A regulation enacted by the Ontario Parliament late last year will require trustees of all occupational defined benefit pension plans in the province to disclose whether environmental, social and governance factors are incorporated in the pension fund’s investment policies and procedures.
The regulation, amended to Ontario’s Pension & Benefit Act, will mandate that, effective Jan. 1, 2016, occupational public and private pension funds will have to include the information in their investment policy statements. They’ll also need to explain how ESG factors are used in their investments if they do so.
“They’ll have to look at their investment policies and procedures and at least consider ESG factors and how they’ll impact the financial return of the plans,” said Susan Nickerson, partner in the pension, benefits and employment group at the law firm of Torys LLP, Toronto, and vice chairwoman of the Association of Canadian Pension Management’s national policy committee. “It’s a big change for (the pension funds).”
The Ontario regulation is the first such rule in Canada, said Anne Wittman, director of law and policy for Shareholder Association for Research & Education, Vancouver, British Columbia.
Similar provisions are in place in the U.K., France, Germany, Sweden and Belgium.
The regulation has been awaiting approval by Ontario legislators since 2011, when it was included in that year’s provincial budget. However, action wasn’t taken on it until November, “more due to inertia on the part of the government” than any contentious political reason, said Ryan Pollice, senior associate, head of responsible investment (Canada), Mercer LLC, Toronto. “The legislation was broadly supported by the large Ontario pension funds,” he said, including the C$140.8 billion (US$121.2 billion) Ontario Teachers’ Pension Plan, C$65.1 billion Ontario Municipal Employees’ Retirement System and the C$16 billion OPTrust. “Those large plans have been active in ESG for many years, as far back as 2003.”
The regulation does not require pension funds in the province to have ESG investments, but Ms. Wittman said SHARE hopes it could prod more to consider them. “It’s not prescriptive; it just requires disclosure,” she said. “But for those pension plans that do not have ESG investments, now there’ll be a thought process begun with pension trustees as to whether they should have ESG principles in their investments. We hope that this provides special encouragement to trustees to consider this.”
However, Ms. Nickerson and Mr. Pollice said they don’t think the provincial government is trying to push ESG investment for pension plans through the regulation. “I’m not sure that applies,” Mr. Pollice said. “The regulations aren’t overly prescriptive. They follow the U.K.’s 2004 rules on ESG disclosure; there, some went ahead and took action to incorporate ESG in investments that otherwise wouldn’t have, while others said ESG was not a significant factor. I think it’ll be the same here.”
Apart from the large provincial plans, ESG “is relatively nascent” with most Ontario plans, Mr. Pollice said. “Not a lot of plans at this point have spent a lot of time on these issues,” he said. “There will be a lot of education, a lot of steps for pension fund investment committees in Ontario to take.”
He said that for most Ontario plan trustees, “Step one will be education. Step two will be, think what is practical, what they can do.”
Ms. Nickerson said the Association of Canadian Pension Management filed a comment with the Ontario government in October supporting the proposal. “We did say that member statements should not explain why plans invest in ESG,” she said. “The regulation’s vague in wording as to whether this applies. We think it’s fine to include if plans use ESG factors in investment decisions, but we don’t think they need to explain how they do it. Members could always request that information, but requiring the details would make annual statements very complicated. It could be the tail wagging the dog.”
Other provinces considering ESG disclosure for pension plans include Alberta, British Columbia and Nova Scotia, Ms. Nickerson said.
Ms. Wittman said the fact Ontario has implemented the regulation could make it attractive to other provinces. “Ontario is a significant jurisdiction,” Ms. Wittman said. “We hope it will lead other provinces to consider implementing this as well.”