Introduction
In January 2025, many American and Canadian financial institutions . As voluntary commitments shift, the question emerges as to whether Canadian financial institutions have a legal duty to tackle climate change. Canadian pension funds offer an interesting case study. They manage in retirement savings and have a uniquely forward-looking mandate, making them both influential and vulnerable to the course of climate change.
While Canadian legal and agree that pension fund managers have a fiduciary duty to consider the financial risks posed by climate change, funds have adopted widely divergent strategies in response to climate-related financial risks: Quebec鈥檚 public pension plan manager, the, while the in 2024. So, what is the scope and extent of this fiduciary duty?
Pension fund managers have a fiduciary duty to consider climate-related financial risks
To answer this question, one must distinguish two forms of climate-related financial risk. "" denote the economic impacts that arise from the growing intensity and frequency of climate-related disruptions to the environment: failing crops, floods, and forest fires can have on all kinds of holdings. "" arise from the transition toward a low-greenhouse gas (GHG) economy: government policies aimed at limiting GHG emissions, technological advancements, and changing stakeholder sentiment can have major financial impacts on carbon-intensive holdings.
There is a broad consensus that both these forms of climate-related financial risks have a material effect on fund performance in the short-term and that these effects will continue to materialize in the long-term. They can no longer be considered 鈥榥on-financial risks.鈥� According to Professor Janis Sarra of the University of British Columbia, a founding member of the Canadian Climate Law Initiative (CCLI), to consider climate-related financial risks. This is especially true in the case of pension funds, which hold investments for the length of a Canadian worker鈥檚 career and must ensure a return on investment upon their retirement. The long-term outlook required of pension plans means that managers have a duty to ensure that short-term investments do not prejudice the fund鈥檚 long-term sustainability鈥攖hey must maintain a kind of . When they make investments, pension fund managers have a duty to carefully consider the long-term financial implications of climate change and balance those considerations against short-term profits.
The duty to consider climate risks is both process-oriented and deferential in nature
But what does it mean to consider climate-related financial risks? Do managers have implied proactive duties to undertake certain actions? Is there a legally enforceable duty to divest from carbon-intensive holdings? While there are a range of answers to these questions, our research has shown that the duty to consider climate risks is primarily process-oriented and deferential. This means that courts look to the way investment decisions are made rather than their substance. It also means that courts have (so far) proven reluctant to prescribe specific investment actions.
Given the wide breadth of the fiduciary duty, funds can adopt one or several strategies, all with their own benefits and risks. These strategies include embracing policies and processes for considering climate risks in investment decisions; funding the green transition; adopting and advocating for climate risk disclosure guidelines; engaging with investees and monitoring their actions post-investment; and divesting from carbon-intensive sectors. We will deal with them in turn.
Policies and processes are likely enough today. This could change tomorrow.
A key step managers can take to ensure they meet their duty to consider climate-related financial risks is to address them in a written statement of investment procedures and policies. In 2021, Randy Bauslaugh of McCarthy Tetrault LLP that these statements constitute prima facie evidence of good fiduciary conduct. Written statements are likely insufficient on their own, though. Rather, they establish a presumption of good consideration and help managers lay out a plan to continuously evaluate and mitigate climate-related financial risks.
According to Simon Archer of Goldblatt Partners LLP, these statements do not go far enough. Archer that the legal test for fiduciary breach is an 鈥渙pen-textured norm鈥�: its application is shaped by the facts and circumstances of each case. As climate change poses an increasingly material threat to short and long-term portfolio health, he predicts that, in response, the duty of pension fund managers will expand. Against the backdrop of this changing economic context and factual matrix, Archer concludes that the text of the law itself will not need to change鈥攔ather, the law will be applied in a way that reflects changing circumstances.
Green investments should come with corresponding efforts to reduce carbon emissions
To meet their fiduciary duties, fund managers are also . The CPPIB has acknowledged the value of this strategy insofar as it allows them to balance short- and long-term investment considerations while ensuring that their funds are drawing on the economic opportunity presented by the green energy transition. However, as Dr. Mazar Peihani of the University of British Columbia in 2020, these clean energy investments do not always come with a corresponding transition away from investment in carbon-intensive energy sources. The Intergovernmental Panel on Climate Change (IPCC) that a significant reduction of carbon emissions is necessary to avoid the worst impacts of climate change. Accordingly, green investments alone may not be sufficient to discharge the fiduciary duty to mitigate climate-related financial risk.
Climate-related risk disclosures are a strong first step that needs regulatory backing
Several funds have the disclosure guidelines of the International Task Force on Climate-Related Financial Disclosures (TCFD) and have called on investee companies to do the same. While the adoption of international disclosure standards is helpful for fund managers and the market at large to navigate climate-related risks, legal scholar Esmeralda Colombo has the foundational premises of the TCFD guidelines and of disclosure policies more generally. She argues that their effectiveness relies on the presumption that more information on climate risk will necessarily lead to a re-pricing of risky assets in efficient markets. In practice, this is not always the case.
Further, clear and consistent requirements (as opposed to voluntary guidelines) are necessary to ensure that climate-related disclosures serve their intended purpose. In Canada, these requirements are unsettled. In 2021, the Canadian Securities Administrators (CSA) proposed National Instrument (NI 51-107), which would create a clear framework for climate-related disclosure requirements. However, the CSA has not yet 鈥攁s they wait to from other jurisdictions and international and national standards boards. In December 2024, as part of this process, the Canadian Sustainability Standards Board (CSSB) the Canadian Sustainability Disclosure Standards (CSDS)鈥攁n towards eventually settling this legal uncertainty and bringing NI 51-107 into force.
As Canadians and businesses wait for climate-disclosure requirements, there remains no regulatory consensus on what climate-related risks are 鈥榤aterial.鈥� Issuers can thus report on climate risks selectively, often leading to underreporting or misreporting. by the Chartered Professional Accountants of Canada (CPA) of the S&P/TSX composite index showed that most climate-related disclosures lacked sufficient context to allow users to understand the implications of climate change for a company鈥檚 business model and financial results, while noted a recent increase in unsubstantiated or misleading ESG claims in continuous disclosures.
If, as Simon Archer , the increasing materiality of climate risks could expose fund managers to fiduciary breach liability, fund managers will need to rely on thoroughly and accurately disclosed information to meet their fiduciary duties. Further, as Professor Sarra , reporting on climate risks despite a lack of clarity on 鈥榤ateriality鈥� may actually attract liability in the form of misrepresentation claims. These challenges illustrate that the value of disclosure policies as a risk mitigation strategy is largely contingent on their expression as a set of clear and consistent requirements by securities administrators.
Post-investment engagement is a crucial strategy but has its limits
In a 2024 review of qualitative research on the subject, Clara McDonnell and Dr. Joyeeta Gupta of the University of Amsterdam found that large pension funds to hold onto shares and have ongoing influence over investees through engagement strategies. This influence can assume the form of conversations with directors and officers, shareholder activism, or even divestment from the portfolio company if engagement is unsuccessful. A of 439 institutional investors showed that 84% had conducted some form of climate-related shareholder engagement in the previous 5 years鈥攑rimarily through discussions with management (43%) and rarely through divestment (20%).
Though this widespread strategy has real value, it also has fundamental limitations. The same study found that 71% of engagements on climate issues were limited to an 鈥渁cknowledgement of the concern鈥� and that only 25% of respondents said the engagement was 鈥渟uccessful.鈥� In response to unsuccessful engagement, 40% of investors decided to take no further action. In many cases, these limitations make sense: shareholder engagement cannot substantially impact inherently carbon-intensive sectors, as these sectors cannot simply change their business models.
Divestment may be a risk in itself
The limitations inherent to the above strategies necessarily bring us to the question of divestment. In a , Randy Bauslaugh argued that given the wide breadth of their fiduciary duty, managers would not be held in breach for a failure to divest from carbon-intensive assets so long as other steps to address climate risk were taken. In the same debate, Simon Archer disagreed (in part), arguing that changes in the materiality of climate risks and improvements in attribution science may very well lead to the establishment of a duty to divest.
The question of divestment poses a serious challenge to pension fund managers because, while short-term investments cannot prejudice long-term investments, the inverse is also true. Dr. Mazar Peihani that pension plans are heavily exposed to carbon-intensive sectors partially because these sectors are so dominant in the Canadian economy. Indeed, . In light of this dominance, funds like the that divestment constitutes an unjustifiably risky move which would punish major Canadian industries and forsake investments that would otherwise provide risk-adjusted, short-term returns (though of 7,000 companies over 40 years found that fossil fuel divestment does not systematically hurt financial performance). This apprehension is reinforced by that divestment would not be effective in practice because shares sold by a divestor would immediately be bought by actors untroubled by the negative externalities of holding carbon-intensive assets.
Ultimately, arguments about the short-term risks of divestment must be contextualized and weighed against long-term interests. In his 2020 paper, Professor Maziar Peihani of the University of British Columbia鈥檚 Allard School of Law that pension funds currently 鈥渕easure themselves against indices like the TSX 60, S&P 500, and MSCI World,鈥� which are respectively consistent with 4.6掳C, 4.0掳C, and 3.7掳C warming scenarios. Economists have projected that the financial impacts of such warming scenarios would be dire. A diligent pension fiduciary should employ intergenerational impartiality and carefully consider whether they should measure their short-term returns against these indices. In making informed analyses that consider these realities, funds may come to see that prudent divestment plays a role in managing climate-related financial risks (as more than have already acknowledged鈥攊ncluding the ).
Conclusion
Despite shifting interests, it may be prudent for Canadian and American financial institutions to keep an eye on the evolution of their fiduciary duty to consider climate-related financial risk. As recognized and affirmed by the Supreme Court of Canada in 2021 in the , climate change represents 鈥渁 threat of the highest order to the country, and indeed to the world.鈥� The existential threat of climate change remains tangible to people and pension plans. Fund managers, entrusted with providing generations of Canadians with secure retirement benefits, may also need to look beyond legal and financial considerations to adopt strategies that reflect our collective responsibility toward the future.