Just as environmental, social, and governance (ESG) issues have been in news headlines recently, they’ve also been a hot topic in investing. With weekly updates from fund management firms and insurance carriers as the use of ESG measurement continues to evolve, the question quickly becomes what to do with all of this information? However, if you sponsor an employee retirement savings plan, you have a fiduciary duty to understand how ESG issues can affect your process for choosing your plan members’ investment menu.
Many large defined benefit pension plans take ESG factors into account when making investment decisions. Plans with large asset bases can leverage their base as a catalyst for change in the companies they invest in. Desired effects could include diversity on the board of directors or transparency and accountability for the environmental impacts of running a business. Some pension plans choose not to invest in certain industries; for example, the Caisse de depot et placement du Quebec announced that it will end all of its investments in oil by the end of 2022.
Most of our clients do not have the same leverage, but they do contribute to a demand for fund managers with desired investing attributes. As a result, most firms now report how their ESG analysis and processes affect their buying decisions.
In 2015 under the Pension Benefits Act (PBA), sponsors of Ontario Registered Pension Plans were mandated to document whether or not ESG factors were included in their investment decision processes. Sponsors were also required to note these decisions in their Statement of Investment Policies and Procedures (SIPP). Most defined contribution (DC) pension plan sponsors chose not to include ESG, and most relegated that task to the fund managers they decided to invest with.
Insurance carriers are beginning to understand their role in educating plan sponsors and plan members on this subject. One carrier has designed a framework that describes possible attributes for choosing a fund manager and ranks their funds as either an ESG Leader or a Developing ESG Leader. Another insurance carrier has introduced ESG Target Date funds for retail clients, and we expect the series to come to the group market. Since target-date funds are becoming the most popular way to invest (based on new contributions into plans), it is a natural asset class to integrate ESG analysis.
It’s important to remember that your role as a fiduciary is to consider reasonable, prudent options and those in the best interest of the plan beneficiaries. You still have fiduciary duties if you use RRSP, DPSP, TFSA or non-registered products that do not fall under PBA regulations. You are not obligated to file a SIPP, but you are obligated to take note of all available information and industry evolvements to keep up to date on your fund lineup decisions.
Institutional investors’ top three reasons for considering ESG issues, according to the 2020 Canadian Responsible Investing Association report, are to:
The U.S. Securities and Exchange Commission has named ESG matters, including disclosures, adherence to policies and operations, as a priority in 2021, and plan members are asking for more choices in this area and becoming more vocal in their desire to be part of the ESG wave. What can plan sponsors do?
Plan sponsors should know how their current fund managers rank on ESG; you may be surprised at how some managers are already taking strides to integrate ESG. BlackRock, for instance, is a passive fund manager but has been involved in research and public commentary on sustainability in financial markets, investments, and corporate governance and stewardship. Plan sponsors should continue to offer a good, compact variety of investments to plan members who are not primarily investors by profession and follow a process to document meetings and decisions with their committees and consultants.
Plan sponsors rely on guidelines and best practices from the Canadian Association of Pension Supervisory Authorities (CAPSA) for many issues that affect retirement plans. CAPSA has formed a Committee on Integrating Environmental, Social and Governance Factors in Pension Plan Supervision, with a mandate to develop principles-based guidelines on the integration (i.e. interpretation, role and use) of Environmental, Social and Governance (ESG) factors in pension fund investment and risk management. The intent is to provide pension plan administrators with guidance as they consider ESG risks and opportunities within the fiduciary framework required for dealing with pension assets.
Reach out to a Cowan retirement consultant if you have questions about ESG issues.