In 2023, ClientEarth, a UK environmental activist group, together with other shareholders in Shell, proceeded with a derivative action against the directors of Shell Plc. Holding 27 shares in Shell Plc, ClientEarth attempted to employ a method in which a shareholder can file a lawsuit against a firm’s directors in the name of the company if they could prove that Shell’s directors fell short of their duties. It is noteworthy that ClientEarth’s primary intention was to emulate an actionsimilar to that undertaken successfully against Shell by a Dutch environmental group, Milieudefensie/Friends of the Earth Netherlands, and other co-plaintiff NGOs, (including ActionAid NL, Both ENDS, Fossielvrij NL, Greenpeace NL, Young Friends of the Earth NL, Waddenvereniging) and more than 17000 citizens (Milieudefensie et al. v. Royal Dutch Shell plc). The applicants in that case alleged that Shell’s contributions to climate change violated its duty of care under Dutch law and human rights obligations. On 26 May2021, the Hague District Court ruled that Shell’s carbon emissions were in breach of Dutch law and ordered it to reduce its carbon emissions by 45% by 2030.
That case built on the landmark 2015 Urgenda decision which, globally, was the first successful climate action against any government, finding that the Dutch government’s inadequate action on climate change violated a duty of care to its citizens. In the ClientEarth action against Shell, the plaintiffs sought to extend this argument to private companies, arguing that, given the goals of the Paris Agreement and the scientific evidence regarding the dangers of climate change, Shell has a duty of care to take action to reduce its greenhouse gas emissions. The UK court was asked to decide if the arguments made by ClientEarth were adequate to establish a prima facie case of duty breach; if not, the derivative action would not be permitted to move forward since it would not be in the company’s best interests. In July 2023, Mr Justice Trower, handed down the judgment, refusing Client Earth’s permission to bring a claim on behalf of Shell against its board of directors. This case is important since it emphasised the difficulty in establishing breaches of director’s duties as articulated in s172 Companies Act (CA) 2006.
Mr Justice Trower determined that ClientEarth did not establish a prima facie case because:
Firstly, they were unable to provide expert evidence to support their claim that Shell Plc’s directors had breached their general duties to promote the success of Shell (s. 172 of CA 2006) and to exercise reasonable care, skill and diligence (s. 174 of CA 2006), along with certain specific or ‘incidental’ duties formulated by ClientEarth (such as a duty to make judgements regarding climate risk that are based upon a reasonable consensus of scientific opinion).The duties of directors relied on by ClientEarth included two of the statutory duties owed by the directors to Shell pursuant to s.170 of CA 2006: the duty to promote the success of Shell (s.172 of CA 2006) and the duty to exercise reasonable care, skill and diligence (s.174 of CA 2006). However, ClientEarth ignored the fact that the management of a business of the size and complexity of Shell Plc required the directors to take into account a range of competing considerations, “the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere.” (paragraph 66 of the judgment).
Secondly, in regard to the energy transition strategy (“ETS”) which set an overall target for Shell to become a net zero (“NZ”) energy business by 2050, Justice Trower held that there is no universally acceptable method to achieve the ETS, thus these decisions are subject to the autonomy of decision making of the directors on commercial issues, utilising their best judgement. It could be argued that, taking into account the severity and urgency of climate risk, it might be worthwhile re-assessing this wide discretion given to directors and trying to define the criteria for areas concerning climate change.
Thirdly, it was challenging for the applicants to prove breaches of directors’ responsibilities due to the complex decision-making process in a firm listed on the London Stock Exchange (LSE). The judgment emphasised that the factors which directors must consider according to s172 CA 2006 are primarily business judgements, which the court is not well-suited to determine unless there is a clear-cut situation.
In thejudgment in the Milieudefensie v Royal Dutch Shell plc Dutch case referred to above, which ClientEarth tried to emulate in UK, the Dutch Court reinforced the point that it was Shell’s responsibility to decide how to comply with the reduction obligations set by Dutch law. It accepted the fact that Shell was not currently acting in an unlawful manner and recognised that it is a matter for Shell as to how it exercises its discretion to comply with the reduction obligations imposed by Dutch law. There was no prima facie case that the directors had breached their duties in respect of the Dutch order. In the English case, ClientEarth could not succeed in proving that the Shell Plc directors had breached their duty of care. It is worth observing Justice Trower’s opinions concerning whether UK directors are bound to take reasonable steps to ensure that the order of a foreign court is obeyed, as expressed in paragraph 36 of the July 2023 judgment:
“I also agree that the nature and extent of the Directors’ duties to Shell are governed by English law as the law of Shell’s incorporation, as to which the underlying point is the same. There is no established English law duty separate or distinct from the general duties owed by the Directors to Shell under CA 2006, which requires them to take reasonable steps to ensure that the order of a foreign court is obeyed, let alone to ensure compliance with that order.”
Fourthly, the reference to Client Earth’s small shareholding in refusing permission to proceed with the derivative action was also significant. Given the nature of the derivative action, it may be implied from the judgment that “activist” shareholders, taking small stakes in companies with the aim of bringing derivative actions against the directors may face judicial scepticism, which is another hurdle to bringing a derivative claim successfully. In another recent case (Compound Photonics Group Ltd; Faulkner v. Vollin Holdings Ltd) in 2022, the Court of Appeal demonstrated that shareholders must meet the objective “duty of good faith test” for a claim to succeed. This clause prohibits conduct that reasonable and honest people would regard as commercially unacceptable without necessarily being dishonest.
Although the UK ClientEarth case cannot be said to be encouraging for climate litigants, it is fair to comment that it also fails materially to advance the issue as to how directors in the UK should satisfy their duties under s.172 and s.174 CA 2006, with reference to the ESG (environmental, social and governance) impacts of the company’s operations. Companies currently are, on account of ESG activism, extremely vulnerable when their ESG goals are not transparent and measurable. ESG reports should be accurate and aspirational statements based on attainable plans,presented realistically. Activists can also target companies they suspect of greenwashing, i.e. when firms disclose large quantities of unaudited ESG data, but have poor ESG performance. In the face of activist attacks, the burden of cost falls squarely on the company itself, as detailed in this report.
Looking ahead, as a result of this decision, it will be impossible to argue that directors have not behaved fairly in addressing climate matters unless there is a ‘universally acknowledged standard’ by which climate activity can be judged. This then raises the question of how and where else can proof of the s.172 and s.174 CA 2006 effectiveness be found if not in its rigorous enforcement in a directors’ duty violation case. More specifically, the judgment demonstrates the need for persuasive expert evidence at the prima facie stage. Given the subject matter of the issues in environmental disputes of this type, this would be an onerous and expensive evidential hurdle to overcome. Thus, it might be considered unreasonable by the court to request expert evidence at the prima facie stage
While this derivative climate change action under s. 260 CA 2006 against a company may be the first in the UK, it is worth noting that this is not the case in other regions of the world. For example, in Poland in 2018, the Polish ClientEarth filed a lawsuit against Enea, a Polish energy provider, which successfully saw the company’s decision to build a €1.2bn coal-fired power station overturned.
Similarly, a 2019 Exxon Mobil Corp Derivative litigation was a response to the failure to disclose major climate-related hazards in various areas including Alberta, Canada, Mobile Bay and others. Claims were filed against ExxonMobil, its Chairman, CEO, and other directors in the United States, alleging substantial misrepresentations and violations of fiduciary responsibilities. However in 2019 the case was transferred to the Northern District of Texas, where a putative federal securities class action filed in 2016 and a consolidated federal derivative action filed in 2019 are pending.
In Italy in 2022, Italian NGOs and environmental groups filed a complaint with the OECD’s National Contact Point, claiming that the oil corporation ENI’s current economic strategy was inadequate to address the impacts of climate change. The lawsuit detailed how ENI has promised to achieve net zero emissions by 2050, but instead, was taking measures that would have the opposite effect. At time of writing, the outcome of this litigation is pending.
With regard to such climate related litigation in other jurisdictions, going to court can be a powerful tool to highlight perceived ESG failures. While litigants might lose the case, they can still win in the court of public opinion.
None the less,there are positive lessons to be learned from the ClientEarth case, principally because it has raised the level of interest and understanding of the issues and obstacles related to climate change and ETS. The case has emphasised the necessity for climate change awareness and expertise on corporate boards in the UK.
In this regard, directors should not be too complacent. The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 stipulate the following duties for the board of directors in these relevant sections:
414C, S. 2, (b) a description of the principal risks and uncertainties facing the company, 414C S.7 (b) (i) environmental matters (including the impact of the company’s business on the environment) and Part Seven Sections 15-20 – Disclosures Concerning Greenhouse Gas Emissions.
Although this particular ClientEarth action was unsuccessful, due primarily to procedural obstacles, boards of directors nevertheless still face significant climate change related legal risks. The rapidly increasing threat of climate change and the impacts of the energy transition will increasingly affect all major fossil fuel companies, as well as their contractors, suppliers, and funders.
