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ESG: Not If, but How? - A Practical Guide for small(er) Capital Accumulation Plans

By Alexandra Barbu, AVP, GRS Investment Solutions, Sun Life 

You may think your organization is too small to put an effective sustainable investing strategy in place for your Capital Accumulation Plan (CAP), may be just starting out, or looking to re-evaluate your strategy. The pandemic and emerging geopolitical risks have underscored the intersections of health and well-being, good corporate governance, and the environment. With the release of new fiduciary draft ESG guidelines and increased member demand for sustainable investing options, the importance of your sustainable investing strategy has never been clearer.

What do you have to do? – New CAPSA and ACPM guidance

In June, CAPSA released a draft guideline on ESG considerations in pension plan management. Expected to be finalized by the end of the year, the guideline currently states that Plan Administrators: 

  1. “…should consider ESG characteristics that may have material relevance to the financial risk-return profile of the pension fund’s investments.”
  2. “…as part of their standard of care, need to assess whether plan governance, risk management and investment decision-making practices are sufficient to identify and respond to material ESG information...”
  3. “…should disclose in their SIPP, information about the pension fund’s investment policies in relation to ESG considerations...”

In addition, ACPM released its ESG Fiduciary Considerations paper on June 1. It suggests that ESG should be viewed as a tool to both mitigate risk, and/or enhance return. It also provided some key takeaways for CAPs:

  • “The integration of ESG is part of the sub-criteria that should be considered in the selection and evaluation of the funds offered…”
  • “As fiduciaries, plan sponsors must be looking for funds with Value and not Values.”
  • “Member interest in ESG investing, where there are also strong financial returns, is high.”
  • “Plan administrators need to inform members of how the funds available to them integrate ESG factors, in the same way members have access to information of fund objectives, asset class, performance, fees, style, etc.”

Both CAPSA and ACPM generally acknowledge:

  • When it comes to ESG vs. fiduciary duty of plan administrators, the primary purpose of a pension plan is to provide lifetime retirement income. When administering and investing pension plan assets, plan administrators must act in accordance with their fiduciary duty in fulfilling this purpose. If ESG factors impact the long-term financial returns of investments, they should be considered.
  • The structure of a plan - including governance, whether investments are direct or via third party funds, plan size, etc- affects how ESG decisions are considered.

What are plan members asking?

Sun Life recently conducted two surveys to understand member attitudes towards ESG and investing in general.

In spring 2021, we surveyed over 400 Canadians. We primed respondents that we would ask them about sustainable investing.  Key findings include:

  • About 80% overall – and 88% of millennials- care about a strong return when investing sustainably; Notably, this aligns with fiduciary duty of CAP administrators described above.
  • 78% are interested in seeing more sustainable investments offered;
  • 71% are interested in learning more about sustainable investing from their provider;
  • 55% are likely to change their current contributions to sustainable investments;
  • 38% are willing to increase their current contribution level, if put towards sustainable investments;
  • 32% didn’t consider ESG factors because they didn’t know they were offered;
  • The following were top considerations in sustainable investing: Human rights (42%), strength of management (39%), protecting environment (39%), fraud/corruption (38%).

Earlier in 2022, Sun Life conducted a second study on what is most important to Canadians when they invest. In this case, we did not prime respondents to discuss ESG. The idea of investing to achieve positive impact is out of context for most people.

People were more skeptical if financial institutions offered investments perceived as new, unfamiliar, or trendy. Respondents expressed their wariness and hesitance to make such investments. To be credible, investment solutions claiming to achieve positive outcomes would—at a minimum—need to illustrate tangible real-world results in plain language.

Both surveys suggest that CAP administrators, leaning on the support of their providers, have an opportunity to educate plan members on a variety of key ESG issues. The solution can’t simply lie in the launch of new investment options or offering “ESG funds”. If ESG factors affect the risk and/or return profile of an investment, they need to be considered in all traditional funds.

Sustainable Investing approaches

A few industry bodies aim to provide standardized sustainable investing fund definitions and classifications1.

As the ACPM paper clarifies, there are three broad sustainable investing approaches:

(1) ESG Integration: Embedding ESG data with traditional financial analysis of a company. This is the most common sustainable investing approach in Canada. ESG Integration is focused on Value (i.e., considered in investment process to manage risks and/or identify investment opportunities)

The majority of CAPs offer ESG integration funds to their members today. With this approach, funds integrate ESG in the investment process and managers engage with the companies they invest in. In this category, the manager can ultimately divest from a company if their engagement activities are not successful.

(2) Divestment: Exclude specific companies, industries or sectors based on Values, ethical considerations, or negative ESG characteristics. Examples include: Socially Responsible Investment (SRI) or Fossil Fuel Free funds. This strategy can only be employed by pension plan fiduciaries where the Values also satisfy the Value test.

Funds that have hard exclusions of entire sectors may not meet fiduciary obligations of plan administrators or satisfy the majority of their members’ needs. By screening out entire sectors, investable universes and opportunity sets are limited.

(3) Sustainability Focused: Funds focus in specific areas, such as renewable energy, waste and water management, sustainable forestry and agriculture. This category of investments is relatively new in Canada. Again, this strategy must also satisfy the Value test.

This newer category includes funds which typically have dual investment objectives of outperforming benchmarks and achieving certain ESG goals.

The standardization of approaches is welcomed and helps to avoid greenwashing, or in the broader context of ESG, misleading claims about ESG practices or products.

CAP members should have access to factual ESG information, so that they can make informed decisions when deciding among the options in their plans. In the same way that information on a fund’s investment objective, performance, style and top holdings is available to members, information on how the fund integrates ESG helps members make informed investment decisions.

Establish beliefs and update the CAP’s investment policy

Best practice suggests that a CAP formalizes its ESG beliefs and incorporates them in the SIP&P. The SIP&P can define how ESG considerations may support overall plan objectives and constraints. A broad statement, such as: “The investment options in our plan consider financially-material ESG factors within its investment processes”, may be appropriate.  In addition, documenting which sustainable investing approach is appropriate for the CAP may be prudent as SIP&Ps evolve.

Manager Selection & Monitoring

Modern investment governance should include evaluations of investment manager engagement on ESG issues. This should include a review of the firm’s ESG policies (such as resources, reporting, diversity and inclusion), investment process and active ownership and proxy voting policies. If CAPs do not collect information directly from managers, their providers collect this information as part of their manager research efforts. It is important to establish a baseline and monitor progress over time as part of ongoing due diligence.

Checklist of Next Steps

  • Do you have a corporate sustainability strategy? What commitments do you make and how will your workplace savings plan align with them?
  • Is it possible that the CAP is ahead of the organization’s sustainability strategy? If so, it should document why ESG is an integral part of the CAP’s investment governance.
  • Review the three approaches to sustainable investing and decide which one(s) make sense for your plan. Adopt a formal policy on your approach and document your selection of investment options. 
  • Ensure your investment governance includes a thorough ESG evaluation of the investment options in your plan, with the support of your providers.
  • Inform members of how the employer addresses ESG issues in selecting and monitoring funds (e.g. through campaigns) and how the funds available integrate ESG factors (fund fact sheets).

A well-articulated sustainable investing strategy will help CAPs achieve a number of key goals - alignment with an organization’s corporate sustainability strategy, meeting new fiduciary guidelines, attract and retain talent and ensuring plan members are aware of how the investment options available to them consider ESG factors.


1 Examples of Fund Classification guidelines

Alexandra Barbu

Alexandra Barbu, Assistant Vice-President, Investment Solutions, Group Retirement Services, Sun Life

With over 18 years of pension and investment consulting experience, Alexandra leads the team of investment professionals who oversee Sun Life’s Group Retirement Services’ investment governance, research and sustainable investing strategy.

She is responsible for overseeing relationships with investment managers and bringing investment products to the market. Overseeing the execution of pension committee investment and education, investment fund selection and on-going monitoring of investment managers and funds are also central to her role.

Alexandra and her team participated in the ACPM and CAPSA ESG groups who are providing ESG guidance to fiduciaries this year. This includes contributing to the recently issued ACPM paper on ‘Fiduciary Considerations Relating to Environmental, Social and Governance Issues for Canadian Retirement Arrangements’. Her team represents group retirement at many of Sun Life’s broader sustainability strategy forums. As the largest CAP record-keeper in Canada, Sun Life and the Group Retirement Services Investments team which Alexandra leads provide valuable ESG data and insights both from a plan sponsor and plan member perspective.