Most investment industry participants seem to be hopping aboard the ESG train lately with the most popular destination being climate change risk. The latest such example is BCFSA[1]’s consultation paper on Natural Catastrophe and Climate-Related Risks which was released in late July 2023. While many have been clamoring for the regulators to step in and provide some guidance, the generic nature of such widespread guidance lacks specifics.

BCFSA’s discussion paper proposes that pension plan administrators should identify, measure, and manage physical and transition risks to their investment portfolios. Both OSFI[2] and now BCFSA are pointing towards using TCFD (Task Force for Climate Related Financial Disclosures) guidance as the preferred disclosure method: summarize your approach to governance, strategy, risk management and show some metrics. Seems simple and is a recognized industry standard …

… simple until you dive into the details. The majority of our institutional investment clients:

  • use investment manager funds
  • are invested in a variety of different asset classes
  • have minimal in-house investment resources and rely on managers and consultants

This means:

  • any reporting the Plan conducts will have to focus on the approach to overseeing the managers’ approaches (which are impossible to consolidate)
  • managers’ approaches differ by their mandate (i.e., a fixed income strategy focused on provincial bonds will have a different approach than a real estate strategy)
  • the Plan relies on managers and consultants for reporting:
    • no consistency in reported metrics between managers makes it impossible to consolidate at the Plan level
    • For smaller plans with fewer resources, there is a cost to having consultants do additional reporting

Why should the oversight and disclosure on climate risk be any different than how a Plan oversees and monitors other key risks? There is no specific reporting required for interest rate risk, credit risk, inflation risk, etc.

Some of the larger Plans have sufficient resources and a desire to do more in-depth reporting. For smaller plans that have limited resources, why impose a regulatory burden to address one specific risk? What is the point of smaller plans bearing the cost until the industry and larger plans have:

  • found value in reporting such that it impacts their investment decision-making
  • a clear set of industry standards and metrics
  • investment managers that can accurately report useful statistics that are generally consistent between the majority of asset classes and are decision-useful

We are all for improving frameworks and transparency, but let the larger plans test the waters when it comes to consolidated reporting at the pension plan level.

[1] BC regulated pension plans are the only ones bound by BCFSA.

[2] OSFI is the regulator for federally-legislated pension plans. The guidance they released in March 2023 (B-15 Guideline on Climate Risk Management) was applicable to federally regulated financial institutions and is referred to in BCFSA’s discussion paper.