In my August 17, 2016 post (found here), I summarized Ontario's recent changes to the Pension Benefits Act and Regulation that require a pension plan's statement of investment policies and procedures ("SIPP") to include information as to whether environmental, social and governance ("ESG") factors are incorporated into the plan's SIPP and, if so, how those factors are incorporated. I noted that while the incorporation of ESG factors into a pension plan's SIPP is not a statutory requirement, the question arises as to whether a failure to consider ESG factors in your pension plan's SIPP could be a breach of fiduciary duty. I didn't answer the question directly but did say that many of Canada's largest public sector pension funds have now incorporated ESG into their investment policies.

Given that provincial pension legislation requires plan administrators to exercise the care, diligence and skill that a person of ordinary prudence would exercise when dealing with the property of another person, would that exercise not, by logical extension, include investigation of the consideration of ESG factors in the assessment of creditworthiness of investee entities?

Recent announcements by some of the world's largest credit rating agencies recognize that ESG factors can affect borrowers' cash flows and the corresponding likelihood that they may default on their debts. S&P Global Ratings, Moody's, Dagong, Scope, RAM Ratings and Liberum Ratings signed a "Statement on ESG in Credit Ratings" (the "Statement") in May of this year acknowledging that ESG factors are important elements in assessing creditworthiness of borrowers and, for corporations, "concerns such as stranded assets linked to climate change, labour relations or lack of transparency around accounting practices can cause unexpected losses, expenditure, inefficiencies, litigation, regulatory pressure and reputational impacts."

Included in the Statement are 100 investors managing US $16 trillion of assets, all of whom are signatories to the six UN-supported Principles for Responsible Investment wherein the investors affirmed their commitment to:

  • incorporate ESG factors into investment analysis and decision-making processes;
  • seek appropriate disclosure on ESG issues by investee entities; and
  • report on activities and progress towards implementing responsible investment.

Several well-known Canadian institutional investment corporations are included in the list of 100 investors.

Rating agency reports that incorporate ESG factors in the assessment of credit risk may soon form part of the statement of the valuation method process required by pension regulators.

The Fall 2016 Corporate Knights article, Credit ratings and climate change, cited a 2015 report from the Center for International Environmental Law, which accused the rating agencies of repeating their risk analysis mistakes from the sub-prime mortgage debacle when it comes to fossil fuel investments: "In assuming a business as usual scenario, rating agencies may be artificially inflating the credit ratings and financial value of companies that contribute to global warming". The report added that "This poses significant risks for investors, and the climate, and could expose rating agencies themselves to legal liability." The May 2016 Statement on ESG in Credit Ratings appears to be the first step in addressing the gap in credit rating which doesn't necessarily consider sustainability and governance factors in credit ratings and analysis.

Plan administrators should seek legal advice to ensure their fiduciary duties are fulfilled when they embark on considering ESG factors in their investment decision making process.

For more information, visit our Employment and Labour blog at www.employmentandlabour.com

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.