Company Law and Climate Change
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Companies face financial, physical, legal, and reputational risks from climate change, whilst also contributing to a large volume of UK and global greenhouse gas emissions. As countries increase national targets to reduce emissions under the Paris Agreement, companies are under increasing pressure to reduce emissions and become resilient to climate change impacts. Company law sets the framework for corporate purpose and operations, and can help to drive this change.
Climate change has multiple implications on company law. Climate issues are already influencing the relationship between boards and shareholders, may be relevant to existing fiduciary duties, and have resulted in a range of reporting and disclosure requirements. Company law may help drive further climate action by strengthening directors’ duties relating to the environment, creating broader and more stringent disclosure requirements, or potentially even offering alternatives to traditional business models and purposes.
Key points in this section:
- Addressing climate change is now widely recognised as important not only to companies’ broader social responsibility, but to their competitiveness and financial success.
- Directors who fail to adequately consider climate action may be breaching their fiduciary duties under Sections 172 and 174 of the Companies Act, but litigation on these grounds has faced barriers.
- The UK has introduced mandatory Taskforce on Climate-related Financial Disclosures (TCFD) aligned reporting requirements. These disclosure and reporting rules are likely to grow in the scope of companies to which they apply, and in the types of emissions that companies must report.
- A significant part of companies’ impact on the climate occurs within supply chains, and new due diligence rules are requiring that companies keep track of how their supply chains are contributing to climate change and other environmental impacts.
- New purpose-driven business structures such as ‘benefit corporations’ are emerging. These businesses may self-impose legal requirements to consider how their activities impact the climate.
How climate change is impacting company law
Stakeholder relationships and climate change
As fiduciaries of the company, and as reflected in the Model Articles, a company’s board of directors has responsibility for managing the company’s business, while shareholders’ ability to directly influence company operations under the Model Articles is generally limited to special resolutions. In companies which have not adopted the Model Articles, shareholders’ ability to influence company operations through special resolutions may be more limited. Shareholders have alternative methods of influencing the board, including by exercising their power under Section 168 of the Companies Act 2006 to remove directors of the board via ordinary resolution. The board of directors therefore oversees the company’s environmental strategy, but it is ultimately accountable to shareholders.
The way that company law manages the relationship between shareholders and directors is relevant to climate change. Shareholders who are committed to tackling climate change may compel or encourage boards to scale up or improve their climate strategies. Such shareholders may be incumbents looking to steward a company towards better climate policy or activist investors who buy shares with the purpose of compelling this change. Directors who fail to meet shareholder expectations may face being removed by ordinary resolution at the next general meeting.
Beyond the director-shareholder relationship, companies must also consider employees when devising climate strategy. In certain sectors, the interests of employees and labour groups may align less closely than shareholder interests with the net zero transition. Labour law may help manage some of these concerns.
Directors must comply with their fiduciary duties under the Companies Act and common law. Particularly relevant to climate change are the requirements to act in the best interests of the company set out in Section 172, and to exercise reasonable care, skill, and diligence under Section 174.
Prior to the enactment of Section 172, the common law position generally equated the interests of the company with those of the shareholders, a position known as shareholder primacy. In light of this, commentators noticed a trend where directors prioritised short-term profits rather than long-term benefits. Consequently, environmental concerns and sustainability were low on many boards’ agendas. However, the courts have also indicated that owing duties to the company was not equivalent to owing duties to the contemporaneous shareholders of the company. Now, under the Companies Act’s ‘Enlightened Shareholder Value’ conception of corporate purpose, directors are required to act in the best interests of the company for the benefit of the shareholders as a whole. Courts have held that this refers to the shareholders of the company as a group, and includes future shareholders. Directors are also required to have regard to the interests of other stakeholders including ‘the impact of the company’s operations on the community and the environment’.
Whilst in theory this new concept of shareholder value should integrate climate considerations in directors’ duties, some argue that little has changed and that directors must only have regard to non-shareholder interests where these impact shareholders generally. However, the courts have recently indicated that failing to consider the interests of other stakeholders, to the extent required by section 172, could give rise to a breach of duty in certain circumstances.
Whether a director has met the Section 174 duty to act with due care, skill and diligence is determined on both an objective and subjective basis; the court examines whether a director has acted to the standard of a “reasonable” board member, and whether they have acted to a standard commensurate with the knowledge, skill and expertise which they actually have. What the standard of a “reasonable” board member entails varies over time, as the social, economic and commercial contexts in which the company operates changes. Boards are subject to a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them to properly discharge their duties as directors, and lack of knowledge, skills or experience on the part of the director will generally not serve as a defence where they fail to meet the objective standard. As the commercial world increases its focus on sustainability matters through, for example, the increasing uptake of voluntary disclosure frameworks requiring disclosures on sustainability-risk management, and certainly as directors become subject to regulations requiring such disclosures, it follows that the objective standard of care to which directors are held is likely to include consideration of these factors.
As the financial impact of climate risks becomes clearer, climate change may still be a relevant consideration to directors’ duties. Regardless of duties to other stakeholders, the nexus between effective climate strategies and long-term financial benefit is becoming well-recognised. Even if directors only owe duties to their shareholders they may still have a duty to consider and combat climate change. Lord Sales recognised this in an extrajudicial speech in 2019, and Australian jurists have expressed similar views in the Hutley Opinions. This link between climate change and directors’ duties raises the prospect of climate litigation.
Litigating directors’ duties
If a director breaches his or her duty, shareholders can bring a derivative claim on behalf of the company. In addition to giving existing shareholders the right to bring a claim against a board which fails to act on climate change, this also opens the possibility of activist groups buying shares in a company specifically to pursue such a claim. However, the particularly onerous permission stage of derivative actions means that only a small percentage of such claims are ever heard on their merits. This has led to some calls to broaden the statutory schemes for derivative actions.
One example of a derivative action was brought by the NGO ClientEarth against Shell plc arguing that the ‘Board’s failure to adopt and implement a climate strategy that truly aligns with the Paris Agreement is a breach of their duties under the UK Companies Act’. Another derivative action, which did not receive permission from the High Court, was brought by the beneficiaries of the Universities Superannuation Scheme against the directors of the fund management company on the basis that, amongst other failures, the board had failed to create a credible plan to divest from fossil fuels. Climate change therefore leads to an increased risk of litigation to boards for failure to fulfil their statutory duties, though these claims may continue to struggle to succeed under existing legal frameworks. As a potential prelude to a derivative action, shareholders can use ‘books and records’ requests to obtain court orders requiring that companies disclose certain information. This course of action has been successful in the context of climate change in Australia, and even by themselves such claims might pose reputational risks for companies and boards.
Companies are legally obliged to provide the market with certain information, in particular financial statements and information about material risks facing the company. As climate awareness grows, there has been a push for companies to report their exposure to climate risks and opportunities. This started through extra-legal initiatives such as the Taskforce on Climate-related Financial Disclosures which provides frameworks for voluntary climate-related reporting and disclosure. Since January 2021, FCA rules have compelled premium-listed companies on the London Stock Exchange to implement TCFD disclosure on a ‘comply or explain’ basis, with further changes to the Listing Rules in January 2022 extending these obligations to standard-listed companies and FCA-regulated asset managers and asset owners. Further regulations that came into force in 2022 have amended the Companies Act to make TCFD-aligned disclosures mandatory for a broader range of large companies and limited liability partnerships. These rules apply to companies with over 500 employees if they are traded, are a banking or insurance company, or have an annual turnover above £500 million. Where applicable, reporting must occur at a group level.
Other relevant reporting requirements include the ‘Section 172 report’, in which the board must set out how it has met its fiduciary duty to act in the best interests of the company. As explored above, considering climate risks may well form part of a director’s duty under s172. Quoted (publicly listed) companies, large companies, and large LLPs must also comply with the Streamlined Energy and Carbon Reporting (SECR) rules by reporting their annual energy use and the carbon intensity of this energy. Climate change may also be relevant to other documents such as a company’s strategic or financial reports.
Though mandatory reporting and disclosure rules do not directly compel companies to reduce their emissions, they give transparency about a company’s exposure to climate change. In doing so, companies with substandard climate strategies may receive less investment and be exposed to reputational risks. Additionally, as discussed above, these disclosure rules may affect the standard directors are required to meet in order to act with due care, skill and diligence.
Other legislation and litigation
In recent years there has been an influx of climate change regulations and legislation that can present both risks and opportunities to companies. Though not directly related to company law, a board may need to effectively navigate this legislation to fulfil its legal duties. In addition to ensuring that the company complies with legal requirements, being aware of, and seizing any opportunities associated with, other climate-related policies may be necessary for a director to carry out their fiduciary duties. These pieces of legislation may also guide corporate purpose by better aligning financial and environmental interests. Examples of relevant policies include the UK’s Emissions Trading Scheme, the Climate Change Levy, and the Energy Savings Opportunity Scheme.
Similarly, litigation grounded in other areas of law poses a risk to companies and their directors. Though most climate litigation has targeted governments, companies are also becoming defendants in different strands of climate litigation (for example, tort cases and greenwashing claims). This theme of litigation could pose salient risks to businesses, so may be relevant to reporting requirements and general business strategy.
How company law can drive the net zero transition
Broadening and harmonising disclosure standards
Climate change has already impacted UK company law through the integration of climate considerations in existing reporting requirements, the imposition of TCFD-aligned disclosures through FCA rules, and the amendment of the Companies Act. The number of companies subject to these requirements is likely to increase. Indeed, the UK Government has expressed an intention to implement economy-wide TCFD disclosure requirements by 2025, which may help compel climate action in a broader range of businesses.
There has also been a push to harmonise standards and proliferate climate disclosure globally, for example through the IFRS’ International Sustainability Standards Board. Although the UK itself already has stringent climate reporting standards when compared to most countries, changes at an international level may be important to companies with significant activity or supply chains abroad.
The Taskforce for Nature-related Financial Disclosures has a similar mission but focusses on the impact that businesses’ have on nature and may, if it follows a similar path to climate disclosures, eventually be implemented in legal requirements. Given the strong links between protecting nature and addressing climate change, legal nature-related disclosure would also likely contribute to mitigating and adapting to climate change.
Strengthening directors’ duties towards the climate
Although considering climate impacts, and especially managing climate risks, may well fall under current directors’ duties, there have been calls to make this more explicit. This could be done through reforming the Companies Act to ensure that social and environmental interests are given greater weight in comparison to shareholder interests. The Better Business Act is a business-led campaign that has advocated along these lines. Alongside other proposed changes, the Better Business Act would reform s172 of the Companies Act so that directors would have a duty to ‘advance the purpose’ rather than ‘promote the success’ of their company. This purpose, under the Better Business Act, would need to involve benefiting company members while also benefiting and reducing harm to the environment.
In the absence of such legislative action, judges may decide to make the link between existing s172 obligations and climate change clearer. Of course, any clarification from the judiciary would require these issues to be considered in a case. As explored above, derivative actions rarely pass the permission stage which may be a barrier for climate-related claims against directors. There have been some calls to loosen the s263 requirements to give derivative actions a greater chance of success. Loosening these requirements could make the risk of litigation under s172 or s174 of the Companies Act more salient and could therefore create more climate accountability on boards.
Supply chain due diligence
Many companies’ direct (Scopes 1 and 2) emissions make up only a fraction of their impact on the climate when including emissions from across their products and services’ value chains (Scope 3). One way of addressing this is through better supply chain management, which requires due diligence on the part of the company. Legal sustainability due diligence requirements could mandate that businesses follow due diligence procedures to better understand the environmental impact of their supply chains. One example of such requirements is in the German Supply Chain Act, though it is unclear whether similar legislation would be implemented in the UK. Parliament has passed more specific due diligence requirements focused on forest risk commodities, which are a key contributor to climate change and biodiversity loss, in the Environment Act 2021.
Corporate purpose has traditionally centred on maximising value for shareholders. Though, as explored above, climate risks and opportunities are often relevant within this traditional framework, some businesses are explicitly integrating climate action in their purpose. One vehicle for doing so is through the ‘B Corp’ (benefit corporation) movement. In the UK, B Corps exist as a voluntary classification for companies that wish to formally describe their purpose as involving fulfilling social and environmental goals, and bind themselves to relevant requirements. Businesses can give this legal effect by changing their articles of association. Benefit corporations have received formal recognition from legislators in Italy and France. The Better Business Act, outlined above, would make all UK companies purpose-driven, and explicitly gives companies scope to establish a more ambitious purpose. If the UK were to recognise B Corps in its company law, it could more readily enforce company commitments to environmental causes.
Piercing the veil
There have been many calls to make individuals accountable for the action they take in accelerating climate change through investing in or managing businesses, and to ensure that parent companies can be held responsible for environmental damage caused by their subsidiaries. A company duly incorporated under the Companies Acts constitutes a separate legal entity from its members and thus has its own rights and obligations and these do not become those of the members of the company. Consequently, the management and members of the company are shielded from personal claims by those impacted by the environmental damage caused by a company’s actions. Following Prest v Petrodel Resources, the corporate veil can only be pierced where the company is a sham and the director/s seek to interpose the company between themselves and the enforcement of a pre-existing legal obligation with the intention of defeating it. It will generally be very difficult to pierce the veil in order to hold directors accountable for environmental damage.
Tort law may prove a useful mechanism in the case of corporate groups. This is because, through the tort of negligence, parent companies can be held responsible for harm caused by their subsidiaries, even if these are located in other jurisdictions. Indeed, Vedanta Resources PLC and another (Appellants) v Lungowe and others (Respondents) and HRH Emere Godwin Bebe Okpabi and others v Royal Dutch Shell plc, have demonstrated that in certain cases UK-based parent companies can be made defendants in negligence claims where it was the subsidiary that caused the harm. Additionally, if the tort is committed at the direction of a director, that director can be found to be liable for the tort.
Written by Emilios Hadjiandreou and Nick Scott
Reviewed by Alex Cooper, Commonwealth Climate and Law Initiative
 Companies (Model Articles) Regulations 2008, SI 2008/3229, Sch 1: Model Articles for Private Companies, para 3, Part 2.
 See, for example, Ibid. Part 4. Shareholders’ power to use special resolutions to require directors to carry out certain actions may vary depending on the contents of the company’s articles of association. In cases where the company’s articles have not required directors to act in accordance with special resolutions, and directors have not done so, the court has sided with the directors: see: John Shaw & Sons (Salford) Ltd v Shaw  2 KB 113.
 Martin Gelter, ‘Sustainability and Corporate Stakeholders’ (Oxford Business Law Blog, 7 July 2021) https://www.law.ox.ac.uk/business-law-blog/blog/2021/07/sustainability-and-corporate-stakeholders.
 J.E. Parkinson, Corporate Power and Responsibility (Clarendon Press 1993)
 See Gaiman v National Association for Mental Health  Ch 317 at 330; Brady v Brady (1987) 3 BCC 535 at 552; Fulham Football Club Ltd v Cabra Estates plc  1 BCLC 363 at 379.
 S.172(1)(d), Companies Act 2006
 Lisa Benjamin, ‘The Duty of Due Consideration in the Anthropocene: Climate Risk and English Directorial Duties’ (2017) 11(2) Carbon and Climate Law Review 90
 See Faulkner v Vollin Holdings Ltd  EWHC 787 (Ch).
 See the discussion in Andrew Keay, Directors’ Duties, 4th ed. (June 2020) at [8.18]-[8.31], which covers the development of English law from a position in which directors were regarded as “amateurs” and held to a low standard, to the current position where directors are held to a standard of reasonable care, skill and diligence, judged on a subjective and objective basis.
 Re Barings (No.5)  1 BCLC 433
 See, for example, Re. DKG Contractors Ltd  BCC 903, in which an inexperienced director was held to have breached their duty under Section 174.
 Lord Sales, Justice of the Supreme Court. ‘Directors’ duties and climate change: Keeping pace with environmental challenges’. (Speech to the Anglo-Australian Law Society, 27 August 2019). < https://law-ccli-2019.sites.olt.ubc.ca/files/2019/09/Lord-Sales-speech.pdf>
 Noel Hutley and Sebastian Hartford Davis. ‘Climate Change and Directors’ Duties’. (Centre for Policy Development, 23 April 2021). < https://cpd.org.au/wp-content/uploads/2021/04/Further-Supplementary-Opinion-2021-3.pdf> .
 Gibbs-Kneller, David, and Chidiebere Ogbonnaya. ‘Empirical Analysis of the Statutory Derivative Claim: De Facto Application and the Sine Quibus Non.’ The Journal of Corporate Law Studies 19.2 (2019): 303-32.
 Andrew Keay, ‘Assessing and Rethinking the Statutory Scheme for Derivative Actions under the Companies Act 2006’ (2016) Journal of Corporate Law Studies 39, 40, 43.
 ‘ClientEarth Starts Legal Action against Shell’s Board over Mismanagement of Climate Risk’ (ClientEarth Website, March 15 2022) (<https://www.clientearth.org/latest/press-office/press/clientearth-starts-legal-action-against-shell-s-board-over-mismanagement-of-climate-risk/> accessed 28 June 2022.
 McGaughey & Anor v Universities Superannuation Scheme Ltd & Anor  EWHC 1233 (Ch) (24 May 2022)
 Commonwealth Climate and Law Initiative. ‘Climate Litigation: Briefing Note For Boards’ (Commonwealth Climate and Law Initiative Website, 2022). <https://commonwealthclimatelaw.org/ccli-cgi-climate-litigation-brief/>.
 Abrahams v Commonwealth Bank of Australia. 2021. Federal Court of Australia | NSD864/2021.
 London Stock Exchange. ‘Your guide to climate reporting: Guidance for London-listed companies on the integration of climate reporting best practice and TCFD implementation.’ (2021). https://docs.londonstockexchange.com/sites/default/files/documents/LSE_guide_to_climate_reporting_final_0.pdf>.
 Department for Business, Energy & Industrial Strategy. ‘Climate-related Financial Disclosures for Companies and Limited Liability Partnerships’. (UK Government Website, 21 February 2022). <https://www.gov.uk/government/publications/climate-related-financial-disclosures-for-companies-and-limited-liability-partnerships-llps>.
 Environment Act 2021, s 116.
 Helena Vieira, ‘How beneficial are benefit corporations?’ (LSE Business Review, 21 February 2017).
 Salomon v Salomon & Co Ltd  A.C. 22
 2013 [UKSC] 34
  UKSC 20
  UKSC 3.
 Rainham Chemical Works v Belvedere Fish Guano Company Ltd  AC 465.