ESG And Institutional Investors: Part Two – Employment and HR – Canada – Mondaq News Alerts

Bennett Jones recently hosted a two-part webinar series on ESG
and institutional investors. The first session looked at their role in ESG,
private markets and investment, how risks and opportunities are
being assessed in the boardroom, ESG performance in the energy
industry and some predictions on what is ahead.

The second session looked at ESG and pension plan administration
with a focus on the issues at the interface of ESG and the duties
of pension fiduciaries, as well as some predictions on what is
ahead.

Here are the key takeaways from the second part of the
series.

ESG Checklist for Pension Plan Administration

A high-level ESG checklist for pension plan administration
should include the following:

Evaluate ESG risks and opportunities. Pension plan
administrators should evaluate and understand how ESG factors are a
source of risk and opportunities for pension plan administration
and investment decision-making, consistent with their fiduciary
duty to act in the best interests of plan members and
beneficiaries.

Establish an ESG policy. Pension plan administrators
should establish a policy or plan to integrate ESG factors into
their activities and decision-making. ESG considerations should be
embedded throughout investment activities and decision-making
processes, including investment manager selection.

Document and monitor your ESG policy. Good pension
governance places a significant emphasis on monitoring and
reporting in the governance process, including the implementation
of ESG policies and integration of ESG factors.

Consider the plan’s ESG disclosure. Plan
administrators should consider their own ESG disclosures, reporting
and transparency. As ESG evolves, expect pension regulators and
plan beneficiaries to want more information on how their plans are
integrating ESG.

Be mindful of fiduciary duties. Directors and officers
of companies that administer a pension plan should be mindful of
their fiduciary duties to the beneficiaries of the plan-the duty of
loyalty and the duty of care. The duty of loyalty is to make the
plan fulfill its promises and deliver financial performance, as the
primary purpose of a plan is financial. The duty of care includes
being informed of relevant and material risks and opportunities,
including ESG.

Director and Officers’ Fiduciary Duties and Evaluating ESG
Performance

The fiduciary standard for directors and officers is about the
reasonableness of the steps taken to evaluate ESG performance. They
meet the standard if they have acted rationally, reasonably, on an
informed basis and without conflict. Meeting the fiduciary standard
is not about the outcome, but about the process of taking into
account relevant issues and being fully informed where ESG factors
in.

This approach has two aspects-process and document. Directors
and officers should have a process to oversee, verify and engage
with respect to ESG performance. They should then demonstrate,
through documentation, how the process addresses ESG issues as they
relate to the mitigation of financial risk and enhancing financial
performance. Compliance with a pension plan’s policies also
needs to be evidenced, to demonstrate that directors and officers
understand their duty and have fulfilled it when dealing with ESG
risks and opportunities in particular circumstances.

The S and the G

Social and governance have become increasingly important for
pension plan administration. They have shifted from a pure risk
based assessment to understanding the opportunities and benefits of
performing well in these areas. Administrators are also placing a
greater focus on social and governance practices such as Equity,
Diversity and Inclusion, reconciliation with Indigenous peoples,
eliminating anti-corruption and supply chain resilience.

Alternative asset classes can be a very effective component of a
pension plan’s focus on social and governance factors.
Alternative investments are increasing, particularly among larger
plan sponsors as part of a well-diversified portfolio and many
funds and managers have well-developed ESG policies and dedicated
internal ESG teams. Alternative investments may also present a
greater opportunity for active management and shareholder
engagement with a plan’s investments. Many private equity, real
estate and infrastructure funds focus on investments that aim for
positive environmental impact or social change and promote
financial transparency.

Engagement vs. Divestment

When faced with a divestment campaign, pension plan
administrators should exercise their independent judgment and think
about the situation in a nuanced way. Divestment campaigns can have
many different components and how they are interpreted can be
complex. Administrators must be aware of calls for divestment or
other ESG related activism, how a divestment campaign may be
relevant to the plan’s risk and return considerations and what
it might say about a potential investment of concern to activists.
Administrators should not, however, act reflexively in the face of
a campaign. The plan administrators’ job is to meet their
return and risk objectives and it is against this backdrop that
they need to assess whether divestment or continued investment is
the most appropriate course.

If administrators decide not to divest, they need to explain
their reasons and how the ESG concerns of beneficiaries are being
addressed. Administrators should not simply say they made their
decision to keep the plan focused on financial returns. Many
pension plans that resist divestment calls point out the advantages
of continued share ownership in influencing management teams at
portfolio companies.

Predictions and Looking Ahead

Once the integration of ESG factors into the plan’s
investment policies and processes becomes increasingly widespread
and further encouraged by regulators, expect a requirement for
increased disclosure relating to ESG. Disclosure will also be about
the data and the methodology used to gather and assess the
data.

ESG and how it is applied or reflected will continue to get
more sophisticated and nuanced.

Tomorrow’s ESG risks and opportunities will likely be much
broader in scope than today’s. They will require continuous
attention, thoughtful analysis and judgment, strategy, engagement,
action and progress.

The full ESG Institutional Investors’ Series: Session 2
webinar can be viewed here.

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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.