Pension trustees do not sit as moral tribunals. They are fiduciaries over retirement security.

Under the Pension Benefits Act (and other Canadian pension statutes), trustees and administrators must invest plan assets prudently and in the best interests of plan beneficiaries. These are the twin duties of prudence and loyalty. Regulations additionally require administrators to ensure that their investments comply with the federal investment rules and establish and follow a written Statement of Investment Policies and Procedures (SIPP). Regulatory guidance further clarifies and frames these pension standards. In short, pension capital is governed by statutes, regulations, and policies—not personal preferences. That framework is what has made Canadian pension investors globally respected for good governance, quality of disclosure, and long-term financial strength.

SIPPs must disclose whether and how Environmental, Social and Governance (ESG) factors are used in their investment strategy.

A recent example involving one Ontario plan’s investment exclusion policy is noteworthy. In an earlier version, the parameters included a country-specific exclusion. The policy was later updated to replace that exclusion with a more neutral and legally anchored parameter: entities subject to Canadian sanctions.

That shift is significant.

In its public explanation, the plan emphasized that its divestment decisions were predicated on “legally binding actions by the Canadian government” and coordinated market responses.

This is not a technical distinction. It is a fiduciary one.

CAPSA’s 2022 draft ESG Guideline makes clear that administrators should consider ESG characteristics “that may have material relevance to the financial risk-return profile” of investments. FSRA’s ESG guidance similarly warns that administrators “should be cautious” that ethical screens do not conflict with their fiduciary obligations, which courts have traditionally interpreted in terms of beneficiaries’ financial interests.

The governing principle is straightforward: ESG integration is permissible—and sometimes required—when it is financially material. It is not a license to pursue non-financial objectives especially those aligning with political preferences.

Pension trustees who were to exclude entire categories of investments, or target specific companies or countries, without a clear, documented financial rationale tied to material risk would be on thin legal ice.

First, such a move could violate the duty of prudence. Broad exclusions—particularly those affecting widely integrated sectors or markets—may materially affect diversification, benchmark tracking, and risk-adjusted returns. CAPSA emphasizes the need to monitor and evaluate ESG strategies against expected outcomes and alternative strategies, net of costs. An exclusion that foreseeably or predictably increases tracking error or reduces opportunity without demonstrable financial benefit could be imprudent.

Second, it could violate the duty of loyalty. Fiduciaries must act in the best interests of beneficiaries as a whole. The governance materials of the Ontario plan mentioned earlier correctly stress that its mandate does not permit decisions “based on moral or political grounds” but requires systematic, evidence-based assessment of material risk. That is not a rhetorical flourish; it reflects binding trust law principles.

Third, it could place administrators in conflict with their own SIPP and regulatory disclosures. Since 2016, Ontario plans must disclose in the SIPP whether and how ESG factors are incorporated. If a plan’s SIPP states that ESG is integrated to identify financially material risks—as FSRA and CAPSA contemplate—then adopting an exclusionary policy primarily for non-financial reasons would be inconsistent with the SIPP and potentially misleading to members.

None of this means that pension funds must ignore ESG-related concerns. To the contrary, both CAPSA and FSRA recognize that ESG factors—including those related to governance practices, legal exposure, and operational risk—may be financially material and therefore relevant to prudent investing. The point is that any exclusion must be supported by market evidence, expert advice, and robust governance processes. That is, a case-by-case, risk-based approach.

What fiduciary law does not allow is to wrap a predetermined exclusion in a veneer of financial analysis. That would not only exceed pension trustees’ mandates; it could expose them to legal challenge from beneficiaries whose retirement security is put at risk.

If Canadian lawmakers impose binding legal restrictions affecting certain investments, pension funds must comply. If credible evidence demonstrates that particular companies face material legal, operational, or reputational risks affecting long-term value, fiduciaries must assess those risks. But absent such triggers, exclusionary strategies risk transforming fiduciaries into decision-makers guided by considerations outside their legal mandate.

Pension capital is not a political policy instrument. It is deferred wages of workers held in trust for their financial security in retirement. Trustees are urged not to lose sight of that distinction.

Ari Kaplan, Principal, Kaplan Law

Ari Kaplan is principal of Kaplan Law in Toronto. His treatise, Pension Law, won the Walter Owen Book Prize for outstanding contribution to Canadian legal literature. He is currently pursuing a PhD from Western University faculty of law.