CAPSA releases draft guidelines on Environmental, Social and Governance (ESG) considerations in pension plan management

Climate Change

On June 9, 2022, the Canadian Association of Pension Supervisory Authorities (CAPSA) released for consultation a draft guideline titled CAPSA Guideline: Environmental, Social and Governance Considerations in Pension Plan Management (the Draft Guidelines).[1] The Draft Guidelines outline how pension administrators may consider some environmental, social, and governance (ESG) factors when making investment decisions, but clarify that administrators cannot adopt a wholesale ESG focus in their main investment funds.

The Draft Guidelines provide a general overview of how pension administrators may incorporate ESG factors into their investment plan while meeting their fiduciary duty to maximize financial benefit for the retirements of plan holders. In the absence of legislative changes to the fiduciary duty of plan administrators, the Draft Guidelines emphasize that administrators should consider specific ESG factors that can impact the returns or risk of investments.

The Draft Guidelines are clear that some ESG factors are relevant to the financial performance of investments. These factors focus on systemic and specific risk to investments caused by climate change but do extend to other ESG considerations. Examples of the way that an administrator could incorporate factors found in the Draft Guidelines include:

  • Placing portfolio limits on exposure to greenhouse gas emissions.
  • Setting investment targets for the portion of green assets in a portfolio.
  • Setting standards related to executive compensation, diversity, labour, or cybersecurity practices in target companies.

The Draft Guidelines emphasize that these considerations should be viewed as ways to manage the exposure of the portfolio to risk, and consequently targets for green investments or limits on exposure to greenhouse gas emissions are acceptable under the Draft Guidelines. This also suggests that an administrator is not entitled to take every potential ESG factor into consideration: only factors with a defensible impact on financial risk adjusted return should be considered when making investment decisions. Finally, the Draft Guidelines stress that ESG factors should be considered in a way consistent with the plan’s consideration of other risk factors: ESG considerations should not be dealt with separately or with a different standard.

The Draft Guidelines further provide that Administrators are permitted to pursue purely ESG related goals in two instances: when they are choosing between two investments with an equal risk adjusted return, or when adding a separate fund that plan members can choose to put money in as part of a defined contribution plan line-up. However, if administrators choose to add a distinct ESG-mandated fund, that fund and its investments must remain consistent with the goal of providing retirement income.

The Draft Guidelines state that the consideration of ESG factors is not mandatory, but given their position that ESG factors may be relevant to assessing the risk adjusted performance of assets, and may have material financial impacts on investments, the Draft Guidelines do note that “ignoring or failing to consider ESG factors that may be potentially material to the fund’s financial performance could be a breach of fiduciary duty.”


The Draft Guidelines also state that administrators can and should consider whether they are effectively able to create value in target companies through their voting or investment power within the organization. The Draft Guidelines state that administrators may be able to use ESG values to change the behaviour of target companies, as long as those changes align with the administrators view of how ESG can improve asset performance. The Draft Guidelines list several key considerations for stewardship activities:

  • Whether, and how, ESG informed stewardship can contribute to value creation
  • Whether stewardship can be performed cost effectively by the plan
    • The Draft Guidelines recommend that administrators consider collective stewardship options like industry organizations, or third party ESG rating services
  • What is the appropriate level of disclosure to provide plan stakeholders with about the plan’s stewardship activities.

Disclosure and Governance

The Draft Guidelines also suggest several considerations related to governance and disclosure when administrators incorporate ESG factors into investment decisions, related to the capacity of the administrator and the need for transparency for plan stakeholders.

The Draft Guidelines recommend that administrators assess their capabilities and capacities to see if they are able to appreciate and use ESG factors to inform risk management and value assessment, and suggests that administrators may need to retain outside advice. Additionally, administrators should evaluate and update the performance of their ESG periodically, and if administrators rely on a third party investment manager, or are investing in a third party fund, need to monitor the ESG considerations of that outside third party.

Finally, the Draft Guidelines note that a plan’s Statement of Investment Policies and Procedures must disclose the factors considered when choosing investments, and that this must include any ESG factors considered in risk assessment. The Draft Guidelines additionally suggest the following minimum disclosures:

  • The role of the administrator and its agents in identifying and applying ESG considerations.
  • The materiality and relevance of specific ESG considerations to the purposes of the plan.
  • A material attribution of ESG considerations to the assessment of performance results.
  • Any stewardship activities undertaken by the plan.
  • If there is a separate “ESG” fund, the rationale for selection of investments in that fund.
  • If using a third party manager, the administrator should disclose that party’s ESG policies.


The Draft Guidelines should be welcome news for many plan administrators. There has been some push back from certain legal/investment pension professionals that ESG investing is not permitted as these factors are not financially relevant. However, there is a growing amount of research that suggest that considering certain ESG factors in the investment decision-making process does lead to either a greater financial reward and/or decreases the risk profile of an investment.

We are, however, mindful that there is a great deal of “greenwashing” in the ESG investing sphere. For this reason, plan administrators can decrease the legal risks of incorporating ESG factors into their investment decision-making process by having: (1) clearly articulated policies on the economic and financial rationale for incorporating certain ESG factors into the investment decision-making process; (2) retaining/hiring personnel with the required expertise and knowledge to gain economic insight from nonfinancial considerations; and (3) ensuring that all investment staff understand their overarching legal obligation to put the members’ best financial interest first when making an investment decision

Comments on the proposed Draft Guidelines are due by September 15, 2022.


[1] “CAPSA Guideline: Environmental, Social and Governance Considerations in Pension Plan Management,” Canadian Association of Pension Supervisory Authorities, June 9, 2022, p. 1. Available at Draft Guideline]