With the increased focus on integrating environmental, social and governance factors into pension plans, a new approach by BlackRock Inc. could have a significant impact on many Canadian defined contribution pension plans, group registered retirement savings plans and other types of workplace capital accumulation plans.

The money manager recently announced it will be adopting an ESG approach to its Canada LifePath index funds. In the late second half of 2022, BlackRock will begin to transition the equity components of its target-date funds to ESG-optimized equity indices, replacing the equity index funds it currently mirrors with equity funds that track indices designed to maximize exposure to positive ESG factors.

Read: Just 1% of institutional investors remain ESG non-adopters: survey

For example, with respect to its U.S. equities asset class, BlackRock will now mirror the investments of the Morgan Stanley Capital International USA ESG extended focus index instead of the S&P 500 index.

For plan sponsors, the first fundamental point to consider when selecting funds is to act in the best interest of plan members. Pension benefits legislation is clear about this fiduciary obligation — there are no exceptions. The second fundamental point is this fiduciary obligation doesn’t mean it’s inappropriate to consider including ESG factors. In fact, it may be required to make prudent investment decisions.

Well-timed commentary from the Canadian Association of Pension Supervisory Authorities supports these fundamental points. Last month, the CAPSA released a draft guideline regarding the integration of ESG factors into investment decisions for registered pension plans.

Read: CAPSA seeking feedback on risk management guidelines

The CAPSA made several very helpful points in its draft guideline, including:

  • There’s potential for ESG factors to provide valuable insight into investment risks and opportunities. It’s the plan administrator’s responsibility as a fiduciary to act prudently to identify all risks and opportunities that may impact the plan, including ESG factors.
  • Plan administrators may determine it’s consistent with their fiduciary duty to use ethical or impact investing considerations, as a deciding factor between otherwise equivalent investment options — that is, options that provide equivalent expected risk-return results.

The Association of Canadian Pension Management recently provided guidance in a white paper discussing how pension plans can incorporate ESG factors into their investment processes.

“When weighing alternative investments, as opposed to setting an investment policy with absolute bars, ESG factors can probably be safely relied upon as a ‘tie breaker’ when deciding between otherwise equally financially prudent investments,” it said.

Read: Pension plan sponsors uncertain about balancing ESG factors, fiduciary responsibilities: ACPM

“Except where the trustees reach a well-founded, good faith conclusion that a particular class of investment is or isn’t in the long-term best financial interest of the beneficiaries, any preference in favour of, or absolute refusal to consider, such investments based on values is potentially a breach of trust or violation of the plan administrator’s fiduciary duties.”

Offering ESG-focused funds can be consistent with the obligation to select funds in the best interests of plan members, even if the switch to ESG funds is unilaterally imposed by an existing fund manager, as is the case with the BlackRock ESG change.

BlackRock’s new approach may motivate employers to undertake reviews of their entire fund lineup. As well, prudent plan administrators should be conducting deep-dive reviews of all funds on a periodic basis.

Read: U.S. DC pension plan sponsors seeking clarity on ESG guidelines, increasing focus on financial wellness: survey