DCIF 2022: What are the legal considerations for ESG investing for DC plan sponsors?

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Read: Investors cite returns and risk management as drivers of ESG integration

“It’s one of those where it looks really easy. “ESG makes sense and it sounds good, so I guess that’s what we’ll do for our members.” [But it’s] not so easy,” she said, noting that research and trends on whether ESG funds actually outperform are still unclear.

For DC plan sponsors looking to get into ESG funds, Bush suggested they first check their plan documents for language prohibiting certain investments, which is common in older plans and trusts. “You have to make sure that you’re not shooting yourself in the foot, that your plan documents allow everything you’re going to do on the ESG.”

Plan sponsors must also rigorously evaluate all ESG options to ensure they are sound investments and that they cannot rely on the defense to meet plan member demand. “You can’t just say, . . . “They wanted a green fund and I gave them a green fund. It offered mediocre returns, but that was their choice,” she said, pointing to language in the Income Tax Act which states that the primary purpose of a retirement plan is to provide retirement income. She suggested plan sponsors could risk being struck off by tax authorities if they provided funds that were there for social good, rather than helping plan members save for retirement.

But divestment and the outright exclusion of certain types of investments – like the banning of Russian companies due to current geopolitical issues or the values-based exclusions of cigarette makers, nuclear weapons makers, etc. . – do not comply with common law decisions.

Read: What are the legal risks of ESG?

“It’s hard because I understand why you don’t like nuclear weapons, but the courts are basically saying, ‘Well, is this a good investment?’ And if so, it’s not up to you to make decisions for the pension plan about what you like or dislike, but it’s a tough message. [to hear]Bush said, noting that plan sponsors are allowed to exclude sanctioned companies because investing in them would be illegal.

To date, only two provinces, Manitoba and Ontario, have specific rules on how pension plan sponsors must disclose how they consider ESG factors, which provide limited guidance. she declared. But changes are afoot. The 2022 federal budget introduced a new requirement for federally regulated pension plans to disclose ESG considerations, including climate-related risks. And the Canadian Association of Pension Supervisors recently stepped in to help plan sponsors navigate these troubled waters.

In June, CAPSA issued guidance that using ESG factors to decide between two otherwise equivalent investment opportunities could be consistent with the fiduciary obligations of pension plan sponsors. The document, which was open for comment until mid-September, also warned plan sponsors that “ignoring or disregarding ESG factors that may be potentially material to the fund’s financial performance could constitute a breach of fiduciary duty” and that these factors should not be considered. not be perceived differently from other types of risk.

Read: CAPSA Seeks Comments on Risk Management Guidelines

Compared with major defined-benefit plan sponsors like the Canada Pension Plan Investment Board, the new guidelines may be more difficult for DC plan sponsors to execute, Bush said. “You’re going to have to be a lot more prescriptive and you’re going to need more governance and that’s going to be a challenge for a lot of plans. Unfortunately, this is going to take time and effort, especially in the beginning. . . . Clearly regulators are looking at this seriously.

She said she expects to see DC plans, especially smaller ones, relying more on the insurance companies they invest with and investment consultants to navigate the new guidelines and requirements. Statements of investment policies and procedures will also need to evolve to include more detailed information about ESG, but she said the question of which factors are relevant will be difficult for plan sponsors to answer.

“I think we’re all still navigating our way around the material stuff. It’s still not very easy to assess, and that’s where I think boards of directors and pension committees really struggle.

Learn more about DC Investment Forum 2022 coverage.

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