The new year often brings change and this year employers in Ontario will need to change the way they approach environmental, social and governance factors in their pension plans.
Starting Jan. 1, 2016, pension plan administrators in Ontario must file a statement of investment policies and procedures with the Financial Services Commission of Ontario and disclose whether plans have taken them into account for investment purposes and, if so, how.
Randy Bauslaugh, partner at McCarthy Tétrault LLP, spoke at Benefits Canada’s 2015 DB Investment Forum on Dec. 11, 2015, about the new requirements.
Bauslaugh began by exploring the definition of environmental, social and governance factors. “One of the things that I keep hearing people talk about is how these are non-financial factors,” he said. “Actually, if you’re utilizing them correctly, you need to think of them as being financial factors.”
His said plan sponsors should take the factors into account if they’re relevant to financial performance. He noted it’s not about ethical investment; rather, it’s about taking into account factors that might affect the value of investments or are relevant to risk mitigation.
Plans have a duty to act in the best financial interest of their plan members and it’s important to consider how that responsibility fits with the requirements around environmental, social and governance factors.
Bauslaugh noted that integrating such considerations, if it’s to more reliably assess or predict financial performance, is arguably a requirement.
He said plan sponsors could take the factors into account when using them as a lens to get a contextual understanding of whether an investment is good or not. He also said plans can use environmental, social and governance factors as a tiebreaker if there are metrics demonstrating financial equivalence.
When plans look to use environmental, social and governance factors as a rationale not to make an investment, Bauslaugh cautioned that they should ensure the plan’s governance document authorizes them to do so.
Bauslaugh also discussed how plans should approach disclosure.
“If you’re going to put something about ESG in your SIPP, the one thing that this disclosure rule requires you to do is have a discussion around it,” said Bauslaugh.
“You can’t make a statement about whether you take it into account or not unless you’ve actually had a discussion around whether you will or not.”
He said plan sponsors should reflect their decision in their minutes and statement of investment policies and procedures. Some factors to keep in mind for plan administrators are to provide brief reasons, ensure they base their decision on current information, provide discretion to withdraw or change policies and ensure consistency with a plan’s proxy voting policy.
“What I would say as a lawyer is whatever you put in your SIPP is certainly evidence. I would advise you to keep it short and sweet,” said Bauslaugh.
All the articles from the event can be found in our special section: 2015 DB Investment Forum coverage.