Globally, many pension funds are divesting from carbon and fossil fuels, while others are staying the course and focusing on financial value and their fiduciary duties
Simon Archer, partner at Goldblatt Partners LLP and co-director of Osgoode Hall Law School’s Centre for Comparative Research in Law and Political Economy:
Political posturing aside, no one seriously disputes the science behind climate change and the threat it poses to societies, economies and, of course, the value of carbon assets held by institutional investors. The key question today is how to get “there” from “here.”
When the topic was discussed four years ago, the University of Toronto and the University of British Columbia each decided not to divest from carbon assets, choosing instead to take an engagement approach. At the same time, Swedish giant AP4 and others pursued divestment.
Today, UBC has committed to divestment and a new campaign is underway at U of T. Around the globe, more than 1,100 institutions have committed to some degree of carbon asset divestment, including university endowments, philanthropic foundations and, notably, pension funds from Australia, France, Denmark, Germany, Norway, the Netherlands, Sweden, the U.K. and the U.S.
Now, as then, there are competing definitions of the destination (what constitutes divestment) and more than one route to get there. The good news is the advisory community has become considerably more engaged in climate change, and there’s a rapid proliferation of measurement tools and methodologies of implementation. The advice is available.
The question is sometimes asked, “But does a fund fiduciary have a legal obligation to divest?” The legal test hasn’t changed. Plan sponsors must take factors that affect risk and return into account in making the decision, but this legal test is an “open-textured norm.” It provides a framework into which a close analysis must be framed. And as such, it won’t be developments in fiduciary law that drives a decision to engage or divest.
It is, instead, the increasing evidence of the material threats that climate change holds for portfolios and wider economic and social welfare, and the rapid improvement in the tools for conducting that analysis.
Accordingly, the better question for legal and investment counsel is, “Can we fully or partially divest from carbon assets and, if so, how and how fast?”
Randy Bauslaugh, leader of the national pensions, benefits and executive compensation practice at McCarthy Tétrault LLP:
Climate change is an urgent and pressing economic issue. It requires pension fund fiduciaries to consider their investments in fossil fuels. But that doesn’t mean they have an obligation to divest; it means they should consider how best to mitigate financial risk or enhance financial value. A one-track preoccupation with divestment could be a violation of fiduciary duty.
Like any investment decision based on the usual financial metrics, many responses are available. In addition to divestment, fiduciaries or plan staff could dialogue with investee companies or managers, exercise proxy-voting rights or, in extreme cases, litigate to recover damages resulting from lost value. Sure, divestment has a place in the spectrum of responses, but it’s a one-time gesture that puts fiduciaries on the sidelines with their fingers crossed and no remaining influence.
In early March, three of the world’s largest pension funds — Japan’s Government Pension Investment Fund, the California State Teachers’ Retirement System and the U.K.’s Universities Superannuation Scheme — indicated they’re forming a partnership for sustainable investing to pressure companies and asset managers. They’re not divesting. They’re taking measured action on climate change consistent with their fiduciary duty to preserve or enhance value.
No doubt climate change is also an urgent ethical issue that compromises basic human rights to life, liberty and personal security. It exacerbates differences in standards of living in developing and developed countries. It destroys other life forms on the planet. It imposes some of the most significant physical, social, technological and health-care challenges ever. But isn’t engagement, rather than disengagement, more likely to lead to meaningful change?
The Canada Pension Plan Investment Board believes in “climate-aware investing as part of [its] mandate of maximizing returns without undue risk of loss and acting in the best interests of our contributors and beneficiaries.” That’s much more consistent with fiduciary duty than a myopic preoccupation with divestment.