Climate change action rejected against major pension scheme trustee

A recent case, McGaughey & Another v Universities Superannuation Scheme Limited & Others, has seen the Court of Appeal refuse to allow pension scheme beneficiaries to proceed with a claim against the directors of the corporate trustee for allegedly failing to deliver on their climate change commitments.

Here, Jennifer Baxter breaks down what the result means for future claims brought against directors.

Continued investment in fossil fuels

The Universities Superannuation Scheme Limited (USSL) is the trustee of the Universities Superannuation Scheme (the scheme) — one of the UK’s largest pension schemes with assets of over £80bn. USSL’s directors have recently been the subject of proceedings brought by two academics, who are also members of the scheme.

Proceedings were brought in October 2021 as a multiple derivative claim on the basis that the directors (among other things) had failed to divest investments in fossil fuels after previously announcing that they would. The announcement was made in May 2021, when the scheme published a statement on its ambition to reach net zero by 2050, if not before.

It published a list of actions that it was likely to take to achieve net zero, which included:

• Ensuring that the relevant processes are in place to select which companies and assets to own (or from which to divest), in a transitioning world.
• Ensuring that assets owned by the scheme are resilient in the face of a move to a Net Zero world.
• Divesting over time from high carbon sectors which are at financial risk from the transition.

The claimants alleged that the scheme continued to invest (both directly and indirectly) in fossil fuels and that there was no credible plan in place to achieve that ambition — nor had the directors of USSL considered the financial risks to the scheme brought about by such investments.

As such, the claimants asserted that the directors of USSL acted in breach of their duties under sections 171 and 172 of the Companies Act 2006 by failing to act for proper purposes, including to make investments that avoid significant risk of financial detriment to the scheme and its beneficiaries.

Alternatively, the claimants contended that the directors had not taken into account relevant considerations (including the results of an ethical investment survey of members in 2020) by failing to have an immediate plan, which also constituted a breach of sections 171 and 172.

In addition, it was pleaded that the failure to take such steps had prejudiced (and would continue to prejudice) the interests and success of the scheme, which had suffered (and would continue to suffer) loss as a consequence. 

The issue with derivative claims

Derivative claims require the permission of the court to continue. In May 2022, Mr Justice Leech in the High Court dismissed the claimants’ application to continue on the basis that that they had “failed to show even a prima facie case” that justified any of their claims.

On 15 June 2023, the claimants took their case to the Court of Appeal to ask them to review the High Court’s original judgment and findings. Giving the leading judgement, Lady Justice Asplin (with whom the other justices agreed) dismissed the appeal.

It was noted that, whereas derivative claims normally involve a shareholder of a company seeking to pursue a cause of action vested in that company, multiple derivative claims cover more complex scenarios (for example, where a shareholder of a holding company brings actions on behalf of a holding company’s subsidiary). Multiple derivative claims are governed by common law and it was accepted that the categories of multiple derivative claims are not limited. In essence, the claimants were, therefore, relying on the broad scope of multiple derivative claims to cover their claim. 

The Court of Appeal considered the case law and noted that the first issue to consider in a multiple derivative claim is whether the claimant had standing to bring the action. It was clear from the previous authorities that this required evidence that the company on whose behalf the claim is brought has suffered a loss or harm that the claim seeks to remedy — and that the claimant must have suffered harm or loss that is reflective of it. If this requirement can be satisfied, substantive issues can then be considered, such as whether the directors have committed a deliberate or dishonest breach of duty or improperly benefitted themselves at the expense of the company. 

The court agreed with the High Court that the Claimants were unable to prove loss to the scheme as a result of the alleged breaches of the directors’ duties — and moreover, it was not even alleged that the claimants had suffered any loss as a result of the alleged breaches. Without being able to satisfy this test and prove that they had standing, the claimants’ appeal could not succeed.

Lacking a basic case

However, even if it had met this first requirement, the court considered that the claim would have failed for the lack of a basic case that the directors had improperly benefitted as a result of their conduct. The court pointed out that it had not been suggested that the directors had been acting in bad faith or done anything other than acting in accordance with what they considered to be the best interests of USSL and the scheme, having taken proper advice.

While it had been alleged that the directors’ breaches had furthered their own interests and put their own beliefs with regards to fossil fuels above those of the scheme’s beneficiaries and USSL, the court did not accept that there was any evidence to support this. In particular, it considered that the ethics survey — which it said had been completed by a tiny proportion of active members of the scheme — could not form the basis of such an allegation. 

The court went further and suggested that the claim would have been stronger had it been brought as a either a beneficiary derivative claim — where a beneficiary brings a claim in their own name on behalf of the trust or estate against a third party — or an administration action — where beneficiaries may bring proceedings to compel trustees (who are not mere bare trustees) to pursue a claim, which is vested in them as trustees. However, as the court pointed out, the procedural rules in relation to these types of claim are more onerous and the court suspected that the claimants had opted to try to shoehorn their claim into the scope of multiple derivative claims to avoid them.

Activists face obstacles

The approach of the Court of Appeal has echoes of that in the recent High Court decision in ClientEarth v Shell Plc and Others. In that case, the claimant — a minority shareholder in the defendant company — brought a derivative claim alleging that the defendant’s directors had breached their duties under the Companies Act 2006 (by, for example, failing to accord appropriate weight to climate risk and failing to adopt strategies that were reasonably likely to meet Shell’s targets to mitigate climate risk).

The High Court dismissed the claim partly on the basis that it was for the directors, in good faith, to weigh up how best to promote the success of the company in accordance with their duties. It was also observed that ClientEarth’s primary purpose had not been to promote the success of Shell, but to advance its own policy agenda — which would mean the claim had not been brought in good faith. 

The decisions in the Shell and McGaughey cases indicate that shareholder or beneficiary environmental activism faces significant obstacles under English law.

On the strength of these cases, it seems that well-established company laws relating to derivative actions do not easily apply themselves to concerns about how corporations respond to the risk from climate change.

It is clear that climate change does not remove the principle that directors are afforded a wide degree of latitude by the courts in how they discharge their statutory duties. It also appears that the courts are prepared to look at the motives of claimants and — in the case of McGaughey — this meant considering whether they were trying to circumvent the normal procedural rules.

On the other hand, these cases certainly generate publicity and while the direct purpose of the claim (i.e., to achieve a ruling in favour of the claimant) may fail, an indirect purpose of the claim (e.g., to exert pressure on the directors to set and deliver more ambitious climate targets) may still succeed.

If you need advice on environmental regulations, pensions law or directors’ duties, talk to us.