Canadian pension funds may be forgiven for wondering is ESG dead? After all, 70+ leading global investment managers including BlackRock and Wellington recently exited global climate related initiatives such as Climate Action 100+ and Net Zero Asset Manager Initiative, and all major US and Canadian banks exited the Net Zero Banking Alliance (NZBA). Many of the exits occurred before the Trump inauguration and the list continues to grow. Suffice it to say that during an era of increased polarization the exits were likely motivated by self-preservation, to mitigate liability, and to avoid losing US clients. 

However, it remains vital for pension funds, who sit at the top of the investment chain, to exercise their voice and communicate their expectations regarding SI and ESG reporting to their fund managers. Asset owners should be aware of measures such as climate value at risk that quantify the exposure of the portfolio. But SI is not just about risk. Global megatrends like energy transition, decarbonization and digitalization offer significant and compelling investment opportunities well aligned with pensions’ asset-liability profiles.

Taking Stock

An argument can be made that it is only because SI has been so successful that backlash to it has grown in some jurisdictions. Of note, the UN- backed Principles of Responsible Investment (PRI) formed in 2005  is still going strong. Today, over 5,000 investment entities representing over US$121T AuM are PRI members, reflecting ongoing investor recognition of the value of SI. 

The business case for SI has been made and SI is becoming more, and not less, integrated into mainstream investment risk management, strategy and value creation.  A 2024 MSCI Research study found that top ESG rated companies consistently outperformed their lower-rated peers, driven mainly by better earnings fundamentals.¹ A 2021 Rockefeller Asset Management meta study found that ESG investing appears to offer downside protection during social or economic crises and that managing for a low carbon future improves financial performance.²  

Many of the entities that exited the NZ alliances are regarded as sustainability stalwarts that are practising greenhushing, by staying quiet about their work on sustainability matters, although this is still ostensibly in progress. Interestingly, 54 Canadian investors representing $8.6T assets under management (AuM) continue to fully support Climate Engagement Canada, which engages with 41 Canadian issuers on climate matters. Despite anti-ESG sentiment, the SEC recently approved the launch of the US’s first sustainability focused stock exchange, to provide investors with easy access to greener companies willing to transparently disclose ESG data.   

Nonetheless, perhaps it is a good time for a rethink to ensure sustainable investment strategy aligns with fund assessment of risk and value. So, what has changed, if anything?

Still Measuring ESG

The nomenclature of sustainability has changed, but the underlying metrics have mostly remained the same. Rather than refer to ‘ESG’ factors, many investors now simply refer to ‘SI’ and track specific metrics across key categories, such as eco-efficiencies for real assets (e.g. energy usage per square foot) which drive down costs and improve asset value, or climate transition readiness (e.g. emissions intensity and % green revenues) for carbon intense entities. 

Terms such as diversity, equity and inclusion (DEI) have become over politicized and may signify something different than originally intended. Investors and companies alike are dropping reference to DEI initiatives in their reporting to stakeholders and may have stopped linking executive compensation to diversity hiring goals.  

Pension funds should ensure that their fund managers continue to track companies’ performance on the same decision-useful, comparable, relevant and material ESG metrics as they did in prior years, to guide their assessment of investment risk and value. 

Impact of Climate Change

The impact of climate change is not lessening in importance. Far from it. 2024 marked the first time in history the Earth’s temperature exceeded 1.5 degrees Celsius of global warming above pre-industrial levels, which scientists consider to be a critical threshold or tipping point.  

Severe weather events caused $8.5b in insured losses in Canada alone. Total economic losses from just one natural-catastrophic event, the January 2025 California wildfires, are expected to exceed US$250 billion. Many US insurance companies are increasing premiums or pulling out of riskier markets.   

Climate change is not an ESG metric to be trifled with. It is a systemic risk that acts as a risk multiplier across multiple dimensions of financial and socio-economic risk. Scenario analysis is vital to identify plausible versions of the future, pathways to climate resilience and adaptive strategies. Pension plans require fund managers to consider longer term climate related risks. Indeed, according to legal scholars, Canadian plan fiduciaries are obligated and deemed ultimately responsible for any failure to take climate risks and opportunities into account.³

ESG Disclosure

ESG disclosure appears not to be adversely impacted to date. RepRisk reports that greenwashing is actually on the decline. We may see less, but overall better-quality disclosure instead. Investors still expect corporate disclosure on material ESG factors, and companies are still subject to mandatory ESG disclosures in jurisdictions they operate in. Climate Action 100+ reported a significant increase in disclosures of firm actions to reduce emissions, to 59% of focus companies in 2024. While Pathways Alliance companies withdrew their climate related disclosures after Canada’s Competition Act (Bill C-59) to address greenwashing was passed, this appears to be due to concerns regarding what should be disclosed, rather than due to any anti-ESG agenda. 

ESG disclosure in Canada is set to continue to improve. Sustainable investment frameworks have converged and formalized under the IFRS accounting umbrella, making it easier for investors to access comparable, decision-useful sustainability data. While these reporting frameworks are currently voluntary in Canada, the Canadian Sustainability Standards Board was formed to support the uptake of the ISSB standards in Canada.  

Public Markets Proxy Voting and Engagement

The anti-ESG sentiment has somewhat impacted proxy voting and engagement, in a US context. Although the number of anti-ESG, including anti-DEI shareholder proposals, at US issuers accounted for approximately 10% of all proposals in 2024, they garnered very low levels of shareholder support at around 2.5%. However, fewer parties are filing ESG proposals overall, with 34% fewer ESG proposals filed as of February 21, 2025 from the prior year. This trend reflects a reticence among shareholders of US holdings to exercise shareholder voice in the current political environment. Recent SEC guidance, which views engagement with issuers on ESG matters as an attempt to exert undue influence, has caused larger investors to pause their engagement programs. Pension funds should ensure they communicate with US fund managers regarding their expectations for proxy voting and engagement.  

Legal Risks

Whether Canadian pension funds’ legal risks have actually increased remains to be seen. Investee firms may be grappling with perceptions of increased corporate liability, potential regulatory action and heightened reputational risk with respect to how ESG matters are handled.

In the US, there is a small but growing number of anti-ESG lawsuits, challenging entities deemed to have climate agendas.  Separate from the anti-ESG trend, there are over 2,000 climate related lawsuits currently in play and more cases expected as individuals and communities turn to the legal system to hold corporations and local governments to account for climate change. While 80% of the caseload emanates from the US, cases are spreading across the globe.

Some US states have adopted anti-ESG regulations across party lines. In January 2025, a federal judge in Texas ruled that American Airlines pension plan breached its legal duty by allowing its asset manager to include ESG factors in its investment decisions. Yet the federal US Department of Labor rule confirms ERISA regulated fiduciaries should consider ESG factors in investment decisions just as they would any other financially relevant factor, which was ruled as still valid  the following month on February 18, 2025. 

Canadian legal scholars find that pension fiduciaries have a duty to factor climate related risks in their management of plan assets⁴, while the Supreme Court of Canada recognizes climate changes as an existential threat requiring co-ordinated action.5 Directors must be satisfied the pension plan is managing climate risk appropriately. 

Sustainability 2.0

So where does that leave us? Fiduciaries cannot afford to drop consideration of material ESG factors. They must balance current and future intergenerational risk and return considerations over time periods that potentially exceed their own lifetimes. Considering the trend of greenhushing, asset owners should ensure that fund managers are sufficiently integrating consideration of ESG factors into investment processes. The anti-ESG pushback may have an upside, causing investors to more deeply embed sustainability considerations into investment processes internally, across organizational functions, impacting investment strategy, and improving risk-adjusted returns over the long term. 

Considering the world has crossed 6/9 planetary boundaries or climate tipping points⁶ it is essential for investors to understand what level of risk the portfolio is truly exposed to. Asset owners should hold fund managers to account for reporting on ESG risk assessment and controls, and on any significant changes to the risk assessment. Sustainability related factors should be included both in enterprise risk management (ERM) assessments and in the investment process. It is important to ensure material ESG KPIs are tracked, and that decision makers are kept abreast of key ESG trends, regulations and policies. 

Furthermore, the 2024 CAPSA Guideline for Risk Management No. 10 sets an expectation for pension plan sponsors to design their plan governance, investment strategy, risk management and investment decision-making practices with consideration of material sustainability risks and opportunities⁵. 

Heightened polarization is reshaping how investors view risks and opportunities, with implications for SI, from country risk assessment and asset allocation strategies through to investment exclusions. For instance, investment in sustainable infrastructure such as renewable energy and electrical utilities may seem increasingly attractive, as these provide a natural inflation hedge in times of economic volatility and represent an US $80T investment opportunity during the energy transition.⁷ According to a PIAC report, Canadian institutional investors have increased their investment in infrastructure from an average of 4.15% AuM in 2010 to 10.15% AuM in 2023. Some asset owners are finding investments in emerging markets more attractive, considering their robust macro-economic performance, accounting for 50.4% of global GDP in 2024 and 65.9% of GDP growth over the past ten years. With respect to exclusions, plan administrators may wish to revisit exclusions criteria in the wake of calls for Canada to step up its military spending, such as whether investments in submarines or military equipment is permissible.

Final Thoughts

Canada's pension fiduciaries should take the US-driven anti-ESG sentiment with a grain of salt. Material ESG risks remain ever-present and must be integrated into plan governance, investment beliefs, risk governance, and ERM processes.

Footnotes

1Giese, Guido et al, MSCI ESG Ratings in Global Equity Markets: A Long-Term Performance Review.” March 2024

2 Whelan, Tensie, et al., “ESG and Financial Performance,’ Rockefeller Asset Management and NYU Stern, 2021

3Bauslaugh, Randy, “Climate Change: Legal Implications for Canadian Pension Plan Fiduciaries and Policy-Makers,” McCarthy Tetrault, 2021

4 Hansell, Carol “Fiduciary Obligations with Respect to Climate Change,” 2020.  

5Supreme Court of Canada. GHG Pollution Pricing Act, 2021

6 Richardson et al, “All planetary boundaries mapped out for the first time, six of nine crossed,” Stockholm Resilience Centre, 2023 

 7 Infrastructure Outlook, Global Infrastructure Hub, https://outlook.gihub.org/

Alison Schneider, Principal, Encompass ESG Corp

Alison is a Senior Fellow with GRESB BV, Canadian representative for Ceres Investor Network and a sustainability consultant. Prior to founding Encompass (2022) Alison built and led the Responsible Investment department at Alberta Investment Management Corporation (2012-2022). Alison is a co-founder of GRESB Infrastructure, and Climate Engagement Canada. 

Alison led or contributed to the governance of entities such as the GRESB Foundation Board, International Governance Network (ICGN),  the G7 Investor Leadership Network (climate change stream)  and International Standards Organization,32210.  Alison is a recipient of the prestigious Canadian Clean50 Award, and University of Alberta Alumni Award. She is an instructor with the Canada Climate Law Initiative (Allard Law School) and the University of Alberta MBA program and is a sought -after speaker and author.