Canada: Environmental, Social and Governance Factors in Pension and Endowment Fund Investment

Last Updated: September 28 2018
Article by Level Chan, Paul Smith and Sarah Jackson


Universities hold significant assets in pension, endowment and similar funds that are invested to maximize returns so as to deliver on promises supported by those funds. While the identification of sound investment opportunities has typically relied upon financial metrics, recent years have seen a shift towards expanding the range of factors considered in this analysis in the form of environmental, social and governance ("ESG") investing.

ESG investing involves incorporating environmental, social and governance factors into investment decisions and is sometimes referred to in more general terms as "responsible investing". There is an important distinction to be made, however, between ESG investing and other related practices that focus on divestment and negative screening of target industries or companies for ethical purposes, such as socially responsible investing or impact investing. Importantly, ESG investing is conducive to investing for the sole purpose of financial returns as it is based on the premise that ESG factors identify risk and opportunity that would otherwise be obscured and accordingly has a material effect on investment performance and the returns obtained on behalf of beneficiaries.

Research supports the central notion of ESG investing that environmental, social and governance practices, when combined with traditionally relied upon financial data, are valuable indicators of future performance.1 The potential value of non-financial indicators in predicting risk and return is frequently exemplified by the hypothetical scenario wherein a company displays solid financials, but upon inquiries into their environmental, social and governance practices, it is revealed that the cost advantage that is reflected in the numbers is the result of poor governance, abusive labour practices or environmental shortcuts that increase the risk that long-term profitability will be unsustainable.

Growing interest in ESG investing has prompted the establishment of the United Nations Principles of Responsible Investments, a multilateral global initiative that sets out investment principles to guide signatories in incorporating ESG issues into their investment practices, and to which a number of Canadian universities are signatories.2


A commonly cited concern with respect to pursuing ESG investing is whether it is consistent with the legal obligations to which fund administrators are subject. Trustees of university pension and endowment funds are bound by the duty to act as fiduciaries with respect to these funds.3 In the context of fund management, part of the legal fiduciary duty of a trustee to manage the fund in the best interests of its beneficiaries is to adhere to the standard of a prudent investor.4

The concern about possible breach of fiduciary duty arises from the common misconception that ESG investing requires investors to prioritize ethical considerations at the expense of financial returns. However, the emerging consensus from a legal perspective is that factoring in the environmental, social and governance practices of prospective investment targets is entirely consistent with the exercise of fiduciary duty. In light of the empirical evidence that identifies the potential for ESG factors to better analyze investment-related risks and the widespread adoption of the practice, legal scholarship supports the integration of ESG factors as being "within the scope of what a prudent investor can do."5


To date, commitments to ESG investing by Canadian university pension funds have been predominantly voluntary. However, the emerging global trend towards increased legislative activity in the area of responsible investment regulation suggests that more universities may see themselves subject to regulations requiring that, at the very least, they consider incorporating ESG factors into their pension fund investment policies.

So far, Ontario has led the way in Canada as the only province to legislate ESG reporting requirements for pension funds. As of January 2016, the regulations under the Pension Benefits Act require pension plan's statement of investment policies and procedures to include information as to whether ESG factors are incorporated into the plan's investment policies and procedures and, if so, how those factors are incorporated.6 Reporting requirements of this nature follow similar pension regulations in place in the United Kingdom, European Union, Germany and South Korea.7

Without going as far as the Ontario regulations, Manitoba's pension standards legislation permits plan administrators to use nonfinancial criterion in the formulation of investment policy subject to the provisions of that province's Pension Benefits Act, including the prudent investor standard.8

While there are no legislative developments on the immediate horizon for Atlantic Canada, global trends and the rules in Ontario and Manitoba suggest that some level of ESG-related pension regulation could be in our future.


In addition to the demonstrated financial benefits of ESG investing, universities are particularly motivated to consider this practice in the investment of their pension and endowment funds.

Notably, concerns about universities' investment practices have been the subject of student activism for many years. This has traditionally taken the form of impassioned efforts aimed at prompting universities to divest from particular industries or regions, with most of the focus tending to be on climate-related issues.

This type of campus activism recently reached new heights at Harvard University, where a student-led campaign advocating for the university's endowment fund to divest from fossil fuels took the notable step of bringing the matter before court. In a lawsuit filed in 2015, the Harvard Climate Justice Coalition sought a permanent injunction ordering Harvard to divest its endowment fund from any fossil fuel companies on the basis that these investments contribute to climate changes, "which adversely impact their education and in the future will adversely impact the university's physical campus."9 The action was dismissed by the lower and appeal courts on the basis that the student group lacked standing to bring the case, with the Massachusetts Court of Appeal declining to find that the students had "been accorded a personal right in the management or administration of Harvard's endowment that is individual to them or distinct from the student body or public at large."10

While legal recourse by students is not prevalent now, there is little doubt that this issue will continue to feature prominently in campus politics. Committing to ESG investing therefore has the added benefit of responding to the concerns of a socially - and environmentally - conscious student body in a manner that is simultaneously recognized as a best practice in maximizing long-term investment returns.

In addition to pressure from students, universities may see endowment fund donations coming with conditions that require the gift be invested in accordance with ESG investing. Having experience with and institutional knowledge about this practice will permit fund administrators to readily facilitate such requests.


There are several important considerations for universities to keep in mind when initiating or reviewing their ESG investment practices with respect to pension or endowment funds.

Consideration of ESG should be made in accordance with the fund's governance processes, including consideration by internal staff and an investment committee. As with other decisions, the options considered and rationale for the decision should be documented.

Once the most appropriate way to adopt ESG investing has been determined, this approach should be incorporated into the applicable statement of investment policies and procedures. An articulation of how ESG investing fits into the fund's goals and objectives may note how the consideration of ESG criteria will factor into the selection and assessment of investment managers and fund performance.

The desired approach to ESG investing should also be clearly communicated to investment managers and set out in investment management agreements. Once a mandate to take ESG factors into account is established, investment managers will rely on various methods and resources to put this into practice. ESG should be considered in selecting, instructing and monitoring investment managers. Increasingly, investment firms are developing capabilities to integrate ESG factors into their research and analytical processes, while some will collaborate with specialized analytics firms to get ESG-related data. Further, a number of different ESG ratings systems are available to assist investment managers in this process. Like other benchmarks and ratings, no rating systems should be taken as determinative, especially since ratings will vary, even for the same investment. Investment managers should be expected to investigate beyond the ratings and any investment considered in light of the particular investment context and strategy of the fund. Appropriate benchmarks and processes should be discussed and confirmed with investment managers. Other ESG directed actions that can be taken by managers such as proxy voting should also be considered.

Implementation, measurement and analysis of ESG is an ongoing process. Policies and their application should be regularly reviewed, including on how an ESG investing approach fits with the overall investment strategy of the fund. While ESG will always require some measure of qualitative analysis, universities should count on having ESG as part of their investment practices.

1 Susan N. Gary, Values and Value: University Endowments, Fiduciary Duties, and ESG Investing, Journal of College and University Law, (2016) 42:4 at Part IV [Gary, "Values and Value"].

2 United Nations Principles of Responsible Investing, "What are the Principles for Responsible Investing?" online:

3 In Canada, this duty is founded in common law and codified in pension standards legislation.

4 Gary, Values and Value, supra note 1 at 255.

5 Gary, Values and Value, supra note 1 at 306.

6 O Reg 909, s. 78(3).

7 United Nations Principles for Responsible Investment, "Global Guide to Responsible Investment Regulation," online at 14-15.

8 Pension Benefits Act, CCSM c P32, s. 28.1.

9 Harvard Climate Justice Coalition et al. v President and Fellows of Harvard College et al. (2015) 90 Mass.App.Ct. 444 at 445 ["Harvard Climate Justice"].

10 Harvard Climate Justice at 1.

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.

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