Are pension trustees required to consider ESG requirements when making investment decisions?

There have recently been a series of cases in the English courts on ESG litigation against pension trustees. The courts has been asked to determine if trustees have breached their fiduciary duties by not taking into consideration environmental, social, and corporate governance aspects when making investment decisions.

In McGaughey & Anor v Universities Superannuation Scheme Ltd & Ors [2023] EWCA Civ 873, the court was asked to consider an appeal by members of a pension scheme against the directors of the corporate trustee for breach of their duties. The alleged breach was that the scheme continued to invest in fossil fuels without an adequate divestment plan, which was not in line with its commitment to be carbon neutral by 2050 and was in breach of the directors’ duties under the English Companies Act 2006 to:

  • act for a proper purpose (including to promote the success of the scheme taking into account its long-term interests and to take into account relevant considerations); and
  • avoid conflicts of interest (it was alleged that the directors furthered their own interests and beliefs in relation to fossil fuels over those of the beneficiaries).

The Court of Appeal in this case upheld the High Court’s dismissal of the application on the basis that there was no prima facie case that loss had been suffered due to the alleged breaches of directors’ duties and no evidence had been put forward that the directors did act to further their own interests. The court held that the claim was “an attempt to challenge the management and investment decisions of [the company] as trustee without any ground upon which to do so” and was bound to fail. In this case the directors had taken proper advice and ensured diversification of assets in accordance with UK pension regulations

Notwithstanding that the claims were rejected in McGaughey, ESG is becoming increasingly topical and is undoubtedly a developing area of the law. Pension scheme trustees should therefore be minded to take ESG factors and risks into consideration in the administration of schemes going forward.

If you would like further information on this subject please contact Rachel Winterbach and/or Annemarie Hughes.

Rachel Winterbach



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