Climate change and fiduciary duties: What should pension trustees know? SHARE Webinar September 15, 2015

Transcription

1 Climate change and fiduciary duties: What should pension trustees know? SHARE Webinar September 15, 2015

2 Agenda Introduction Peter Chapman, Executive Director, SHARE Climate Change and the Fiduciary Duties of Pension Fund Trustees in Canada Murray Gold, Managing Director, Koskie Minsky LLP Questions and Answers

3 Partners Shareholder Association for Research and Education (SHARE) Koskie Minsky LLP West Coast Environmental Law

4 Why we commissioned this report Climate change a defining economic issue of our time Trustees have a duty to invest prudently The time horizon, scale and economic complexity of climate change presents challenges for pension trustees Trustees benefit from a clearer understanding of the interaction between climate change and fiduciary duties

5 How are investors responding to climate change? Measuring and reducing carbon footprint (Montreal Pledge, Portfolio Decarbonization Coalition) Investing in the transition to a low carbon economy (clean tech, green bonds, renewables, public transportation) Engaging companies to support 2 degree compliant business models (Shell, BP and Statoil proposal support - 98%) Encouraging public policies that aid investors (G7 letter - $12 trillion; Alberta Premier letter - $4.6 trillion)

6 For more information contact: Peter Chapman, Executive Director Telephone:

7 CLIMATE CHANGE AND THE FUTURE OBLIGATIONS OF PENSION FUND TRUSTEES IN CANADA PRESENTED BY MURRAY GOLD, MANAGING PARTNER ADRIAN SCOTCHMER, ASSOCIATE September 15, 2015

8 OVERVIEW PART I THE SCIENCE PART II DUTY OF PRUDENCE PART III DUTY OF LOYALTY PART IV COWAN V. SCARGILL PART V THE LIMITS OF COWAN and SCARGILL PART VI MERCER Report, The Physical Risk of Destroyed Assets, Regulatory Risk of Stranded Assets PART VII PUBLIC POLICY INTERFACE PART VIII CONCLUSION 2

9 PART I THE SCIENCE International panel on climate changes (IPCC Consensus): Human induced greenhouse gas emissions are extremely likely to have been the dominant cause of the observed warming since the Mid-20 th Century. Continued emission of greenhouse gases (GHGs) increases the likelihood of sever, pervasive and irreversible impacts for people and ecosystems: Surface temperature on the planet is projected to rise over the 21 st Century under all assessed emission scenarios. An emerging international consensus (G7, June 20, 2015) that the increase in global average temperatures should be held below 2C; 3

10 PART I THE SCIENCE, cont d. Failure to maintain global warming within the 2C target carries severe threats to human societies, with much amplified risks of severe climate events, including heat waves, flooding, drought, fire, with consequential loss of life and climate migration. 4

11 PART II DUTY OF PRUDENCE Exercise the care, diligence and skill that a person of ordinary prudence would exercise when dealing with the property of another person ; Use all relevant knowledge and skill that the administrator possesses or ought to possess and seek specialized advice where relevant; Investments to be made in a diversified portfolio, without undue risk of loss, and with a view to the plan s liabilities. 5

12 PART III DUTY OF LOYALTY Duty of loyalty is the central obligation of a pension fiduciary; distinguishes fiduciaries from non-fiduciaries; Duty of loyalty focuses on a plan s beneficiaries to the exclusion of other interests; Duty of loyalty requires impartiality between current and future beneficiary interests; Duty of loyalty requires consideration of an investment strategy in the context of long-term liabilities; timeframe for investment strategy corresponds to timeframe for global climate change. 6

13 PART IV COWAN V. SCARGILL Dispute between National Coal Board and National Union of Mineworkers Trustees over the investment policy of the National Coal Board pension fund; NUM Trustees sought withdrawal of investments competing with coal; NUM Trustees position rejected on the basis of 6 guiding principles: 1. Beneficiaries interests are paramount; 2. Personal views are irrelevant; 3. Non-financial benefits may sometimes outweigh financial benefits; 4. Prudent Person Standard applies; 5. Diversification is important; and 6. Pension trusts are governed by ordinary trust law principles. 7

14 PART V THE LIMITS OF COWAN and SCARGILL Since Cowan, broad recognition of a greater range factors relevant to investment decision-making; Renewed focus on the duration of plan liabilities, and on investment strategies that correspond to liability duration; Recognition that investment returns flow largely from overall market performance, and only secondarily from outperformance strategies; Emerging rejection of the requirement that Trustees act dishonorably ; Emerging recognition of a public fiduciary responsibility, especially for very large pension fiduciaries. 8

15 PART VI MERCER REPORT, The Physical Risk of Destroyed Assets, Regulatory Risk of Stranded Assets Pension Fund Investment Decision-Making Climate change denial is not an option; All factors relevant to risk and return must be considered, including attention to systemic risk; Undue risk of loss to be avoided; Investments to be considered in a time frame commensurate with the plan s liabilities. 9

16 PART VI MERCER REPORT, The Physical Risk of Destroyed Assets, Regulatory Risk of Stranded Assets, cont d. Climate Change Risks: Substantial risks from climate change technology, physical, resource availability and regulatory impacts; Risks to portfolios negatively impacted by 3-4 degree Celsius warming; Physical risks affect particularly sensitive holdings in real estate, emerging market equities, and agricultural subsectors; Regulatory risks affect particularly sensitive holdings in fossil fuel subsector; Increasing likelihood of climate change regulation. 10

17 PART VII PUBLIC POLICY INTERFACE Generally, pension fund fiduciaries have engaged in a wide range of public policy debates; Many public policy interfaces concern pension regulation, pension funding, as well as the regulation of securities and financial markets; Pension funds have a key interest in long-term sustainable investing, which includes predictability in regard to climate conditions; Pension fiduciaries are specially situated to draw public policy makers attention to the repercussions of climate disruption; 11

18 PART VII PUBLIC POLICY INTERFACE, cont d. Fiduciary responsibility suggests that pension fiduciaries, especially of larger pension funds, have an obligation to protect their funds to effective climate change advocacy. 12

19 PART VIII CONCLUSION Climate change denial is not an option; Climate change risks must be taken into account at the investment decision-making level and at the advocacy level; Pension fiduciaries may protect beneficiaries longterm interests by acting as public policy advocates for climate change regulation. 13