Earlier this spring, the Ontario government proposed that pension plans registered under the Pension Benefits Act be required to "file Statements of Investment Policies and Procedures (SIP&Ps) with the regulator and disclose whether or not their SIP&Ps address environmental, social, or governance ('ESG') factors."¹ If passed, Ontario would be the first jurisdiction in Canada to require plan administrators to expressly disclose this information.

Global Trend

This development follows the introduction of similar requirements in multiple countries. In 1999, there was a change to a regulation under the UK Pensions Act to require a fund's Statement of Investment Principles to cover its policy on "the extent (if at all) to which social, environmental, or ethical considerations are taken into account in the selection, retention and realization of investments." This coincided with my joining Mercer's London office, and having completed a Masters in Political Economy and International Development and working for CEM Benchmarking - the development brought together my interests and experience. I volunteered to help clients respond and haven't looked back since.

In Australia, the Financial Services reform Act (2000) requires that all products with an investment component - including superannuation funds and mutual funds - include disclosure of the extent to which labour standards or environmental, social, or ethical considerations are taken into account in the selection, retention, and realization of the investment. Similar requirements exist in Sweden, France, Germany, Norway, Belgium, Italy, and Austria, with legislation pending in Spain and in discussion at the EU level.

Disclosure Versus Action

The approach taken by regulatory authorities relies largely on disclosure requirements for pension funds to inform beneficiaries of the extent to which ESG or ethical factors are incorporated into the fund's investment strategy.

While regulatory developments have not mandated the adoption of responsible investment practices - defined as the explicit consideration of ESG issues in investment decision-making and ownership practices - the requirements to disclose have served to prioritize a discussion of this area by investment committees and boards, and functioned to remove some of the barriers that exist to heightened responsible investment activity.

Penny Shepherd, chief executive of UKSIF, the sustainable investment and finance association, notes that "a key impact of the (UK) disclose requirement was to help dispel the myth that considering ESG issues is inconsistent with a trustee's fiduciary duty. If regulators require funds to disclose how they address the area, ergo, they should have a thoughtful and defensible approach to it."

ESG Signals

Similar to other regions, Ontario's potential ESG disclosure requirement follows a number of industry signals placing enhanced focus on ESG and active ownership principles. These include:

• The requirement stems from the Ontario Expert Commission on Pensions 2008 report. Recommendation 8-23 stated that "Plan statements of investment policy should reveal whether, and if so, how, socially responsible investment practices are reflected in the plan's approach to investment decisions."²
  

 

• The National Round table on the Environment and the Economy's (NRTEE) Capital Markets and Sustainability report (2007) called for the enactment of similar regulations to that of the UK, requiring pension funds to disclose annually the extent to which ESG factors are taken into account in the selection, retention, and realization of investments, as well as proxy voting and corporate governance engagement activities.
  

 

• NRTEE also called for pension plans disclosure of their proxy voting activity, which was similar to the 2004 amendment contained in National Instrument 81-106, requiring continuous disclosure by Canadian mutual funds of their proxy voting policies and proxy voting records.

While timing is unknown, indications suggest this disclosure requirement could take effect by March 2012, in time for the annual reporting period to beneficiaries. The disclosure requirement is expected to progress independently of the outcome of the provincial Ontario elections in the fall.

Practical First Steps

Given this, plan administrators and fiduciaries should consider their approach to ESG (and associated disclosure) and be prepared to respond to questions from beneficiaries. There are a number of practical first steps a fund can take towards considering its approach to ESG, including having a fulsome discussion about the topic, developing an understanding of the issues, and moving towards an approach that makes sense for your organization.

Possible questions for discussion include:

• Is the fund concerned that ESG factors could have a material impact on the assets in its care?
  

 

• What are emerging best practices among peers?

The body of academic and practitioner literature to address the first question is growing. Similarly, to the second point, an increasing number of pension plans are writing RI policies, hiring full-time ESG staff, monitoring managers on ESG criteria, and making thematic investments. These examples can help guide other funds' approaches.

Looking ahead

Did the disclosure requirement have impact elsewhere? It seems to have led to accelerated action on ESG in regions that don't have the requirement, including Canada. It will be interesting to see how local developments unfold.

We expect the announcement of the proposed Ontario budget disclosure requirement to result in an increased focus on ESG factors by Ontario based pension funds, and it is possible that other provincial jurisdictions may follow Ontario's lead.

This article was first published in Benefits and Pensions Monitor, Volume 21 Number 6, September 2011

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