On 13 June 2023, the Court of Appeal is due to review the 2022 dismissal of a case against directors of the corporate trustee of one of the UK’s largest pension schemes, the Universities Superannuation Scheme (“USS”). The claim is being brought, among other reasons, for inaction around climate change commitments.
Background to the proceedings
Two academics – from University College London and King’s College London – issued proceedings in the High Court in October 2021 against the directors of the USS as a multiple derivative claim to sue the directors in the name of the company (USS Ltd) on behalf of all members of the Scheme. One of the claims is that the directors’ failure to divest investments in fossil fuels has caused, and will continue to cause, significant financial detriment and is against the interests of beneficiaries.
The 2021 claim followed a statement published by the USS in May 2021 announcing its ambition to be net zero by 2050, “if not before”. In the statement, the USS asserts that the announcement “is the latest development in the long-standing history USS has of recognising climate change as an investment risk.”
To deliver on their net zero ambition, the USS published a set of “likely actions”, including:
- 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 USS are resilient in the face of a move to a Net Zero world; and
- Divesting over time from high carbon sectors which are at financial risk from the transition.
Nevertheless, despite this announcement, the claimants alleged that the USS continues to invest directly and indirectly in fossil fuels and that its directors have failed to form an adequate plan to deal with the financial risks involved in such investments. The academics argue that such inaction constitutes a breach of their duties as directors pursuant to sections 171 and 172 Companies Act 2006 to act for proper purposes, including to make investments that avoid significant risk of financial detriment to the Scheme and its beneficiaries.
While in May 2022 the High Court dismissed the claims against the USS Trustee, holding that the trustee had complied with its duties under the Investment Regulations 2005 in relation to their power of investment, the claimants obtained permission to appeal to the Court of Appeal, with the hearing taking place on 13 June 2023.
What does this mean for the future of climate litigation?
The claimants describe their case as “the first case in the world to hold directors of a corporation directly accountable for climate risk, and to protect their pensions, including by divesting fossil fuels with a credible plan for clean energy.”
Nevertheless, it follows the growing trend in litigation whereby claimants seek to hold governments and corporate organisations to account for climate change failures and inaction. We have previously reported on the claim filed against Shell plc by non-profit environmental law organisation, ClientEarth, which commenced a derivative action against Shell’s board of directors alleging that Shell has not done and is not doing enough to reach its net-zero climate target. That claim was dismissed by the High Court in May 2023, on the basis that the duties in play were not capable of constituting enforceable personal director duties - a decision which ClientEarth are challenging at an oral hearing.
This latest action against the USS gives the Courts a further chance to consider how climate change risk may be analysed in light of director duties and how such claims may be brought. It highlights the importance of pension schemes in particular taking their climate risks and ESG considerations seriously. Directors and trustees should seek to manage any litigation risk by ensuring that climate risks are carefully considered and accounted for when consulting with investment advisers or making investment decisions, and by making sure that the communication with members of those risks, as well as climate targets and commitments remains transparent and consistent with applicable disclosure requirements.
Contact our ESG team if you want to know more about what this might mean for you.
Universities Superannuation Scheme Limited – the trustee of the UK’s largest private pension scheme by way of assets – has reinforced its view of climate change as a financial risk to the returns generated by its assets by announcing its ambition to be Net Zero for carbon by 2050, if not before.