Climate Change Claims: Risks For Directors

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Climate Change Claims: Risks For Directors

As the High Court dismisses ClientEarth’s shareholder derivative claim against Shell, what could this mean for the future of climate-related litigation?

Key contact: Aisha Wardell

Author: Rachel McCulloch

Climate change-related litigation is a growing trend and is set to continue with the drive to reach net zero. The directors of Shell were recently in the firing line as one of its shareholders, climate activist group ClientEarth, brought a claim against them alleging that as the company cannot achieve its aim of net zero carbon emissions by 2050 with its current climate transition strategy, its directors were in breach of their statutory duties owed to shareholders.

The case was touted as a “world-first” of a shareholder bringing a claim on behalf of a company (termed a ‘derivative action’ in legal terms) to hold the directors of a listed company to account for allegedly failing to manage climate change risks.

ClientEarth, which holds a minority stake of 27 shares in Shell, argued that in failing to accord appropriate weight to climate risk Shell’s directors had breached their statutory duty to promote the success of the company and the duty to exercise reasonable skill, care and diligence.

ClientEarth’s case was that Shell’s directors owed duties incidental to their statutory duties, including a duty to accord appropriate weight to climate risk and to adopt strategies reasonably likely to meet Shell’s targets to mitigate climate risk. However, the Court disagreed and gave a number of reasons for dismissing the case, namely:

  • the Court was reluctant to interfere with the business decisions of company directors, both in terms of any climate change strategies to be adopted and the way those strategies are implemented;
  • directors themselves are best placed to consider and balance a range of competing considerations to come to a commercial decision- the Court is ill-equipped to carry out this exercise to determine the efficacy of board decisions and strategy; and
  • it is a well-established legal principal that directors themselves determine (acting in good faith) how best to promote the success of a company.

Shareholders bringing derivative claims need to prove they are acting in good faith. Interestingly for future climate-related litigation, the judge stated that as ClientEarth is a climate change activist organisation, an inference must be drawn that its true interest in bringing the claim was not for the benefit of the shareholders of Shell as a whole. This would suggest that in any future derivative claims, it may automatically be assumed that activist groups that hold shares in companies harbour an ulterior motive in bringing  a claim and are pursuing their own policy agenda in alleging breach of directors’ duties.

If the lawsuit had been allowed to proceed, it could have opened the door for shareholders and investors in other companies to sue boards that allegedly fail to adequately manage climate-related risks. However, it may not be the end of the matter as ClientEarth has confirmed its intention to appeal.

If you would like advice on achieving your business’ ESG objectives, please contact our ESG team.

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