Viewpoint: How trustees can protect against the ESG backlash

The risks posed by pension scheme trustees failing to consider ESG factors are well known. However, one area which is yet to receive much attention in the UK is the risk posed by ESG backlash litigation.

ESG backlash litigation can be loosely defined as litigation which is aimed to prevent or inhibit the ESG agenda and it’s on the rise in the US.

A recent report from the Grantham Research Institute notes that there were 50 such cases filed in 2023 (with the majority being issued in the US).

The focus of the backlash has been on ESG investing and whether adopting climate risks in financial decisions presents a potential breach of fiduciary duty. There remains a well-trodden debate in the UK as to how far ESG considerations are judged as genuine financial considerations to be taken into account by trustees. This has been a subject of work by the Law Commission and more recently the Financial Markets Law Committee. However, as of yet, there is no definitive or codified rule on this.

Back in the US we have seen some notable cases in this space.

The Grantham Research report highlighted ‘Wong -v New York City’, where it is alleged that fund managers breached their fiduciary duties by integrating climate considerations into investment decisions and damages for losses are being sought. It is argued that the defendants divested the pension plans of approximately $4bn of holdings in companies involved in the extraction of fossil fuels. No decision is expected until at least 2025. However, claims such as this could increase as this claim and others are being considered on their merits and tried and tested.

Additionally, in its analysis of global trends in climate change litigation the Grantham Research Institute report notes that the US has also seen cases against investment managers who have faced fines and been forced to stop some ESG investment policies.

This contrasts with the position outside of the US where, as of yet, we have not seen this type of litigation. However, there is a risk that the trend in the US will follow in the UK. The volatile geopolitical landscape and concerns over energy security and safety mean that there is a risk that members may become concerned that ESG investing criteria do not ensure their best interests both financially and practically. US litigation often sets precedents for strategies adopted globally, both in Europe and the UK.

It is also notable that asset manager priorities have started to change. In a 2022 Northen Trust survey global asset managers’ main priority was ESG. The 2024 survey shows this has now reduced in importance compared with factors such as emphasising quality and accuracy, with a focus on enhancing the investor experience. Nonetheless, in Europe there remains support from government regulation for ESG investing and a focus on achieving net zero. Importantly, public opinion is more in favour of ESG investing and achieving net zero than in the US. 

What can trustees do to protect themselves?

It appears that this latest challenge for trustees has potential to grow in the UK. However, there are some practical steps trustees can take to try and alleviate and/or prepare for some of this risk.

1. Ensure suitable investment advice is taken from well qualified and experienced investment advisers and that the work of these advisers is closely monitored.
2. Document decision-making and rationale to demonstrate why trustees’ duties are being met.
3. If investing in ‘ESG investments’ ensure the rationale for investing in an ESG compatible way is in the best financial interests of the members as a whole.

In the event of a claim a paper trail is the best defence. Provided the trustees can show they considered all relevant (and no irrelevant) factors whilst making decisions in the members’ best interests, it would be difficult for any claim to succeed against the trustees. Absent such a paper trail, certain things may be able to be inferred about the trustees’ decision making. This could be used against them to argue that a decision was not in the best financial interests of all the members and leave trustees open to the growing risk of anti-ESG sentiment.

Jennifer Miles is partner at Eversheds Sutherland and her colleague Samuel Fulda an associate