Climate change poses financial and liability risks to companies. By addressing these risks, businesses can find opportunities to grow and adapt. Nick Scott’s leadership insight links climate change to directors’ duties and examines how English courts have responded. It summarises direct litigation risks and related legal and non-legal threats and suggests how understanding this issue could help businesses implement effective climate strategies.
Insight Highlights:
- Climate change’s major financial implications, alongside directors’ statutory obligations to consider environmental impacts and long-term consequences in promoting the success of the company, indicate a clear link between sustainability and directors’ duties.
- Derivative actions brought against directors face numerous potential barriers, but boards should nonetheless be aware of the potential litigation risk associated with an inadequate climate strategy.
- Ambitious and integrated sustainability strategies may help directors avoid these legal risks and discharge their duties as they seize business opportunities through the net zero transition.
Report Summary:
Climate change has clear implications for many organisations and their financial success – companies that ignore climate change expose themselves to financial and liability risks, whereas in mitigating and adapting to climate risks, businesses can seize opportunities to develop and diversify in order to survive and thrive in a changing climate.
In the UK, directors have duties to act in their companies’ best interests which are enshrined in the Companies Act 2006 (‘CA 2006′). Commentators, academics and industry actors argue that directors are permitted, and some consider are required, to create credible climate strategies in order to fulfil their legal duties prescribed in the CA 2006. Recently, litigants have sought to test this theory in court – most notably in ClientEarth’s derivative action against Shell’s board of directors, commenced in the High Court of England and Wales in 2023.
This paper provides an overview of how climate change is linked to directors’ duties and explains how this issue has been received by the English courts to date. It then summarises the direct litigation risk alongside related legal and non-legal risks, and finally suggests how understanding this issue could help businesses implement effective climate strategies.
About the author: Nick Scott is manager of the Law for Climate Action Programme at the Centre for Climate Engagement. This programme engages academics, legal practitioners, and corporates to determine legal solutions to the climate crisis. This includes finding ways to leverage existing legislation to address climate change, and also investigating emerging climate law and policy measures, particularly those relevant to business. Nick has law degrees from the University of Cambridge and the University of California, Berkeley.
Slingshot