When Does Fiduciary Duty End?

Not that long ago, most Canadian pension funds recited a mantra that fiduciary duty kept them from not investing in certain ethical areas as they were mandated to maximize returns for members.

Yes, there were a few funds that did not buy into this. Mostly church pension plans and charitable organizations, they decided a little bit of extra return was not worth the moral cost of investing in weapons, tobacco, and adult entertainment.

But that all started to change. In the early 1990s, the United Nations Framework Convention on Climate Change came out of the Earth Summit. The turn of the century saw the launching of the United National Global Compact which called on companies to align strategies and operations with universal principals on human rights, labour, environment, and anti-corruption, and take actions to advance those goals.

Legal Viewpoint Shifts

Today, the pension legal viewpoint has shifted with plans now required to explain how they incorporate ESG (environmental, social, and governance) considerations into their investment process. We’ve moved from plans might get sued by members for acting responsibly to they could face lawsuits for not acting in a responsible fashion.

Which brings us to the Russian invasion of Ukraine.

Bob Rae, ambassador and permanent representative of Canada to the United Nations, called it “brutal,” breaking every rule of war and convention in the way war is to be conducted in terms of maximizing the protection of civilians (See In the News on page 7). Russia is now a “pariah state” that has behaved in a way that is intolerable for the international community to accept.

And the global response has been considerable with sanctions against Russia doubling every week and companies from McDonald’s to Visa pulling out of the country.

Still, Canadian pension   plans   need to be careful, says Randy Bauslaugh, co-chair of McCarthy Tétrault’s national pensions, benefits, and executive compensation practice. Canadian plans have a legislated purpose ‒ to provide lifetime income in consideration for services rendered. From a financial perspective, they cannot let ethical considerations be the basis of their decisions.

Fortunately, they can make a case for divesting themselves of Russian holdings because most don’t have a lot invested in Russia and, financially, “this does not look like a friendly environment for pension funds,” he said.

Moral Compass

However, most of the large funds reacted quickly to the invasion by pledging to divest themselves of Russian assets in early March shortly after the invasion started. We’d like to think that it was their moral compass pointing them in this direction, not just an opportunity to look socially responsible.

And this should be the case, period. If something is wrong, it is wrong and you can’t justify it with the premise of potential lost returns.

We seem to be coming to that realization, but we need more of this on a host of other issues facing us today. Pension funds can make a difference if they allow themselves, and are allowed, to make a stand.