In case you missed it, a recent legal opinion by pension lawyer Randy Bauslaugh suggested plan sponsors might be personally liable for failing to consider risks posed by climate change in the institutional investment decision-making process.
Bauslaugh’s paper connected the dots between the current evidence on the materiality and urgency of the financial implications of climate change and the recent reflection of this evidence in Canada’s courtrooms. He concluded that there’s the potential for plan sponsors and their agents to be held personally liable for “economic, reputational or organizational loss” if they fail to consider the potential financial impact of climate change when making investment decisions.
“In view of widely accepted evidence of climate change and its financial implications, including evidence recently accepted by the Supreme Court of Canada, pension fund fiduciaries ignore, at their peril, the financial risks climate change poses to the investments they have a duty to manage.”
Ignoring financial risks can have consequences. When Bauslaugh wrote “ignore at their peril,” it’s code for “this could cost you.”
Canadian pension plans have only incorporated climate changes risks into investment decisions voluntarily, if at all. Although legislation compelling plan fiduciaries to consider climate change has yet to be put in place, the potential consequences of not doing so may motivate them. In an email, Bauslaugh explained there’s a growing recognition of the level of financial risk from this urgent problem.
“Nothing has changed in terms of fiduciary duty — what has changed is the recognition that climate change poses material financial risks and opportunities that fiduciaries responsible for investment management decisions just shouldn’t ignore.”
The paper laid out a list of possible consequences, including fines levied under pension standards legislation and personal financial responsibility for investment underperformance or loss resulting from failure to properly manage climate change risks including compensation or damages.
So who, exactly, might be in imperiled according to Bauslaugh’s opinion? The types of external providers listed in the paper include actuaries, accountants, pension plan consultants, investment managers, mutual fund companies, trust companies, life insurance companies, third-party administrators and lawyers.
What’s the big takeaway? Most of the investment business is on the list.
This includes the almost 17,000 Canadian registered pension plan administrators — trustees and the plan staff members of defined contribution and hybrid plans. In his paper, Bauslaugh noted that the vast majority of RPPs are too small to have in-house climate change expertise. This requires small plans to rely on third-party service providers which effectively results in plan administrators sharing the fiduciary duty with their expert agents.
There’s another category of investments that might be impacted by Bauslaugh’s legal opinion. He indicated that companies offering group registered retirement savings plans to their employees could potentially be subject to the same fiduciary standard as RPPs.
Who’s relied on, and for what, would ultimately determine the level of fiduciary responsibility. This would vary from plan to plan.
Insurers are also moving along with the times. Directors and officers insurance has traditionally excluded coverage against property damage. However, a recent blog on climate change litigation by a large insurance underwriter said that, in addition to property damage, exclusions on bodily injury, mental anguish and death could come into play.
It’s a truism that when it comes to climate change, there’s no place to hide. Pension plans, take note.