Trustee climate change investment decisions under the microscope
The Court of Appeal has handed down its judgment in the McGaughey v USSL case, brought by two members of the University Superannuation Scheme against the current and former directors of the trustee company. There were multiple claims brought, but the one relating to fossil fuels claimed the directors had breached their director duties by failing to act for proper purposes. However, the appeal was dismissed.
Two members of the University Superannuation Scheme (the “Scheme”) (one of the largest private occupational pension schemes in the UK which is responsible for providing pensions for university staff) brought various claims against the current and former directors of the trustee company. The claim relating to fossil fuels was particularly interesting as it is the first time we have seen trustee’s decisions in relation to climate change action questioned.
The claim was brought against the directors of the trustee company. There were multiple claims but of particular interest was the claim that the failure to form an adequate plan to deal with the risks involved in investing in fossil fuels, without any adequate plan for divestment, was a breach of the director’s duties to act for proper purposes, including making investments that avoid significant risk of financial detriment to the Scheme, beneficiaries and trustee company, and promote the success of the (trustee) company. The members also claimed that: (i) the directors failed to take into account relevant factors, including the results of a members’ ethical survey; and (ii) failing to have a plan in place meant the directors prejudiced the interests and success of the trustee company and that the directors had “put their own beliefs with regard to fossil fuels above the interests of the beneficiaries and the Company.”
The claim was dismissed. In order for the derivative claim to be met, the claimants would need to show that there was a loss to the trustee company as a result of the alleged breach of directors’ duties and that the claimants had suffered a reflective loss. The claimants were unable to satisfy this and unable to prove they had sufficient standing to bring the claim. In addition, all claims failed because of a lack of a prima facie case that the directors had improperly benefited as a result of their conduct. The judge found no evidence to support the allegations that the directors’ breaches had furthered their own interests noting they had taken proper advice.
The judge suggested that the claim would have been best suited as a beneficiary derivative action (where the members would bring a claim in their own name on behalf of the trust against a third party) or an administration action (where the members would bring proceedings against trustees to compel those trustees to pursue a claim vested in them). The procedural rules for these types of claims are more complex than derivative actions and the judge suggested this is one of the reasons the claims were brought as derivative actions despite the difficulties flagged at an initial stage.
It has been reported the members are considering bringing appeals at the UK Supreme Court and European Court of Human Rights, although it may be expected these will not be successful if they are brought as derivative claims. Even so, the publicity of these cases will be something trustees would prefer to avoid even if the claims themselves have no merit.
The hurdles to bring a successful derivative action claim, particularly in relation to climate change challenges, are high. There is an appetite for claims in this area which, even if not successful, could still involve time and reputational damage for both current and former directors of trustee companies.