:

The Office of the Superintendent of Financial Institutions and the relevant pension regulators in each province

The Office of the Superintendent of Financial Institutions and the relevant pension regulators in each province should clarify that asset owners are expected to pay attention to long-term factors (including ESG factors) in their decision-making, and in the decision-making of their agents.

The federal government and the governments of the provinces

The federal government and the governments of the provinces should follow the example set by Ontario and introduce ESG disclosure legislation. The legislation should require regulators to:

  • review progress annually;
  • explain how asset owners integrate ESG issues into their investment processes;
  • analyse how these commitments have affected the actions taken and the outcomes achieved (where the outcomes relate to both investment performance and to the ESG performance of the entities in which they are invested).

Read Fiduciary duty in the 21st century: Canada roadmap

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