In this High Court of Justice judgment, the court declined to permit two members of the pension scheme to bring a derivative claim against the Universities Superannuation Scheme and the directors of its corporate trustee.

Derivative claims are made when those with interest in the company, usually shareholders, bring a lawsuit against directors for alleged wrongdoing.  The claimants sought to argue that the trustee breached their fiduciary duties by failing to come up with a “credible plan” to divest from fossil fuels, that the trustee had been negligent in running the pension plan and had seen “dramatic increases” in internal and external asset management costs. It was alleged that the directors’ valuation of the pension plan, and the decision to continue with the valuation of the scheme in March 2020, despite being in the middle of the “greatest stock market crashes since 1945, amid the covid-19 pandemic, was negligent.  The claimants not only argued negligence but also equitable fraud (an English law remedy) alleging mishandling of the fund.

The court said that the claimants could not clear the legal threshold for a derivative suit.

The court was not convinced that the relevant changes caused losses for the company or amounted to sex, age and race discrimination against some of the members in favour of other. The court left open the door to discrimination claims from individual members. Nothing the court held was determinative of direct claims by any individual members. The court did say that derivative claims from pension scheme members could normally proceed if there is evidence of alleged wrongdoing. But that while some of the pension fund members “may be well off” as a result of the changes it was hard to see that the fund itself lost out. The latter was a key test for any derivative claim.

On the exercise of investment discretion, the court made pertinent observations in the ESG context. The scheme rules imposed a duty upon the Company to exercise their powers of investment in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole. The rules also provides that the assets must be properly diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings and so as to avoid accumulations of risk in the portfolio as a whole.

The evidence was that the company 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 invested in the meantime. In the court’s opinion, these policies were well within the discretion of the company in exercising its powers of Investment.

The judgment contains a thorough assessment of the UK derivative claims mechanism.