Bulletins | July 5, 2023

Part 3 – Climate change in the spotlight: Updates from the Pensions Regulator not to ignore the ESG elephant in the room and the latest on ClientEarth’s claim against Shell PLC

We report below on two key developments since our last Spring update, as environmental social and governance (“ESG”) developments remain firmly on pension trustees’ agendas, and the risk of global temperatures exceeding the Paris Agreement cap of 1.5°C looks increasingly likely. 

In this update, we provide a brief roundup of two key issues and developments that have arisen in recent months. 

  1. The Pensions Regulator (“TPR”) warns pension scheme trustees not to ignore the “ESG elephant” now in the room (17 May 2023)

In this blog by Louise Davey (Director of Regulatory Policy, Analysis and Advice at TPR), TPR note how change in government policy, increased regulations and industry initiatives have led to greater awareness of ESG issues in the pensions industry. Nonetheless, TPR acknowledges the numerous challenges trustees face. There remains a perception that climate change is a matter for government and policy makers, rather than a matter for trustees where the focus is on investing and managing pension scheme assets. 

TPR also acknowledges that Trustees are faced with a myriad of challenges in the ESG space. Such challenges include the availability and quality of scheme data and the potential for both “greenwashing” (whereby a company makes false or misleading statements about the environmental benefits of a product or practice) and also “green hushing” (whereby companies keep quiet about their emissions reduction targets to avoid scrutiny). Whilst these are “legitimate concerns“, TPR stated that they should not prevent trustees from meeting their legal duties or as “an excuse to put things in the too-difficult-to-do box“.

TPR highlight its regulatory initiative in relation to trustees’ obligations to produce and publish a statement of investment principles (“SIP”) and implementation statement (“IS”). The first phase of the initiative involves TPR checking all trustees have published their SIPs and ISs, which should both be made publicly available on a website. The second phase involves a review of a cross-section of SIPs and ISs. TPR’s review is due to start this Autumn, by which time ISs should reflect the guidance published by the Department for Work and Pensions (DWP) in June 2022. TPR will publish the outcome of this review and share it with industry to highlight good practice as well as identifying areas for improvement. TPR’s intention is that such examples will help other schemes improve their future disclosures and TPR will take enforcement action where necessary.

Whilst TPR understands there are significant risks, they also recognise the potential for significant opportunities as the global economy transitions to net-zero. This is all amongst a backdrop of local economy policymakers aligning behind a ‘carrot’ approach to incentivise decarbonisation, emissions reductions and overall transition to a zero-carbon economy. 

TPR recognise the emphasis in DWP guidance on stakeholder engagement.  There is recognition this can be utilised as a “key stewardship tool” for trustees to understand and consider both financially material ESG factors and stewardship in their investment decisions. TPR states that trustees need to improve their understanding of climate, ESG and wider sustainability issues whilst also improving the quality of their policies and disclosure. All in all, trustees have a lot to do.

  • ClientEarth v Shell PLC – High Court refuses permission for climate activist shareholder’s claim to proceed

The High Court has dismissed ClientEarth’s claim for permission to pursue a derivative action against Shell PLC’s board of directors. A reconsideration oral hearing has however been granted.

The Court has dismissed ClientEarth’s derivative claim under the Companies Act 2006 stating that there was “no basis for a claim for breach of directors’ duties”. This is further to allegations ClientEarth made against the Shell Board of Directors around (i) Shell’s Energy Transition Strategy (“ETS”) and (ii) the response of Shell’s Directors to an order made by the Hague District Court. The High Court stated that the “proper forum” for matters relating to director’s conduct is “by vote of the members
in general meeting”. Although the High Court has dismissed ClientEarth’s application, this was on the papers only and we understand the High Court has agreed to reconsider the matter at an oral hearing.

Whilst ClientEarth is only a minority shareholder in Shell, the company’s ETS received less support in its 2022 AGM (80% vs 88.4% at the previous 2021 AGM). However, the judge concluded that the level of support for the ETS and its progress would count strongly against the grant of permission in favour of ClientEarth’s derivative claim. 

Wedlake Bell Comment

TPR’s latest blog shows its willingness to scrutinise and challenge trustees (where necessary through enforcement action) in the publication of SIPs and ISs. We look forward to TPR’s review period getting underway this Autumn and will continue to monitor developments in this area.  

As for ClientEarth’s initial failure in its claim against the Shell board of directors, the continuing challenge to Shell and other energy giants will likely only increase, if indeed previous climate targets set under the Paris Agreement are not met by 2030. Shell and other global energy companies will not relish further potential challenges to their board agendas; either in the boardroom itself, or via the courts. 

Pension scheme trustees must ensure they continue to comply with their legal obligations under the Pension Schemes Act 2021 and take into account TPR and DWP guidance in the process. As the legal and regulatory framework becomes ever more challenging, it is vital trustees and scheme sponsors continue to monitor developments and have adequate plans in place to comply with their current obligations under the Pension Schemes Act 2021 and underlying regulations.