The Universities Superannuation Scheme and Vanguard are under fire for not adequately addressing climate risk, with pension scheme savers and retail clients looking to courts to drive action.
The UK’s largest pension scheme Universities Superannuation Scheme (USS) and US asset management giant Vanguard are both facing legal challenges from individual clients over their alleged failure to adequately address climate risks.
USS, which controls £80 billion (US$98 billion) in AuM, is at risk of being taken to court by its pension scheme savers, while 1,400 individual retail clients of Big Four asset manager Vanguard allege it is breaching fiduciary duty.
Pension scheme savers of USS are attempting to sue its directors with a case being heard at the UK Court of Appeal in June after it was dismissed by the High Court last year.
Speaking to ESG Investor Neil Davies, Professor of Medical Statistics – University College London, said USS pension scheme savers were filing a derivative claim asking for permission from the court to proceed with a legal action on behalf of the company that runs the pension fund against its directors.
It follows pension scheme savers not being able to engage adequately with directors on their governance and climate concerns for years.
“This is quite an unusual case and quite an unusual legal strategy,” he said. “There is no precedent in terms of corporate trustee directors being subject to a derivative claim like this.”
The case also had many layers of complexities, according to Davies, with the USS pension scheme savers’ having to file this case under UK common law, not under the Companies Act, where shareholders can file derivative claims against directors as of right.
The Court of Appeal judge will have to apply a series of tests set out under various similar legal cases going back to 1843 to decide whether the case can go forward, said Davies.
He added that although pension scheme members didn’t own the USS pension scheme, they will argue they have an economic interest in the company and, therefore, are the nearest category to a shareholder of the company.
Last year, a High Court judge accepted that beneficiaries of a pension corporation have economic interests in the fund and can bring legal claims. However, this specific claim was ultimately dismissed by the justice on the basis that “duties cannot be enforced unless directors personally benefit from their breach”.
A USS spokesperson said: “We have been clear from the outset that these claims have no merit. This has been supported by Mr Justice Leech’s detailed explanation for the rejection of the original claim, and his rejection (on 1 August 2022) of the claimant’s subsequent application for leave to appeal. We are confident that the Court of Appeal will endorse Mr Justice Leech’s earlier decision.”
Vanguard accused of breaching fiduciary duty
Vanguard is under pressure from its retail clients over its alleged failure to adequately address climate risks. The Big Four asset manager has received thousands of copies of a letter from clients claiming it is violating its duty of care to investors for falling behind its industry peers on mitigating climate risks, and “placing the firm’s own financial interest ahead of those of its investors” by withdrawing from the Net Zero Asset Managers Initiative.
The letter warned that Vanguard could face litigation for its neglects of climate risks, citing a case in Australia against Retail Employees Superannuation Trust. The landmark case saw 23-year-old Mark McVeigh take the trustees of REST to the Federal Court, under the Corporations Act, seeking information about what they knew about the impact of climate change on its investments and what they were doing to address them.
The case, filed in 2017, initially sought this disclosure, but in 2018 McVeigh filed a new claim alleging REST had breached its fiduciary duty to protect his retirement savings from the financial risk of climate change. The new claim asked REST to comply with TCFD and engage with its investment manager on climate risks. REST settled the case in 2020, acknowledging that “climate change could lead to catastrophic economic and social consequences and is an important concern of Rest’s members” and agreed to implement McVeigh’s requests.
A legal opinion from Susan Gray, Professor Emerita of Law at the University of Oregan, has said: “Vanguard should be concerned that if it is in breach of these fiduciary responsibilities, its customers could have grounds for a class action suit.”
The letter was drafted by Vanguard investor Paul Rissman, former Executive Vice President of US asset manager AllianceBernstein and Director of the Sierra Club Foundation.
Speaking to ESG Investor, Rissman said: “I am a fiduciary, and I was a fiduciary for 20 years at AllianceBernstein before I retired, so I take that very seriously and there are potential serious negative economic impacts of climate change that can hit financial portfolios and I don’t want that to happen.”
Rissman said fiduciary duty was a very powerful obligation that’s been called the “highest duty under the law in the US courts” and Vanguard, as the largest stockholder in the world, had a strong voice to convince companies to change all over the world. However, Rissman argued that the asset manager is “shirking their responsibilities”.
The letter criticises Vanguard for a “lack of attention to prudent proxy voting” in relation to climate risk, with the asset manager having one of the worst records of voting for shareholder climate resolutions.
It calls on Vanguard to escalate engagement, improve proxy voting and shift investment policies in line with a 1.5°C pathway.
A Vanguard spokesman said: “As an investor-owned asset manager, Vanguard is singularly focused on maximising our clients’ returns and giving them the best chance for investment success.
“As we’ve long maintained, we consider climate change to be a material risk to companies and their shareholders, and are committed to continuing to help our investors navigate its impact on their long-term financial success.”