The claimant pursuing the trustees of his superannuation fund for failing to disclose the risks of climate change and for breaching their duties to invest with reasonable care and skill settled the case last week immediately before the hearing in the Federal Court of Australia in Sydney. 

As the first case worldwide to test whether a fiduciary investment duty encompasses a duty to take account of climate change risk, McVeigh v Retail Employees Superannuation Trust (REST) has been watched around the world – both by financial institutions and other corporates, given the potentially wide implications for climate-related litigation risk.  

While there will now be no judicial consideration of the issues, the terms of the settlement are interesting – and include public acknowledgements by REST of the impact of climate change risks on its own business as well as initiatives which will see REST working to promote the climate goals of the Paris climate agreement more generally.

The case against REST

Mark McVeigh brought his claim against REST in 2018, alleging that the fund had failed to provide him with information about the fund’s exposure to climate change and any plans to address those risks, and that it had therefore breached its duty in the Corporations Act 2001 to provide him with the information he needed to make an informed decision about the fund’s management and financial condition.  

Later in 2018 Mr McVeigh brought an additional claim that the trustees of the fund had also breached the duties they owed him under the Superannuation Industry (Supervision) Act 1993, which included a duty to act with care, skill and diligence, and to perform their duties and exercise their powers in the best interests of their beneficiaries. Rather than financial compensation, Mr McVeigh sought declarations from the Court that REST’s trustees had breached their duties.    

In its defence, REST admitted that climate change was a foreseeable risk which was in some cases material, but denied that Mr McVeigh had established that there was any specific risk to REST’s investments.

Settlement terms

In its press release about the settlement last week, REST acknowledged that climate change is a material, direct and current financial risk to the fund across many risk categories, including investment, market, reputational, strategic, governance and third-party risks. It also explained that:

  • REST’s investment managers will now take 'active steps' to consider, measure and manage financial risks posed by climate change and other relevant ESG risks;
  • its (likely updated) policy requires disclosure of both climate change risks and its management of those risks;
  • REST will continue to work on its management processes for dealing with the risks of climate change, and that Mr McVeigh acknowledges and supports REST’s initiatives to (among other things) achieve a net-zero carbon footprint for the fund by 2050, measure and report in line with the recommendation in the Taskforce on Climate-Related Financial Disclosures (TCFD) and encourage its investee companies to do the same, disclose its portfolio holdings, and undertake scenario analysis to help in setting its investment strategy and asset allocation positions; and
  • REST will also actively consider all climate change related shareholder resolutions of investee companies and otherwise continue to engage with investee companies and industry associations to promote business plans and government policies to be effective and reflect the climate goals of the Paris climate agreement, and will also work to ensure that its investment managers and advisers do the same.

In many ways the settlement has gone further than the Court could have done if breaches of the relevant duties were established – particularly in relation to REST’s agreement to engage with its investee companies and industry associations to promote the goals of the Paris climate agreement more generally.

Indicative of broader trends

The settlement of this case highlights some of the broader trends in the current wave of climate change litigation against financial institutions and other corporates – using disclosure (or lack of disclosure) as a springboard for a claim, and a focus by the claimant on achieving changes in strategic direction rather than an award of damages, which means that settlement is inherently more likely.  

The success of similar claims in other jurisdictions would of course depend on the relevant legislative and regulatory context. For example, in the UK trustees of all pension funds are already encouraged to consider climate change risks in their investment decisions, there are specific requirements in some contexts, and more wide-ranging rules to consider, manage and report on climate change risks are well underway in the Pension Schemes Bill. 

UK regulators are also more advanced in their expectations of how other financial services firms manage and disclose climate risks (see our latest explanation of this here), and there are increasing expectations on corporates in other industries to disclose climate risks too. The FCA has just finished consulting on a proposed listing rule, which would require premium listed companies to disclose in line with TCFD by the end of 2021, and the government indicated yesterday that it intends to mandate disclosure in line with TCFD for all financial services firms and large companies in the UK by 2025. The direction of travel in Europe is broadly similar, primarily driven by its sustainable finance action plan.

There is therefore perhaps less need in the UK and in Europe for some of the judicial confirmations sought in McVeigh. However, what McVeigh does illustrate is the importance that beneficiaries, investors and shareholders now place on good climate risk management and disclosure – and those expectations are certainly mirrored in the UK.

In the meantime, there will still be a focus on developments in Australia. In particular, the first case management conference in O’Donnell v Commonwealth & Others, a case being brought by a bond holder against the Australian government for failure to disclose climate change risks in documents promoting sovereign bonds, was scheduled for today.