Can retirement plan sponsors think green?

Taking environmental issues into account in pension plans

The environment has become an area of critical concern for almost everyone. Can, or should, pension plan sponsors and administrators take environmental issues into account in relation to their investment decisions about the assets of retirement plans?

The legal answer to this question is not a simple one and is most probably: “It depends.”

That’s because, in most provinces and federally, pension benefits standards legislation has imposed broad statutory prudent-person requirements on the administrator of the pension plan with respect to investment.

In Ontario, the legislation requires the plan administrator to exercise the care, diligence and skill in the investment of the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person.

Registered pension plans are also subject to the prudent-portfolio rule, which relates to the overall reasonable level of risk the plan should undertake as a whole and the appropriate level of diversification. Most jurisdictions have adopted this approach in some form. In addition, there are generally investment constraints such as maximum allocations to a single stock or to certain asset classes.

Manitoba has assented to, but not yet proclaimed, legislation that would allow a plan administrator to use non-financial criterion to formulate an investment policy or to make an investment decision. It also provides that, in so doing, the administrator does not commit a breach of trust or contravene the legislation, subject to complying with the appropriate standard of care.

British union wanted to limit overseas investment

The case most often referred to as establishing the standard of care required of pension trustees when investing the assets of a pension fund is Cowan v. Scargill. In this British case, there was a dispute regarding a mineworkers’ pension scheme set up by the National Coal Board in which five trustees were appointed by the board and five by the National Union of Mineworkers. In 1982, the board proposed a revised investment plan. The union trustees refused to ratify it unless it was amended so no increase in overseas investments could be made, any existing overseas investments needed to be withdrawn at the most opportune time and no investments in energies competing with coal could be made.

The board trustees sued the union trustees and the court ruled in the board’s favour. It held that where the purpose of a trust is to provide financial benefits for the beneficiaries, the best interests of the beneficiaries are normally their best financial interests.

Many have interpreted the principles enunciated in this case as precluding any considerations in relation to pension funds that are not financial considerations.

CPP updates policy on responsible investing

Some public-sector plans have included environmental, social and governance factors in terms of their investment policies and proxy voting guidelines.

The Canada Pension Plan Investment Board recently updated its “Policy on Responsible Investing.” The policy provides that responsible corporate behaviour with respect to environmental, social and governance factors can generally have a positive influence on long-term financial performance.

The CPP Investment Board has focused its attention on two critical areas — disclosure and corporate governance. The policy also explains that the CPP Investment Board is pursuing its goal of encouraging corporate conduct that enhances long-term financial performance through a policy of engagement as opposed to screening stocks, a process by which certain companies or entire industries are precluded from consideration for investment based on non-financial or social criteria.

Explosion in socially responsible investing

The Canadian Socially Responsible Investment Review 2006, published by the Social Investment Organization, indicated that, since its 2002 report, there has been an explosion of activity in the areas of socially responsible investment by pension funds. In part, the report attributes this increased activity to growing awareness of issues such as climate change and the fiduciary impacts of global warming.

In February 2007, the National Round Table on the Environment and the Economy published the report Capital Markets and Sustainability: Investing in a Sustainable Future. The report devotes an entire chapter to “sustainable pension plans” in which it identifies key barriers to integrating environmental, social and governance factors into the capital allocation decisions of pension plans.

One of these barriers is the perception among pension fund trustees that their fiduciary duty limits the inclusion of these factors in investment decisions.

Natasha vandenHoven is a partner with Davies Ward Phillips and Vineberg in Toronto, specializing in pensions and benefits law. She can be reached at (416) 863-5521 or [email protected].

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