There has been a significant growth in climate and other ESG litigation in recent years both in the UK and elsewhere across the globe. Not only that, but some claims are succeeding – a trend which is set to continue. But what does this mean for pension scheme trustees in the UK?

To date, there has only been one complaint to the UK’s Pensions Ombudsman relating to climate change and it was not upheld. The complaint was brought by a member of the Shell Contributory Pension Fund (Mr D), who claimed that the trustee had failed to provide him with information relating to how the potential risks arising from climate change were being taken into consideration by the scheme. The trustee had explained how climate change was considered in its investment strategies, risk management and covenant monitoring, and had provided copies of the scheme’s actuarial valuation, statement of investment principles and responsible ownership policy. However, the trustee declined to share further information requested by the member (including its investment strategy and risk management framework). Mr D was not satisfied with the level of information provided and complained to the Pensions Ombudsman. 

Noting that the information requested went far beyond what the trustee was required to provide by legislation, the Ombudsman decided that there had been no breach of any disclosure duty or maladministration. Since the date of this determination (15 August 2019), more onerous disclosure obligations in relation to climate change have come into force (see our client alert for details). However, in principle, we expect the Ombudsman would apply the same reasoning to any future complaints of this nature: trustees who comply with their legal obligations to provide information to members should not be at risk of an adverse determination.

Looking to the Courts, the High Court recently handed down its decision in a case brought by members of the Universities Superannuation Scheme. The members sought permission from the Court to bring a “derivative action” (i.e. a claim brought in the name of the company) against the directors of the trustee. The members alleged that the directors had breached their statutory and/or fiduciary duties in a number of ways, including by continuing to invest in fossil fuels without any (or any adequate) plan for divestment. For a derivative claim to proceed, claimants are required to apply to the Court for permission. The Court decided to refuse permission to continue the claim on the basis that the claimants had not established a prima facie case either that the trustee directors had committed breaches of fiduciary and statutory duty or that those breaches of duty were of a type which allowed the claimants to bring a derivative action. 

Interesting points to note from the judgment include the following:

• The members claimed that the trustee company had suffered loss and would continue to suffer loss as a result of the failure to have a plan for divestment. However, no further particulars of this loss were given and the evidential support for this claim was based on a selection of Financial Times articles. It is perhaps unsurprising that the Court decided the claimants had not established a prima facie case that the trustee company had suffered any immediate financial loss.
• The members also claimed that some of the trustee directors had put their own beliefs or interests above the interests of the members and the trustee company. Again, the Court was not satisfied that there was any evidence to support these claims.
• The trustee company provided evidence it had complied with its duties in continuing its investment in fossil fuel companies. In particular, it had taken legal advice, conducted a survey of members, adopted an ambition of net zero by 2050 and put in place policies for working with the companies in which it invests in the meantime. The Court was satisfied that these ambitions and policies were well within the discretion of the trustee in exercising its powers of investment. 

The High Court was not asked to decide whether the trustee had committed any breaches of trust, so the members could in theory bring direct claims for breach of trust against the trustee. However, for now, the question of how the Courts (or the Ombudsman) would approach a claim relating to how trustees take into account climate-related risks and opportunities remains open.

An interesting feature of Mr D’s case was that the member was helped to bring his complaint by ClientEarth. In a press release issued at the time of the Ombudsman’s determination, ClientEarth said that: “We remain committed to helping people engage with their pension funds on climate change. We’ll also keep reminding pension funds that they risk legal action if they fail to consider the effects of climate change on their portfolios.” It seems likely that ClientEarth (and other similar organisations) will continue to support members wishing to challenge trustees who they think fail to adequately manage climate change risks, including by exploring novel approaches similar to the derivative action described above.

Although this is an emerging area of litigation, trustees need to be alive to the risk of future member complaints and possible litigation if they fail to comply with their legal obligations in this area. Members are likely to be paying closer attention and asking more questions given the increasing focus on the potential risks arising from climate change. To minimise this risk, trustees should ensure they are meeting the governance and disclosure requirements that apply to them, including those relating to their statement of investment principles, implementation statement and (for larger schemes) TCFD governance and reporting. Trustees should also ensure they are properly taking into account ESG factors when making investment decisions where relevant, recognising that ESG factors will often be financially material.