A recent judgment in the UK has clarified some of the limits of challenges taken by shareholder NGOs. This litigation is part of a trend we are seeing across several jurisdictions in which the emissions reduction plans formulated by governments and corporates are challenged as being inadequate in a variety of respects.
In ClientEarth v Shell [2023] EWHC 1137 (Ch), Client Earth, a minority shareholder in Shell Plc, claimed that, while Shell has set targets consistent with the Paris Agreement, its 2030 targets for Scope 1 and 2 emissions are inadequate, and it has not set out a reduction pathway for its Scope 3 absolute emissions.
ClientEarth also argued that Shell intends only a modest decline in its oil production and active growth in its gas business. ClientEarth argued that Shell had not disclosed the extent to which its pathway to 2050 is reliant on carbon capture or nature-based offsetting, which it claimed to be an ineffective mitigation to Shell’s transition risk, merely serving to add to the cost of Shell’s fossil-fuel business.
ClientEarth alleged that Shell’s directors failed to take appropriate action to address climate change and breached their duties under the UK Companies Act 2006 by:
- adopting and pursuing an inadequate energy transition strategy, and
- failing in their response to the Dutch Court’s order in Milieudefensie, which had required Shell to reduce all its CO2 emissions (Scope 1, 2 and 3) by 45% at the end of 2030 relative to 2019 levels.
ClientEarth sought a declaration that directors were in breach of statutory duties, as well as an injunction requiring them to implement a strategy to manage climate risk in compliance with their statutory duties and to comply immediately with the Dutch Court order.
Similar to the position under the Irish Companies Act 2014, directors in the UK owe their duties to the company and not to the shareholders. Accordingly, ClientEarth sought to pursue its claim as a derivative action under the UK Companies Act 2006. To proceed with a derivative action, ClientEarth had to establish a prima facie case against the directors.
The Court found insufficient evidence of a prima facie case against the directors and denied permission for ClientEarth to proceed with a derivative action against Shell.
Directors’ duties
ClientEarth alleged breach by the directors of their statutory duties under the UK Companies Act 2006, including section 172 (duty to promote the success of the company for the benefit of its members) and section 174 (duty to exercise reasonable care, skill and diligence).
The Court was reluctant to interfere in directors’ decision-making, noting that the law respects the autonomy of directors on commercial issues and their judgments. The Court will not exercise a supervisory function over decisions honestly arrived at by the board unless no reasonable director could properly have adopted the same approach.
The Court also refused to impose further incidental duties on the directors in relation to climate risk, finding that to do so would cut across the general statutory duty to have regard to the many competing considerations as to how best to promote the success of Shell for the benefit of its members as a whole under section 172. This includes having regard to, amongst other matters, the impact of the company’s operations on the community and the environment. The Court also found that the proposed incidental duties were “inherently vague and incapable of constituting enforceable personal legal duties”.
This is notable. Courts in other jurisdictions have been prepared to read international norms, particularly the Paris Agreement, into domestic law and apply the European Convention on Human Rights to require emissions reduction targets to be met more swiftly. The High Court of England and Wales, however, rejected the argument that Shell had an incidental statutory duty when considering climate risk “to implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of Shell in the transition to a global energy system and economy aligned with the global temperature objective of 1.5°c under the Paris Agreement on Climate Change 2015”.
In Ireland, there is no equivalent to section 172 under the Companies Act 2014. However, under the EU proposal for a Corporate Sustainability Due Diligence Directive (which we considered here), directors would be obliged to consider human rights, climate change and the environment in their decision-making.
The Dutch Court’s order
As regards the Milieudefensie order, the Dutch Court had, when making it, accepted that Shell was not acting in an unlawful manner and recognised that it is a matter for Shell as to how it exercises its discretion to comply with obligations imposed by Dutch law. The Court considered that there was no suggestion that the Dutch Court would have anticipated compliance with its order in a manner other than through compliance with directors’ duties.
The relief sought
The Court considered that the injunction and declaration ClientEarth sought would be too imprecise to be suitable for enforcement. It was difficult to see what legitimate purpose a declaration that directors were in breach of statutory duties would fulfil. It was not the Court’s function to express views as to the directors’ conduct, the proper forum for generating those types of view being by vote of the members in their general meeting.
No prima facie case
In conclusion, there was not a prima facie case for giving permission to ClientEarth to proceed with its substantive application to continue its claim, on the basis that a person acting in accordance with the statutory obligation to promote the success of the company would not continue the claim.
Neither would a substantive application succeed
The Court went on to consider the discretionary criteria that would apply if a substantive application were heard. The first, for example, was whether ClientEarth was acting in good faith. The Court considered that, in legal terms, the claim was not brought in good faith if the primary purpose was an ulterior motive in the form of advancing ClientEarth’s policy agenda with the consequence that, but for that purpose, the claim would not have been brought at all. The Court inferred from evidence that the real interest in taking the action was not the promotion of the company’s success for the benefit of shareholders. A large majority of shareholders had supported Shell’s 2022 energy transition strategy progress report. The strength of this support for the directors’ strategic approach was a factor to which the court would have particular regard were it faced with a substantive application for permission.
More litigation to come?
Corporates across all sectors are making concerted efforts to embed ESG-based decision-making in their organisations and to show leadership in the transition to sustainable growth.
The judgment in Shell is a useful insight into how a Court in the UK (and likely Ireland) will apply the legal framework on directors’ duties and derivative claims to climate litigation. However, while this action was unsuccessful, it is part of a trend (noted here) whereby climate activists are seeking to re-purpose company law rights – whether at shareholder meetings or in the courts – to increase the pressure on directors’ decision-making and scrutiny of climate transition plans.
While the Courts in Ireland have always been reluctant to second-guess Board decisions taken in good faith, directors should continue to ensure that strategic decision-making properly factors in climate and other ESG considerations, that the data on which the Company is basing its decisions, and the data it publishes in relation to its own activities in these areas, is robust, and that the Board properly weighs ESG and other factors in coming to decisions that are taken in the best interests of shareholders as a whole.
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