RI Comment: Climate litigation against pension schemes – if not now, then when? (Updated)

Updated with a response from Client Earth.

Responsible Investor has been covering the potential for climate change litigation against UK pension funds since at least 2014, when ClientEarth – then a new name in the sector – ramped up its climate litigation team in the first inkling of what could have been a groundbreaking test case.

Then, in February 2015, we reported that an unnamed fund was facing a test case by members alleging a breach of fiduciary duty for not considering the potential impacts of climate change on its investments.

The mooted case would have targeted one of the laggard pension funds in the UK country ranking of the Asset Owner Disclosure Project (AODP), the not-for-profit group that went on to be absorbed by ShareAction.

We said at the time that it could send shockwaves through the institutional investment industry.

But some leading figures were wary, with Mark Mansley, then the chief investment officer at the Environment Agency Pension Fund (now with Brunel Pensions Partnership) saying an unsuccessful case could set back responsible investment by 10 years.

Mansley told RI that trustees have enormous discretion under the law and that judges are reluctant to interfere with that. “The bar is set very high and claimants would have to demonstrate serious failings by trustees,” he said.

Then, in April that year, we reported that the planned case had been delayed in favour of a public campaign as part of ClientEarth teaming up with the AODP to form the Climate and Pensions Legal Initiative (CPLI).

Then, in November 2015, Prince Charles backed a heavyweight initiative called the Commonwealth Climate & Law Initiative (CCLI), also involving ClientEarth and other well-known names, which was to look at the legal liability risk of pension funds that fail to consider the risk of climate change.

But, to date, no case has been filed in the UK, despite all the build-up (although one has been filed in Australia).

So it is in this context that we must view the latest warning from ClientEarth that pension schemes risk litigation if trustees “fail to develop their approach to climate risk in line with improving data and market practices”.

The law firm has written to 14 UK pension funds identified as laggards (sound familiar?) among the 25 written to by the House of Commons’ Environmental Audit Committee (EAC) in February, based on their responses.

The letter states: “Your legal obligations in respect of climate risk are not static – advances in the evidence available on the financial risks of climate change, along with rapidly evolving market standards in responses to climate change-related risks, will be relevant to how a court would weigh your actions against your legal duties.”

But, as a layperson, it’s hard to see a trustee being successfully sued on this basis given that ClientEarth admits that the legal obligations are evolving, and in light of the respect for trustees’ discretion that Mansley mentioned. So the conclusion, at this stage, has to be that the firm has not been able to build a strong enough case.

ClientEarth says the funds show a “woeful level of understanding and awareness” and it is also true that the EAC said a minority were “worryingly complacent”.But a look at, say, the submission from the Shell Contributory Pension Fund (SCPF) shows, in my view, a far from “woeful” level of understanding.

SCPF has noted the work of the Law Commission and reviewed the strength of its ‘covenant’ with its sponsoring entity, the oil giant.

The letter from then Chair Clive Mather says: “The fund is especially interested in the implications of the energy transition and climate related financial risks in two areas: investment strategy and the financial strength of the SCPF’s Sponsor in the short and long term.” ESG factors including climate change risks were “an integral part” of the 
fund’s investment principles, it added.

“The Trustee strives to be a responsible steward of the assets in which it invests, taking all material factors, including ESG considerations, into account.” It has adopted the UN Global Compact Principles as its Responsible Ownership Framework and signed up to the Principles for Responsible Investment (PRI). It also uses Hermes Equity Ownership Services and discussed the potential impact of climate change with its actuary, Aon Hewitt. Regardless of you view of Shell the company, Shell the pension fund is far from “woeful”, based on this evidence.

As an aside, the likely precedent cases about trustee duties here are 1985’s Cowan v Scargill and Harries v The Church Commissioners a few years later.

If nothing else, the letters have revealed the links between those at the top of UK pensions. For example, retired business executive Sir Ian Prosser received two letters, as chair of trustees at both Aviva and BP.

Former Pensions and Lifetime Savings Association (PLSA) Chairman Ruston Smith received a letter as chairman at the Tesco fund.

Virginia Holmes, chair of USS Investment Management was contacted in her role as chair of British Airways’ New Airways Pension Scheme (NAPS). A former top AXA executive, she sits on the board at Alberta Investment Management Corporation, among other top roles.

The Electricity Supply Pension Scheme’s Joanna Matthews chairs the Royal Mail Pension Scheme and others in her role as a Director of independent trustee firm Capital Cranfield.

The National Grid’s Nigel Stapleton formerly chaired the Mineworkers Pension Scheme, while Liz Airey received a letter as Chair of the Rolls-Royce UK Pension Fund; she is non-executive chair of Jupiter Fund Management and a former Chair of Trustees of the Unilever UK Pension Scheme. If nothing else, there can be few people responsible for big DB schemes in the country unaware of the ClientEarth letter.

ClientEarth DOES have a track record of successful litigation and we accept that part of its remit is to raise awareness — at which it has been successful. We also understand that the House of Commons committee’s action has focused minds at the pension funds.

But a lack of actual hard litigation could start to undermine ClientEarth’s position. It is better to have these issues debated in a court of law rather than on the pages of Responsible Investor/the Financial Times, and I for one would relish reporting on a legal case that could change the world!

Alice Garton, Head of ClientEarth’s Climate Programme, responds:

This article again refers to a ‘test case’ which RI first suggested was in development in 2015.

I would like to make it clear that we were not aware of any test case against a particular pension fund being prepared in 2015.

The first we heard that this ‘case’ was waiting for our ‘greenlight’ was when we read the RI article that is linked to in the above piece. In 2015 ClientEarth had only just started a project to investigate what pension funds were doing to manage climate risks and assess whether they were meeting their legal duties.

We agree with Mark Mansley (both then and now) that the law affords trustees significant investment discretion and that an unsuccessful case on this topic could set the responsible investment field back.

This field is constantly evolving and the litigation risk for pension funds that do not address these risks is rapidly increasing over time. Our recent letters demonstrate that the financial evidence, and market standards, have moved on significantly since we commenced our work in this field in 2015.

Our assessment is that we are now at a point where the courts may well intervene, despite the significant investment discretion afforded to trustees.

We will continue to use the law – and, where appropriate, litigation – in a strategic and responsible way to protect members’ pensions and to drive the energy transition.