Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner
Climate change litigation update: Derivative claim dismissed
McGaughey & Anor v Universities Superannuation Scheme Ltd & Anor  EWHC 1233 (Ch)
On 24 May 2022, the High Court refused a claim brought against the directors of the Universities Superannuation Scheme (the “USS”), the largest private pension scheme in the UK, for inaction around climate change commitments.
In October 2021, a group of academic staff issued a derivative claim in the High Court (the Court) against the USS and its directors for, amongst other claims, failing to create a credible disinvestment plan for its fossil fuel investments. Please read our previous update here.
The claimants alleged that climate change inaction constituted a breach of the directors’ duties pursuant to sections 171 and 172 Companies Act 2006, including making investments that avoid significant risk, and to promote the success of the company, prejudicing the interest and success of the USS which will suffer loss as a consequence.
On 24 May 2022, the Court held that a derivative action could not be pursued by the Claimants.
Test for derivative claims
The Court set out guidance that permission to bring a derivative claim will only be granted where a Claimant can satisfy all the following requirements:
- Limb 1: the Claimant has a sufficient interest or standing to pursue the claims on behalf of the company (i.e. that the subject company has suffered a loss and that this loss is reflective in the Claimants’ own loss);
- Limb 2: a prima facie case that each individual claim falls within one of the established exceptions to the rule in Foss v Harbottle (the exception the Claimants’ relied upon was that the Directors committed a deliberate or dishonest breach of duty or that they improperly benefitted at the expense of the company);
- Limb 3: a prima facie case in respect of the alleged claims (i.e. the Claimant only needs to present enough evidence to create a rebuttable presumption that the matter asserted is true); and
- Limb 4: it is appropriate in all the circumstances to permit the Claimant to pursue the derivative claim.
The Court noted that the Claimants’ case was primarily directed at the USS’ future conduct and that the Claimants did not allege that they themselves had suffered any financial loss as a consequence of the Directors' failure to adopt an adequate plan for long-term divestment of investment in fossil fuels. As such, the Court concluded that the Claimants failed to show that the USS had suffered an immediate financial loss (i.e. Limb 1).
The Court refused to accept that the Directors had committed a deliberate or dishonest breach of duty or that they had improperly benefitted themselves at the expense of the Company (i.e. Limb 2).
The Court acknowledged that the USS had to exercise its’ powers of investment in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole. Evidence was put forward by the USS that it had taken legal advice, conducted a survey of members, adopted an ambition of Net Zero by 2050 and policies for working with the companies in which it invests in. The Court concluded that the USS’ ambition and policies were well within the discretion of the USS in exercising its powers of investment. As a result, the Court was not satisfied that the Claimants had created a rebuttable presumption that the directors had breached their fiduciary duties (i.e. Limb 3).
While the Court accepted that the Claimants may have a claim against the USS for breach of trust, the claim before them was a derivative one and as such the Court would not have exercised its discretion to permit the Claimants to continue with the claim (Limb 4). Instead, the Court would leave them to pursue a direct claim for breach of trust.
Notwithstanding that the claims brought by the Claimants were unsuccessful, there may be instances where members of a pension scheme (or companies more generally) have the ability to bring a claim against the pension scheme (or company/directors) for climate change related breaches.
The Court’s refusal to allow the Claimants’ to pursue a derivative claim was not related to the Claimants’ alleged losses caused by the USS’ policies or climate change inaction. Climate change policy breach claims could therefore still be actionable as a derivative claim, should they meet the necessary legal test.
This decision highlights that UK company directors have a duty to avoid significant financial risk to the company, and to promote the success of the company having regard to the company’s long term interests, including ESG considerations such as climate change policies, relationships with suppliers and whistle-blower schemes.
With the proliferation of ESG into corporate thinking, shareholders and investors are increasingly expecting fiduciaries and fund managers, whether in the energy sector or not, to promote the long term sustainable success of the company. Ensuring ESG considerations are at the forefront of directors’ decision making should help reduce risk and naturally, legal guidance should always be sought if in doubt.
If you have any questions about the content in this article or would like to discuss further, please do not hesitate to reach out to a member of our team.
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