| Cowan v Scargill | |
| Court: | High Court |
| Citations: | [1985] Ch 270 |
| Opinions: | Megarry VC |
| Keywords: | Duty of care, ethical investment |
Cowan v Scargill [1985] Ch 270 is an English trusts law case, concerning the scope of discretion of trustees to make investments for the benefit of their members. It held that trustees cannot ignore the financial interests of the beneficiaries.
Some of the obiter dicta in Cowan, however, have been implicitly doubted by Harries v The Church Commissioners for England,[1] which held that trustees are entitled to consider the social and moral interests of the beneficiaries where they relate to the express or implied objects of the trust. Furthermore, the Goode Report on Pension Law Reform in 1993 stated the law to be that trustees "are perfectly entitled to have a policy on ethical investment and to pursue that policy, so long as they treat the interests of the beneficiaries as paramount and the investment policy is consistent with the standards of care and prudence required by law."[2] In 2014, the Law Commission (England and Wales) commented that the case should not be seen as precluding pension trustees from taking account of environmental, social and governance factors when making investments.[3]
The trustees of the National Coal Board pension fund had £3,000 million in assets.[4] Five of the ten trustees were appointed by the NCB and the other five were appointed by the National Union of Mineworkers. The board of trustees set the general strategy, while day to day investment was managed by a specialist investment committee. Under a new "Investment Strategy and Business Plan 1982" the NUM wanted the pension fund to (1) cease new overseas investment (2) gradually withdraw existing overseas investments and (3) withdraw investments in industries competing with coal. This was all intended to enhance the mines' business prospects. The five NCB nominated trustees made a claim in court over the appropriate exercise of the pension fund's powers.
Mr JR Cowan was the deputy-chairman of the board. Arthur Scargill led the NUM and was one of the five member nominated trustees, and represented the other four in person.[5]
Megarry VC held the NUM trustees would be in breach of trust if they followed the instructions of the union, saying ‘the best interests of the beneficiaries are normally their best financial interests.’ So if investments of an unethical type ‘would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by virtue of the views that they hold.’ Only if all beneficiaries, all of full age, consent to something different is it possible to invest ethically. His judgment outlined his view of the law.[6]
While the case has often been cited as controversial, given the doubts it may have given rise to over ethical investment, it did not lay down a rule that pension funds or other trustees must single-mindedly act in their beneficiaries' exclusive financial interest, nor did it say that pension trusts cannot invest ethically if they have opted for such an investment in their trust deeds. However Megarry VC did appear to question a previous decision by Brightman J in Evans v London Co-operative Society[7] that pension trustees could take into account the interests of employees of the workplace in making investment decisions. The most important report on pensions, the Goode Report chaired by Roy Goode stated it was clear that Cowan together with the rest of the law on fiduciary duties clearly allowed for ethical investment. The following was reported.[8]
In 2005, authored by Paul Watchman of Freshfields, a report for UNEP suggested that the effects of Cowan had been overstated and that it was no precedent at all for saying ethical considerations could not be taken into account.[9] In 2014, the Law Commission (England and Wales) reviewed this area of law.[10] It concluded that when trustees make a long term investment in a company they may take account of risks to that company’s long-term sustainability, including risks arising from environmental degradation or from the company’s treatment of customers, suppliers or employees. Trustees may also take account of non-financial factors, where they have good reason to think that the scheme members share their views and that the decision does not risk significant financial detriment. The Law Commission published a six page guide for trustees on this issue.[11]
In 2016, UNEP FI, the PRI, and The Generation Foundation launched a project to end the debate on whether fiduciary duty is a legitimate barrier to the integration of environmental, social and governance (ESG) issues in investment practice and decision-making.[12] This follows the 2015 publication of Fiduciary Duty in the 21st Century by the PRI, UNEP FI, UNEP Inquiry and UN Global Compact which concluded that “failing to consider all long-term investment value drivers, including ESG issues, is a failure of fiduciary duty".[13] It also found that ten years after the Freshfields Report, despite significant progress, many investors had yet to fully integrate ESG issues into their investment decision-making processes.
The Fiduciary Duty in the 21st Century Programme was founded on the realization that there is a general lack of legal clarity globally about the relationship between sustainability and investors’ fiduciary duty. Having engaged with and interviewed over 400 policymakers and investors, the programme published roadmaps setting out recommendations to fully embed the consideration of environmental, social and governance factors in the fiduciary duties of investors across more than eight capital markets, including the UK. Several recommendations are being implemented. Drawing upon findings from Fiduciary Duty in the 21st Century, the European Commission High-Level Expert Group (HLEG) recommended in its 2018 final report that the EU Commission clarify investor duties to better embrace long-term horizon and sustainability preferences.[14]