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Do Net-Zero Commitments belong in Pension Plans?

By André Choquet, FCIA, FSA, CIM, Director, Millani and Milla Craig, BBA, SIPC, President and CEO, Millani

"In today's world of extreme weather events, the new normal for yearly insured catastrophic losses in Canada has become $2 billion, most of it due to water-related damage. Compare this to the period between 1983 and 2008, when Canadian insurers averaged only $422 million a year in severe weather-related losses." (1)

Craig Stewart, Vice-President, Federal Affairs, Insurance Bureau of Canada (IBC).

Once in a 100-year extreme weather-related events are occurring more frequently. They have a significant impact on the organizations we invest in, and on our economy. Net zero commitments by asset owners and asset managers will not change the course of extreme weather patterns in the short-term. They are partly the result of decades of accumulated Greenhouse Gas (GHG) emissions in the atmosphere. That said, Net zero commitments could positively impact the future.    

Should Canada’s 17,000 pension plans, with $2 trillion in assets (5), have an obligation to set Net zero targets? Do they have a fiduciary duty to do so? 

Net zero refers to cutting the GHG emissions of a portfolio to as close to zero as possible, with any remaining emissions re-absorbed from the atmosphere by oceans and forests. (2)  The GHG emissions of an investment portfolio refers to the Scope 1 and Scope 2(3) emissions associated with its investments. For example, a pension plan that owns 1% of company X would record 1% of company X’s Scope 1 and Scope 2 emissions. 

In Millani’s June 2022 Semi-Annual ESG Sentiment Study of Canadian Institutional Investors (4) with 37 Canadian asset owners and asset managers, it was found that:

  1.  32% have made Net zero commitments;
  2.  22% have established decarbonization targets, and
  3.  19% have become or were in the process of joining investor coalitions such as the Net Zero Asset Owner Alliance.

In summary, 57% are meaningfully addressing the GHG emissions within their portfolio.

Why would a Canadian pension plan want to adopt a Net zero pledge and interim decarbonization targets?

Traditionally, pension plans have been managed under a return maximization/risk minimization framework.   Definitions of risks varied from one plan to another, but they would typically be linked to volatility of funded status, contributions, or other plan-specific metrics. These are affected by plan design, plan maturity, demographics, policies, and financial externalities such as interest rates, inflation, and market performance. In a sense, pension plans were viewed as a singular entity to be protected against external threats to meet their long-term obligations to beneficiaries.

Collectively, pension plans are providers of capital that fuel the economy, which in turn impacts each pension plan within it. Pension plans can be inwardly focused on hedging their risks and maximizing return, but they can also be outwardly focused on a sustainable future for their beneficiaries. This latter goal can be reached by collaborating with others in driving the economy towards Net zero and limiting the impacts of global warming.  

What about plan trustees’ fiduciary duties?

When discussing fiduciary duties, the following legal concepts are often cited:

  1. the Income Tax Regulations state that “the primary purpose of a pension plan is to provide periodic payments to individuals after retirement and until death in respect of their service as employees.”  
  2. Canadian provincial pension standards legislations include a prudent person rule that applies to the investment of pension assets. The prudent person rule is typically captured in the care, skill and diligence required of a pension plan administrator, for example in section 22 of the Ontario Pension Benefits Act.

Are Net zero commitments and interim decarbonization targets at odds with these legal concepts? Legal opinions imply that they are not. In May 2021, McCarthy Tetrault published Climate Change: Legal Implications for Canadian Pension Plan Fiduciaries and Policy-Makers (5). Their opinion is unequivocal: “[…] plan fiduciaries (and their delegates) are ultimately responsible for any failure to properly take climate change risks and opportunities into account”.  

The issue of decarbonization and Net zero pledges are indirectly addressed in their legal opinion: “[…] the primary financial purpose does not preclude other secondary considerations such as the environment or ethical considerations in very specific circumstances”.  The legal opinion concludes that the consensus evidence for climate change, and the sheer threat of it, demands fiduciary attention. It also speaks to the need for a long-term outlook: “Pension plan fiduciaries must recognize and balance current and future intergenerational risk and return considerations over periods that potentially exceed human lifetimes.”

Pension plans with an inward and outward focus?

As mentioned above, pension plans can be inwardly focused on hedging their risks and maximizing return, but some Canadian plan trustees have started taking an outward look, with a collective focus on people and the planet (see window).  Such plans may have followed a rationale like this one:

  • Our pension plan has long-term obligations extending well until 2050;
  • Climate science expects that a world transitioning to 1.5C degree will have less negative physical and market impacts than a 3C or 4C degree world by 2050;
  • The sixth assessment report of the Intergovernmental Panel on Climate Change (IPCC) highlights that a 1.5C degree world can only be achieved with Net zero emissions, deep decarbonization and systemic transformation; (6)
  • Pension plan investments can become significant actors in this transformation and contribute to a more stable climate;
  • It is therefore our fiduciary duty to make a Net zero pledge and help ensure the global average temperature does not rise above 2C degrees. 

This dual inward and outward focus is also getting traction abroad.

In 2020, the UN Principles for Responsible Investment (UNPRI), in partnership with the UNEP Finance Initiative and the UN Global Compact published In search of sustainability - Private Retirement Systems In Australia, The United Kingdom, and The United States.(7) The UNPRI defines sustainability as “the ability of plan Boards and managers to be responsible investors, active stewards, and allocators of capital to economic activities with desirable social and environmental outcomes”.

The report proposes four preliminary interventions for policymakers/regulators and three for industry bodies (including the UNPRI) to ensure the global private retirement sector delivers desirable outcomes to beneficiaries. One of regulators’ interventions is to require retirement plans to incorporate sustainability issues in investment strategies and decisions, or at least remove barriers.

The UK has recently introduced stronger and more supportive regulation on responsible investment for the retirement industry.  As of 1 October 2022, trustees of pension schemes with more than £1bn in assets must calculate and report a metric on the alignment of the scheme’s assets with the climate change goal of limiting the increase in the global average temperature to 1.5C degrees.(8)  Thérèse Coffey, Secretary of State for Health and Social Care and Deputy Prime Minister (UK) said: “It will not be enough for schemes to just passively report on and tick-box their way through climate change risks and to Net zero”.(9) Australia, the USA and Canada have yet to enact similar regulations.   

Pension plans come in all shapes and sizes. Half of Canada’s registered pension plans have fewer than 10 members (5).  And when it comes to pledges and decarbonization targets, there is not a “one-size fits all” approach.  That being said, a strong first step is to set the appropriate framework to integrate ESG factors and climate-related risks into pension plan management.  This includes a governance framework, development of a responsible investing policy and implementation plan, assessing external investment managers and disclosure. Only after the foundation has been built should trustees start considering Net zero ambitions and targets, in order to set targets that make sense for them.

The winds of change are clear. Trustees will need to set and manage Net zero plans. The choice lies in waiting for regulations and to act in a reactive manner or begin the journey now to set up an ESG framework, to proactively mitigate the risks and to capture the opportunities related to ESG and climate change. Trustees who choose the latter will be better equipped to respond to new regulations when they come. 

In the end, are the purposes of a retirement plan not to provide lifetime pension to beneficiaries and to contribute to a better environment for beneficiaries to retire into?

Examples of concrete actions by some large Canadian pension plans:

  • CDPQ (392$B AUM) pledges to:
    • hold $54 billion in green assets by 2025 to actively contribute to a more sustainable economy;
    • achieve a 60% reduction in the carbon intensity of the total portfolio by 2030;
    • create a $10-billion transition envelope to decarbonize the main industrial carbon-emitting sectors, and
    • completely exit from oil production by the end of 2022.

CDPQ announces its new climate strategy | CDPQ

  •  University Pension Plan(11$B AUM)
    • The materiality of climate change for UPP is twofold: UPP’s ability to realize adequate investment returns and provide retirement benefits depends on a stable climate; and UPP’s investments affect the stability of the climate.
    • UPP will
      • transition its investment portfolio to net zero GHG emissions by 2040, or sooner;
      • emphasize climate resiliency and GHG emission reductions in the real economy;
      • invest only in new mandates and assets that align with the transition to a net zero world;
      • reduce its portfolio’s carbon footprint by 16.5% by 2025 and 60% by 2030 from a 2021 baseline (as measured by tonnes CO2-eq / $M invested);
      • set a target for new investments in climate solutions, and 
      • selectively exclude investments in companies that present significant climate risk.

Climate action plan – My UPP


  1. Severe Weather in 2021 Caused $2.1 Billion in Insured Damage ( 
  2. Net Zero Coalition | United Nations
  3. The GHG Protocol has defined three scopes of emissions: 
    1. Scope 1 emissions are direct emissions from company-owned and controlled resources. In other words, emissions released to the atmosphere as a direct result of a set of activities, at a firm level. 
    2. Scope 2 emissions are indirect emissions from the generation of purchased energy from a utility provider. In other words, all GHG emissions released in the atmosphere, from the consumption of purchased electricity, steam, heat, and cooling. 
    3. Scope 3 emissions are a consequence of the activities of the company but occur from sources not owned or controlled by the company. Some examples of Scope 3 activities are extraction and production of purchased materials, transportation of purchased fuels and use of sold products and services, financing, investments, and insurance of emission intensive activity.
  4. Millani June 2022 ESG Sentiment Study of Canadian Institutional Investors
  5. Canada Climate Law Initiative Opinion - FINAL(41726929.1).pdf (
  6. 6th assessment report of the Intergovernmental Panel on Climate Change (IPCC) WG1 
  7. In search of sustainability - Private Retirement Systems In Australia, The United Kingdom, and The United States (
  8. Statutory guidance: Governance and reporting of climate change risk: guidance for trustees of occupational schemes - GOV.UK (
  9. Pensions, People, Planet: Saving for the future to save the future - GOV.UK (

André Choquet, Director, Millani

André is a senior investment professional (CIM) and actuary (FCIA, FSA) known for being a trusted partner to institutional fund clients.  He has 30 years of experience consulting to pension plans and has leveraged his deep technical pension finance expertise to integrate ESG factors and managing climate-related risks in the investment process..

André pioneered the Outsourced Chief Investment Officer (OCIO) practice at a major global consulting firm and has developed investment strategies for private and public sector institutional funds. He has experience integrating ESG factors and climate-related risks in the investment process of pension plans and endowment funds. He was the lead client portfolio manager for a university endowment, advising them on the implementation of TCFD recommendations, leading a search for low carbon managers in Canadian and International equity and producing quarterly investment committee reports on GHG emissions and ESG risks. 

André holds a BSc. in Actuarial Mathematics from Concordia University (Montreal). He is Chair of the Climate Change & Sustainability Committee of the Canadian Institute of Actuaries (CIA) and was also recently awarded the 2022 President’s Award of the CIA for his dedication in progressing the integration of climate-related risks and opportunities in the practice of the Institute's 6,000 members.

Milla Craig

Milla Craig, President and CEO, Millani

Millani is an independent advisory firm helping investors integrate ESG issues into their investment decisions, companies communicate their material ESG issues to investors, boards of directors understand their ESG responsibilities and capital markets participants create their proprietary ESG strategies.

Throughout her career, Milla has worked very closely with senior management and investor relations teams of Canadian publicly-listed companies, as well as financial analysts and investment managers of several Canadian pension and investment funds. Prior to founding Millani in 2008, she worked for more than 15 years in the institutional equity markets for major Canadian financial institutions such as RBC Dominion Securities and Scotia Capital, where she was consistently ranked as a top-tier salesperson. Later, as Deloitte's Leader – Sustainability, for the Quebec Region, she was actively involved in the development of sustainability strategy, management, stakeholder engagement, and reporting for a variety of Canadian organizations.

Milla is a board member of the Responsible Investment Association (RIA) and is the Chair of its Nomination Committee. She is Co-Chair of the Steering Committee of the Finance and Sustainability Initiative of Finance Montréal. Milla is recipient of the 2017 Clean16 Award, and in 2020 was awarded Montreal’s Y Foundation Women of Distinction Award, in the Business & Entrepreneurship category.