In February 2023, the non-profit environmental organisation, ClientEarth, brought a claim in the High Court of England & Wales against Shell Plc's board of directors, alleging that they had breached their legal duties under the Companies Act 2006 by failing to adopt and implement an energy transition strategy which aligns with the environmental aims of the Paris Agreement. The claim itself was launched almost a year after ClientEarth first notified the Shell directors in early 2022 of their intention to litigate. On 12 May, the High Court refused permission to continue the claim. Does this sound the death knell for climate litigation in the UK, or merely provide a temporary reprieve for directors? Given the different motivations behind modern environmental litigation, it is also necessary to consider whether this is really a "loss" at all for ClientEarth given the publicity their claim has already generated.
Derivative claims procedure
ClientEarth's claim was brought in their capacity as a Shell shareholder (having acquired 27 shares), using the derivative claim procedure in the Companies Act 2006. In essence, that process permits shareholders to bring a claim on behalf of the company for negligence, breach of duty or breach of trust by a company director. It is, as the court explained, an exceptional procedure, and as such requires a shareholder to obtain permission from the court in order to continue such claim. In procedural terms, the question for the court was whether, on the face of its application, ClientEarth had established a prima facie case that it should be given permission to continue the claim on behalf of Shell.
ClientEarth argued that the directors of Shell Plc had breached two duties under the Companies Act 2006:
- The s.172 duty to promote the success of the company for the benefit of the members as a whole. This is supplemented by a non-exhaustive list of factors the directors must have regard to, which includes the company's impact on the environment.
- The duty under s.174 to exercise reasonable care, skill and diligence.
ClientEarth argued that, when considering climate risk, these statutory duties gave rise to six incidental duties, including a duty to accord appropriate weight to climate risk, and a duty to implement reasonable measures to mitigate risks to Shell's long-term profitability in the context of a global energy transition away from fossil fuels. It argued that the targets adopted by Shell's board do not materially mitigate the climate risk facing the company, and that the board's approach was outside the range of reasonable responses to climate change risk.
ClientEarth also asserted breaches as a result of the directors' response to an earlier judgment made by the Hague District Court, which had ordered Shell to reduce its emissions by 45% by 2030 (compared to 2019). The much publicised 2021 Milieudefensie case has, in many ways, kick-started the recent increase in focus on climate litigation as a real threat which companies and their boards have to consider, moving Environmental, Social, and Governance (ESG) and associated litigation swiftly up the corporate risk register.
ClientEarth asked the court for an injunction requiring directors to adopt and implement a strategy to manage climate risk, and to comply with the Dutch court order.
No prima facie case for permission
While the court accepted that ClientEarth had prima facie established that Shell faces material and foreseeable risks to its business as a result of climate change, it held that it had not demonstrated a prima facie case that the directors have breached their duty in shaping Shell's response to those risks. Accordingly, it dismissed ClientEarth's application. Among its reasons were the following:
- Directors' latitude – the court stressed that it is for the directors themselves to determine, acting in good faith, how best to promote the success of a company and how to weigh the non-exhaustive factors listed in the act in doing so. The proper balancing of these competing considerations is a "classic management decision with which the court is ill-equipped to interfere", and imposing the absolute duties that ClientEarth argued for would cut across this balancing act. In the court's view, the evidence fell some way short of establishing a prima facie case that Shell's business is not being managed in the best interests of members.
- Nature and utility of relief – the court also held that the nature and utility of the relief sought are relevant to whether permission should be given. The injunction sought by ClientEarth was too imprecise, and fell foul of the basic principle that the court will not grant relief which would require its continuing supervision. Nor is it the court's function to express views as to the Directors' conduct in the form of a declaration which has no substantive effect and which fulfils no legally relevant purpose.
- Ulterior motive – the court found that ClientEarth's primary purpose in bringing the claim was not to promote the success of Shell, but to advance ClientEarth's own policy agenda. Notwithstanding that ClientEarth had secured letters of support from other shareholders (ClientEarth had managed to generate support for its claim from shareholders with 12.2 million shares in Shell and letters of alignment from shareholders representing a further 12.5 million shares, but given the sheer scale of Shell's operation that amounted to less than 0.4% of the total shareholder base), the court considered that bringing the claim on the basis of its 27 share stake gave rise to a clear inference that ClientEarth's real interest was not in how best to promote the success of Shell, and this had to be set against the high level of support (over 80% of the shareholders) among other members for Shell's Energy Transition Strategy.
A temporary reprieve
ClientEarth's claim was the first time derivative claim process has been used to advance environmental aims in this way in the UK. As the court identified, simply bringing such a claim (whether or not it is allowed to proceed) is a means for organisations like ClientEarth to gain publicity and advance their policy agenda, and so while this decision demonstrates the hurdles that activist investors will face in getting such a claim off the ground, this is likely to be only a temporary reprieve for directors, rather than a real setback for climate litigation. Given the publicity which ClientEarth has already generated through this case, bringing the claim could be seen as a valuable victory in its own right, potentially encouraging others to do the same. The approach which has been adopted by ClientEarth in this case is also only one of the ways that companies and their directors could be subject to environmental, or other ESG, litigation, and it should be remembered that more "traditional" forms of litigation don't impose the same onerous hurdle of requiring the Court to grant permission to continue. To that end, directors should carefully consider ESG risks in the context of their Directors and Officers cover. For more information, see our recent article: Directors & Officers liability – claims and insurance in 2023.
ClientEarth has sought, and obtained, an oral hearing at the High Court to request the reconsideration of this decision, so there is more to come. We will be watching this space closely for further developments, as the ramifications for all businesses, and beyond, are likely to be hugely significant.
For more information on climate litigation, please contact Sean Adams or Emma Carr.