The 2023 ruling in McGaughey & Anor v Universities Superannuation Scheme Ltd was a defining moment in the evolving conversation about climate change and fiduciary duty. At its core, the case tested the boundaries of how pension trustees, and by extension, directors and boards, should navigate the tension between financial prudence and environmental responsibility.
Two academic beneficiaries of the Universities Superannuation Scheme (USS), Neil McGaughey and Ewan McGaughey, brought a legal challenge against the pension trustees. Their claim: USS was failing to take sufficient action against climate change and should immediately divest from fossil fuels in order to protect both the environment and the long-term value of the pension fund.
The case was ultimately dismissed by the Court of Appeal. But the reasoning behind the dismissal carries substantial weight for fiduciaries, investors, and corporate boards.
The plaintiffs advanced several arguments, which the Court addressed systematically:
Double Materiality
The claimants argued that trustees should consider not only how climate change impacts investment returns (financial materiality), but also how investments impact the climate (impact materiality). This dual lens, often referred to as “double materiality,” has become increasingly popular in ESG discourse.
The Court rejected this as a legal duty. It affirmed that a trustee’s primary obligation is to act in the financial best interests of beneficiaries. While trustees may consider environmental factors as they relate to financial risk, they are not required, at least not yet, to prioritize the pension fund’s impact on the climate as an independent goal.
Immediate Fossil Fuel Divestment
The claimants demanded that USS divest immediately from all fossil fuel holdings. Again, the Court declined to intervene. It reaffirmed that trustees enjoy wide discretion in how they discharge their duties, including in how they address climate risk. Whether to divest, engage with companies, or pursue a blended strategy falls within trustees’ reasonable judgment, as long as climate risks are being taken seriously.
Best Interests Must Include Ethics?
The claimants also contended that the trustees' duty to act in the "best interests" of members should include aligning with their ethical concerns, such as a desire for climate-conscious investing.
The Court acknowledged that ethical considerations can be factored in, but only if doing so does not materially compromise financial returns. Financial performance remains the overriding consideration. The pension promise, the Court emphasized, is a financial one.
Climate Risk as Financial Risk
This point was not only accepted by the Court, it was underscored as essential. The ruling confirms that climate change introduces significant financial risks (including transition, physical, and regulatory risks), and trustees have a legal duty to manage them. Ignoring climate risk could itself constitute a breach of fiduciary duty.
This last finding provides a firm legal foundation for integrating climate risk into the financial oversight duties of trustees, boards, and corporate executives.
Though this case focused on a pension fund, the implications extend to any fiduciary or governance structure, particularly corporate boards responsible for long-term strategic oversight.
Boards must recognize that climate change is not just a reputational or moral issue; it is a financial risk that can affect company value through disruptions to supply chains, rising costs, resource scarcity, regulatory compliance burdens, and investor expectations.
Under Kenya’s Companies Act, 2015 (Section 143), directors have a duty of care, skill, and diligence. If foreseeable risks such as climate-induced flooding, drought, or heat stress are ignored in strategic decisions, that duty may be breached.
Failure to act on climate risk, when its financial consequences are foreseeable, can result in legal liability. The bar for liability includes failure to identify material risks, failure to factor them into decision-making, and failure to implement appropriate mitigation or adaptation plans.