The Court of Appeal has dismissed an appeal by two members of the Universities Superannuation Scheme (USS) who alleged that the directors of the scheme's corporate trustee had breached their duties by continuing to invest in fossil fuels without an adequate plan for divestment (McGaughey v Universities Superannuation Scheme Ltd).

The legal arguments before the Court of Appeal focused on the specific legal mechanism by which the claimants were seeking to bring their claim.  The claimants had sought to bring a type of claim known as a "derivative claim".  Broadly, this is where the law allows a claim which would normally be brought by the company itself to be brought by another interested party on behalf of the company.  The law allows this in some circumstances where the alleged wrongdoing suffered by the company has been committed by those who control the company.

The Court dismissed the appeal on all grounds.  It held that the claim fell at the first hurdle because on the face of it there was no loss to the corporate trustee as a result of the directors' approach to fossil fuel investment.  The claimants had suggested that the acts of the directors of the corporate trustee had put the directors' own beliefs regarding fossil fuels above the interests of the USS's beneficiaries and the corporate trustee itself.  The Court held that there was no evidence to support these allegations at all.  The claimants had referred to a survey regarding the attitudes of the scheme's active members to fossil fuel investments by the scheme.  However, the survey had been completed by less than 1% of the USS's active members, and the Court held that a survey completed by such a tiny proportion of the USS's active members could not form the basis for such an allegation.

Our thoughts

Much of the judgment in this case relates to technical legal arguments regarding the legal mechanism which the claimants were attempting to use in order to bring their claim.  In our view, it is unsurprising that the claimants in this case were unsuccessful.  However, the case does illustrate that scheme members with strongly held views on climate change may seek to bring legal challenges against trustee investment policies with which they disagree.  Trustees should therefore take care to ensure that they have a documentation trail in place to demonstrate that they have followed a proper decision-making procedure on any issues relating to investment policy.

This is not the only recent case in which claimants have sought to use a derivative claim to drive change on climate-related issues.  In ClientEarth v Shell Plc, the charity ClientEarth, which held a small number of shares in Shell Plc, sought to bring a derivative claim based on allegations that the directors of Shell had breached their statutory duties as company directors by failing to adequately manage climate change risk.  The judge refused permission to bring the claim, holding that much of the material placed before the court by ClientEarth amounted to opinion rather than expert evidence, and that the size and complexity of Shell's business meant that the court was ill-equipped to interfere in Shell's decision-making.  The judge also considered that in the circumstances, the fact that ClientEarth held only 27 shares in Shell clearly suggested that ClientEarth's  real interest was not in how best to promote the success of Shell for the benefit of its members.  We understand that ClientEarth intends to seek permission to appeal.

The decision in ClientEarth v Shell suggests that the courts will be wary of allowing derivative claims to be used as a vehicle for forcing change to companies' climate change policies.  However, as the courts will need to consider any such claim on its merits, it is still possible that parties could use derivative claims as a means of putting pressure on companies to change their climate change policies.