On 9 February 2023, ClientEarth, a non-profit environmental law organisation and UK registered charity, brought a claim against the directors of Shell plc before the High Court of England and Wales, alleging breaches of their duties as directors for failing to take certain steps to manage climate risks. This case note, an adapted version of which was published in the Austrian journal Nachhaltigkeitsrecht, gives brief summary of the claim and the High Court’s judgment, ahead of a longer insight from the CCE on directors’ duties and climate change.
By Nick Scott, Manager of Law for Climate Action at the Centre for Climate Engagement.
Environmental law charity ClientEarth brought a derivative action against Shell’s board of directors in the High Court of England and Wales, arguing that the directors had breached their legal duties towards the company by failing to adequately address climate risks in their sustainability strategy. The High Court did not give permission for the action to proceed. While courts’ deference to directors on business decision making, along with the high threshold that shareholders must meet to bring derivative actions, are barriers to this type of claim under UK company law, similar claims may find more success under different circumstances.
Facts
Shell, a public limited company listed on the London Stock Exchange, is one of the largest oil and gas companies in the world. Shell has committed to several climate-related targets, including becoming a ‘net-zero business’ by 2050. In doing so, it has signalled alignment with the ambition to limit global average temperature to 1.5 degrees Celsius above pre-industrial levels, a target set out in the Paris Agreement under the United Nations Framework Convention on Climate Change.
In 2019, Milieudefensie and other Dutch nongovernmental organisations brought a legal challenge against Shell in the Hague District Court, alleging that the company had breached a duty of care towards Dutch residents by failing to take sufficient action to reduce greenhouse gas emissions.[1] The court held in favour of the claimants in a landmark decision, and ordered Shell to reduce its direct (Scopes 1 and 2) greenhouse gas emissions by 45% by 2030, also creating a ‘significant best-efforts obligation’ to reduce its indirect (Scope 3) emissions.
In 2023, ClientEarth brought another legal challenge centred on Shell’s sustainability strategy, this time in the UK. This claim alleged that Shell’s board of directors had breached their legal duties towards the company by failing to implement adequate plans for addressing the climate transition. ClientEarth held 27 shares in Shell, which meant that the organisation could bring a ‘derivative action’ against directors on behalf of the company. Before assessing the substantive claim, courts will first decide whether to grant a derivative action permission to proceed. Actions will proceed if claimants have demonstrated a prima facie case,[2] a person seeking to promote the success of the company would continue the claim,[3] and the act has not been authorised by the company.[4] This was the first climate-related case of its kind brought against a corporate board in the UK – another derivative action had been brought against directors of a pension scheme in 2021 and was refused permission by the High Court.[5]
ClientEarth’s case relied on two legal duties set out in the Companies Act 2006. The duty to ‘promote the success of the company’ under Section 172 and to ‘exercise reasonable care, skill and diligence’ under Section 174. The ‘success of the company’ under Section 172 centres on shareholders, but other stakeholders may be relevant when considering how decisions will impact shareholder value. Section 172(1) provides a non-exhaustive list of factors to which directors must have regard when fulfilling their duty, which includes impacts on the environment. Prior to this case, there had been a growing body of analysis recognising a link between climate change and directors’ duties across common law jurisdictions.[6] ClientEarth described a number of risks that climate change poses to Shell’s business, including broader systemic risks from the physical impacts of climate change, the possibility of oil and gas infrastructure becoming ‘stranded assets’ once demand for these products reduces, investor sentiment shifting towards sustainable practices, and a regulation that will impact highly emissive companies.
Stating that Shell’s board had responded to the above issues inadequately, ClientEarth argued that by exposing the company to greater climate change risk directors had breached their legal duties. The claimants highlighted specific aspects of Shell’s strategy including caveats in the 2050 net zero target, the company’s interim emissions target excluding Scope 3 emissions, and ‘carbon intensity’ targets which may not lead to reductions in absolute emissions. ClientEarth also argued that Shell had not established a credible strategy for meeting its net zero target as it relied on offsets and carbon capture technology that had not been proven at scale, fossil fuels still made up the majority of Shell’s capital expenditure, and the company continued to open new oil and gas projects. Finally, the company’s alleged failure to comply with the Hague District Court’s order in the Milieudefensie case was also argued to amount to a breach of directors’ duties.
The relief claimants sought was a declaration that Shell’s directors had breached their duties, and an injunction requiring directors to adopt a new strategy to manage climate risks and to comply with the order in Milieudefensie.[7]
The High Court of England and Wales did not grant ClientEarth permission to proceed with its derivative action.
Reasons for the decision
To proceed with a derivative action in the UK, claimants must show a prima facie case – “a case that, in the absence of an answer by the defendant, would entitle the claimant to judgement”.[8] The High Court assessed ClientEarth’s arguments and considered the evidence they presented at its “reasonable highest”.[9] The court first considered ‘incidental duties’ which ClientEarth argued Shell’s directors owed to the company – including a duty to accord appropriate weight to climate risk and a duty to adopt strategies which are likely to meet Shell’s climate targets. The High Court determined that this interpretation is contrary to the principle that it is up to directors to decide how to weigh different factors when carrying out their Section 172 duty.[10] Similarly, the court rejected ClientEarth’s argument that Shell’s directors held a specific legal obligation to comply with the Dutch court’s ruling in Milieudefensie.[11]
ClientEarth’s witness statement was given by one of their staff, an expert in climate law and policy, who presented the consensus opinion of multiple fields relevant to climate change. The High Court placed “very little weight” on this statement, indicating that they would need witnesses with more specific subject matter expertise. [12]
Putting aside evidential concerns, the court held that, since there was no universally accepted methodology for reaching Shell’s net zero target, ClientEarth had not established that no reasonable director would reach the same decisions as Shell’s board.[13] The High Court further noted that directors must undertake a ‘balancing exercise’ when considering how multiple factors might impact the company,[14] stating that ClientEarth had not recognised the significance of this balancing exercise nor explained how Shell’s directors had got it so wrong.[15] The High Court accepted that the Dutch court’s order in Milieudefensie obliges Shell to take certain actions, but noted that the order allows flexibility in stating that the company “has total freedom to comply with its reduction obligations as it sees fit”[16] and suggested that Shell was not acting unlawfully.[17]
The court also considered the relief claimants sought, which it considered “as much a factor in the company’s entitlement to obtain that relief as is the nature of the breaches on which ClientEarth relies”.[18] A mandatory injunction making Shell adopt an updated climate strategy and comply immediately with the order in Milieudefensie would, in the High Court’s view, be too imprecise for enforcement and might cause disruptive impacts that would adversely impact the company and its shareholders.[19] The court was also sceptical about the utility of declaratory relief and stated that shareholders could better express their views at a general meeting.[20]
Courts must refuse permission to proceed with a derivative action when “a person acting in accordance with Section 172 (duty to promote the success of the company) would not seek to continue the claim”.[21] The High Court determined that a director acting in accordance with Section 172 would not continue the claim.[22] The court then examined discretionary factors which it must consider when determining whether to grant permission, the first of which is whether the claimant is acting in good faith.[23] Here, the court indicated that ClientEarth was acting to advance a broader policy agenda, rather than simply out of concern for the best interests of the company.[24] The court noted that ClientEarth only held a small number of shares in Shell, and that ClientEarth’s argument focused mostly on climate strategy with little acknowledgement of other factors which directors must consider.[25] Although claimants may have multiple motives for bringing a claim, the High Court determined that ClientEarth would likely not have brought the claim but for this ulterior motive.
The court briefly addressed the support ClientEarth’s claim received from institutional investors when considering if the acts might have been authorised or ratified. Members explicitly supporting the action held a combined 12.2 million shares, which only amounted to 0.17% of Shell’s shares.[26] Members who expressed alignment with ClientEarth’s position held a similar number, so the cumulative number of shares held by investors supporting ClientEarth represented only a small percentage of the company. Votes at recent Annual General Meetings had showed meaningful support from minority shareholders for transparency in Shell’s climate strategy, but the court held that this did not equate with support for an action of this kind.[27]
Discussion
ClientEarth’s claim against Shell’s board of directors tested theory that had previously been set out in analysis focused on the links between climate change and directors’ duties in common law countries. Unlike some other challenges that centre on how organisations’ contributions to climate change impact others, the claim focused on how climate change poses a risk to Shell.
The High Court’s judgement indicated limits and potential pitfalls to derivative actions on these grounds, which may inform similar litigation and advocacy in the UK going forward. It emphasised the high level of deference that UK courts will grant directors when evaluating business decisions. Despite flaws that ClientEarth highlighted, Shell’s net zero strategy was a clear indication that the company at least had regard to climate impacts, and determining the best method of meeting climate targets is a task that courts will generally leave to directors. A successful case may therefore need to target organisations without such a strategy, or which had made more clearly unreasonable decisions.
ClientEarth’s reliance on the order in Milieudefensie showed the potential for climate litigation to create cross-jurisdictional impacts, as the court did substantively engage with the Dutch decision when determining that it gave Shell’s directors the flexibility to comply with the order as they see fit. However, the court did not find an incidental duty to comply with the order and did not see it relevant to directors’ duties under UK law given the flexibility of compliance. Similar enforcement gaps may emerge as more climate litigation is brought to court.
The High Court’s treatment of ClientEarth’s witness statement may not be an issue for other claimants but could mean they need to dedicate more resources to the claim at its first stage. More generally, future claimants may be able to rely more on evidence of actual, rather than prospective, financial loss as climate impacts become more severe, which could prove more convincing to courts. Claimants might also seek more specific remedies when bringing derivative actions given the court was clear that ordering an updated climate strategy would be too imprecise.
ClientEarth’s small number of shares and broader agenda was another barrier, which indicates that similar activist groups may face similar issues as claimants in derivative actions. Conversely, larger shareholders without a clear policy agenda might have a higher chance of success should they decide to bring a similar action.
Finally, although this claim highlights barriers to similar actions, the high thresholds for derivative actions might also protect boards when implementing ambitious climate strategies. Litigation from shareholders that believe boards should prioritise short-term shareholder value over sustainability would also be difficult – not least because the environment is a factor to which directors must have regard under Section 172 of the Companies Act 2006. As long as directors are pursuing climate strategies for the benefit of the company, rather than as a goal on its own, courts will also likely defer to their decision making.
Conclusion
This claim demonstrates some difficulties in using derivative actions to change company behaviour in the UK, and more specifically as a method of strategic climate litigation. However, other claimants and factual matrices may receive different treatment, and Lord Carnwath, a former Supreme Court judge, has labelled the High Court’s decision a ‘missed opportunity‘, suggesting that different courts may treat such claims more favourably and engage further with the substance of ClientEarth’s arguments. In any case, such claims may achieve certain nonlegal goals by raising awareness of the link between climate change and corporate success, and some evidence suggests that climate litigation may still pose a risk to oil and gas majors even in the absence of a successful claim.[28]
As we navigate the complexities and challenges highlighted in this case, it is clear that there is much more to explore on the subject. Our upcoming Leadership Insight will provide a longer discussion of director’s duties, and how understanding this issue could help businesses implement effective climate strategies.
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This insight informed an article that was translated by Dr Markus Gehring for publication in an Austrian journal, NR Nachhaltigkeitsrecht, Volume 4, April 2024, issue 1. An online version is available here: Article – ClientEarth gegen Shell Plc im High Court von England und Wales (biblioscout.net)
[1] Friends of the Earth Netherlands (Milieudefensie) v Royal Dutch Shell) District Court of the Hague (2021).
[2] Companies Act 2006, s 261(2).
[3] Ibid. s 263(2)(a).
[4] Ibid. s 263(2)(b).
[5] McGaughey and Davies v Universities Superannuation Scheme Ltd and Directors [2023] EWCA Civ 873.
[6] See e.g. ‘Directors’ duties and climate change: Keeping pace with environmental challenges’, Lord Sales (2019) and ‘Climate Change and Directors’ Duties’, Mr Noel Hutley SC and Mr Sebastian Hartford-Davis (2016).
[7] ClientEarth v Shell Plc [2023] EWHC 1137 (Ch) at [19].
[8] Bhullar v Bhullar [2016] 1 BCLC 106 at [21].
[9] Haider v Delma Engineering Projects Company LLC [2023] EWHC 218 (Ch) at [48].
[10] ClientEarth v Shell Plc at [27].
[11] Ibid. at [36].
[12]Ibid. at [59]
[13] Ibid. at [64].
[14] Ibid. at [63].
[15] Ibid. at [66].
[16] Friends of the Earth Netherlands (Milieudefensie) v Royal Dutch Shell) District Court of the Hague (2021) at 4.4.54.
[17] ClientEarth v Shell Plc [2023] at [72].
[18] Ibid. at [79].
[19] Ibid. at [81].
[20] Ibid. at [83].
[21] Companies Act 2006, s 263(2)(a).
[22] ClientEarth v Shell Plc [2023] at [84].
[23] Ibid. at [86]
[24] Ibid. at [89].
[25] Ibid. at [93].
[26] Ibid. at [97].
[27] Ibid. at [98].
[28] ‘Impacts of Climate Litigation on Firm Value’, Misato Sato; Glen Gostlow; Catherine Higham; Joana Setzer and Frank Venmans (2023).
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