Aberdeen City Council is embroiled in a high-stakes legal dispute with global investment manager Federated Hermes, seeking to recover tens of millions lost from the North East Scotland Pension Fund’s investment in Swedish wind farms. City of London investment chiefs, representing Federated Hermes, contend that the local authority has “misunderstood” the nature of the failed deal and faces an uphill battle to recoup the losses.
According to legal documents uncovered by the P&J, the action, initiated at the High Court in London, centres on an approximate £39 million investment made by the North East Scotland Pension Fund (NESPF) in August 2019, through a London-based sub-company of the US-headquartered Federated Hermes. The investment secured a 20% stake in the Ventus Portfolio, encompassing five Swedish wind farms.
The NESPF, which manages £6.3 billion in assets for nearly 80,000 current and former council workers and employees across over 30 public and charitable bodies in the North and North East of Scotland, typically aims for “predictable” and “core” investments. However, by September of last year, the value of NESPF’s stake in Ventus had plummeted from £39 million to just £6 million, with £33.8 million wiped off its value.
Aberdeen City Council officials argue that Federated Hermes fund managers exhibited incompetence in their due diligence, labelling the investment in allegedly unprofitable Swedish wind farms as “irrational.” They claim the deal was “highly risky,” inherently vulnerable to variable weather conditions and potential grid disruptions.
Conversely, Federated Hermes, a global leader in active, responsible investment with over $900 billion in managed assets, vehemently denies these allegations.
Represented by Linklaters, one of London’s elite “Magic Circle” law firms renowned for its corporate and financial expertise, the investment firm asserts that its strategies align with standard market practice and were far from an “existential gamble” as the council alleges.
Federated Hermes blames the significant losses on “extreme and unprecedented” global events, specifically citing the Covid-19 pandemic and the war in Ukraine.
The Covid-19 pandemic led to sharp drops in energy demand and increased price volatility across European markets, while Russia’s invasion of Ukraine in February 2022 triggered a severe energy crisis, causing gas and electricity prices to soar across the continent.
Although Sweden uses little natural gas for electricity production, its energy market is interconnected with Europe, leading to increased volatility and higher prices, particularly in southern regions.
Moreover, the defence, led by Richard Handyside KC, highlights a critical “no liability” clause within the investment agreement. This clause stipulates that Federated Hermes is not liable for losses “save in respect of any loss resulting from fraud, gross negligence, wilful misconduct, bad faith, material breach of this agreement or reckless disregard for their obligations or duties.”
Mr Handyside argues that the council’s case relies “entirely on hindsight” and does not accurately reflect how a competent investment manager would have assessed the investment at the time.
A key point of contention revolves around the “baseload power purchase agreements” (PPAs) associated with four of the wind farms. Aberdeen City Council’s lead counsel, Steven Elliot KC, claims these contracts exposed investors to “substantial losses” by obliging the wind farms to deliver fixed quantities of power or pay the difference at higher spot market prices. He contends that Sweden’s “notorious” variable winds and volatile electricity prices made this an “unusually high risk” venture.
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Conversely, Mr Handyside KC argues that the council “misunderstands” how these baseload PPAs function, describing them as a “purely financial instrument” and a common hedging mechanism in Sweden to stabilise wind farm income. He states that the wind farm does not sell its actual production under these agreements, and therefore “there is never a ‘shortfall’ in any physical delivery obligation.”
The council further alleges that Federated Hermes failed to take timely action to mitigate risks once problems became apparent. However, Hermes maintains it launched restructuring talks in late 2022 and asserts that the wind farms are part of a wider fund still expected to yield an overall positive return for investors.
The complex legal battle continues in the High Court.
