Legal Opinion released in response to a request by the Canada Climate Law Initiative concludes pension fiduciaries must take climate change into account in their management of plan assets

July 21, 2021

Matt Masters

Randy Bauslaugh’s “Climate Change: Legal Implications for Canadian Pension Plan Fiduciaries and Policy-Makers”,[1] a legal opinion written at the request of the Canada Climate Law Initiative, is the latest contribution to the discussion of whether pension plan administrators should be factoring climate change into their decision-making on investments. Bauslaugh concludes that the current scientific consensus regarding climate change means that plan administrators must consider the financial risks that climate change could pose to the plan’s portfolio, quite apart from any social or ethical concerns—echoing the conclusion reached by Murray Gold and Adrian Scotchmer in their 2015 report commissioned for SHARE: “Climate Change and the Fiduciary Duties of Pension Fund Trustees in Canada”.[2]

The opinion, which has generated much discussion since its release in May of this year, offered a brief review of relevant climate science. While Bauslaugh acknowledges there is debate with respect to the specifics of the impact of the climate crisis, the baseline consensus is that even assuming significant efforts to curb carbon emissions, average global temperatures and sea levels can be expected to continue rising over the next century, and the economic consequences “could be devastating.”[3] The opinion identifies three consensus categories of investment risk resulting from these circumstances: i) physical risks with respect to the value of assets due to climate or weather events, or changes in water levels or land use; ii) liability risks involving compensation for climate-related loss; and iii) transition risks with respect to the changing value of assets caused by acknowledged physical risks or climate-related developments of policy or technology. Likewise, the circumstances create investment opportunities identified by Bauslaugh as well, including, construction projects better able to withstand extreme weather events, renewable energy, and businesses focusing on sustainability.[4]

Bauslaugh highlights the significance of the Supreme Court of Canada’s (“SCC”) decision in the GHG Reference,[5] which, while not a case related to pensions, saw the SCC acknowledge the reality of climate change, and the severity of the impending impact. Bauslaugh suggests the GHG Reference could serve as a “sign post” and speculates that actions could be brought against pension administrators who invest or allow investments to be made without properly considering climate change, or who fail to consider opportunities opened by climate change, and also notes that every government in Canada agreed that “climate change is real and poses existential threats,” suggesting a willingness of pension regulators to investigate complaints based on failure to properly consider climate change.[6]

Bauslaugh’s conclusion is that the financial risks associated with climate change, as well as the potential opportunities, make the topic something that plan administrators cannot afford to ignore—at least not without risking a breach of their fiduciary duties. The elevated duty of care and duty of loyalty that they owe to plan beneficiaries demand engagement with climate change and its consequences when making decisions about the plan’s assets.

The opinion makes recommendations to assist plan fiduciaries in insulating themselves from potential claims of fiduciary misconduct. In brief summary, some of those suggestions include:

• Addressing climate change in the fund’s statement of investment policies and procedures (“SIPP”);
• Making policy statements that are brief, clear, and flexible to changing circumstances, and adhering to them;
• Keeping minutes of meeting at which material decisions are made;
• Sharing policies with plan stakeholders; and
• Staying informed on “legal and other relevant climate change developments and industry practices”[7]

In terms of public policy recommendations, Bauslaugh recommends that all jurisdictions adopt a modified version of Ontario’s environmental, social and governance factor (“ESG”) disclosure rule, which requires plan administrators to disclose whether a plan’s investment policies and procedures incorporate ESG factors, and if so, how those factors are incorporated. Bauslaugh suggests that such disclosure should also be required to specifically refer to climate change management.[8]

Both Bauslaugh’s opinion and its reception indicate that in the six intervening years since Gold and Scotchmer’s report, a consensus has been developing around their core thesis: the current and future effects of climate change create investment risks, separate and apart from social and ethical concerns. Boards of trustees who have not turned their minds to the issue of incorporating climate change into their investment policies and procedures, or who have not meaningfully done so, would be wise to start that process. Doing so will involve conducting difficult and complicated assessments of investment risks and opportunities created by climate change. Such assessments should consider the matter from a variety of perspectives, and may require climate, economic, engineering, technological, legal, regulatory and political expertise. With respect to investment opportunities, plan administrators seeking “green” investment opportunities should apply further scrutiny to investments or funds marketed as “green,” as there are currently no recognized standards for such claims. Seeking appropriate advice as needed will be an important part of a plan administrator’s engagement with the climate crisis in light of their fiduciary duties.

[1] Randy Bauslaugh, ‘Climate Change: Legal Implications for Canadian Pension Plan Fiduciaries and Policy Makers’, (May 2021)

[2] Murray Gold and Adrian Scotchmer, ‘Climate Change and the Fiduciary Duties of Pension Fund Trustees in Canada’, (September 1, 2015).

[3] Bauslaugh supra note 1, at pg 6-7.

[4] Ibid., at pg. 11

[5] References re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11 (CanLII).

[6] Bauslaugh supra note 1, at pg. 12

[7] Ibid., at pg. 15-17

[8] Ibid., at pg. 20-22

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