An update on blog post 29 June 2023: ‘Do directors have a duty to be “green”?’
Since ClientEarth’s initial failure to be allowed to pursue a derivative claim against Shell directors for alleged breach of their duties relating to climate change risk management, our courts have made two further decisions that deal with the relationship between climate risk and the duties of company directors.
In both cases permission to pursue derivative claims was refused. These judgments suggest that derivative claims are not the appropriate route for minority shareholders and climate activists to challenge decisions of companies about the environment. They offer clarification of directors’ statutory and common law duties. At the same time they indicate future trends in climate change litigation and make significant points about how directors should approach their duties at this time of climate emergency.
The new judgments
After failing in its initial application on paper to bring a derivative claim against Shell’s directors, ClientEarth was allowed to argue its case at an oral hearing before the court. The resulting judgment [1] was handed down on 24 July 2023.
The court once again refused ClientEarth permission to continue a derivative claim. The court ruled that the minority shareholder and non-profit environmental law organisation had not established a sufficiently viable case of breaches of duties by the Shell directors. In relation to such duties, the court affirmed that:
- The fundamental duty of directors is to act, with reasonable care, skill and diligence in ways that are most likely to promote the success of the company for the benefit of shareholders as a whole.
- In performing this duty, directors are to have regard to the non-exhaustive range of matters listed in section 172 of the Companies Act 2006, including the impact of company operations on the community and wider environment.
- Directors are not required to balance the interests of the company and those of other stakeholders but must weigh up all the relevant factors and decide what best leads to the success of the company.
- This is a commercial decision, and the law respects the autonomy of directors in this process and accepts that they are best placed to make these judgments.
A few days before this latest ClientEarth judgment, the Court of Appeal had handed down judgment[2] in a similar application to bring a derivative claim against the directors of a pension trustee company. Two members of the Universities Superannuation Scheme were refused permission to continue multiple derivative claims for breach of duties by the directors of the pension scheme, including failing to plan for divestment from fossil fuels. Again, the court considered that a sufficiently viable case had not been made to demonstrate that the directors had acted improperly in making their investment decisions.
Multiple derivative claims are still governed by common law rather than the statutory claims allowed by the Companies Act 2006. The categories of multiple derivative claims are not closed, but they also require the court’s permission to proceed. To achieve this, it is essential to demonstrate loss as a result of the alleged breaches.
As in the ClientEarth judgment, the court in the McGaughey case stressed that the derivative claim procedure is available only in exceptional circumstances. Its purpose is not to allow stakeholders to monitor every step taken by directors or to avoid other procedural hurdles but to enforce the rights of the company.
The message for directors
These judgments confirm that there is a limited scope within which derivative claims may be allowed to proceed. Courts will not be quick to interfere in the decisions and discretion of company directors, without clear evidence that they have breached their duties.
The cases also suggest that bringing a derivative claim may not be an effective approach for stakeholders concerned to hold directors to account for their decisions relating to climate risk. If courts perceive that claims are brought with an external agenda permission will not be granted to proceed.
However, directors should take note of some of the general principles reiterated by the courts about how they should approach their duties:
- In making complex decisions, directors need to assess all competing risks facing a company and ensure that that they exercise their judgment with the reasonable skill and care expected of someone in their position.
- Climate change creates financial and regulatory risks for companies, and therefore should reasonably be assessed when decisions are made.
- As directors undertake their duties it may be prudent for them to be able to show that they were properly informed about all risks relevant to their company. This may include obtaining external advice to ensure it is clear that they had sufficient and suitable knowledge when reaching a decision or setting a strategy.
The sign of things to come?
Recently released reports[3] on the global status of climate change litigation confirm that the trend of bringing climate-related litigation against directors and companies continues worldwide. Over the last 5 years the number of climate-related cases globally has more than doubled and are now judged to be more than 2000 across 65 jurisdictions. The UK has the third highest number of cases worldwide.
Although historically most environmental cases were brought against governments, these now only account for about 50% of new matters. A great deal of focus has shifted to companies and trade bodies. Claimants continue to try novel ways to prompt action by companies to address climate change. As the ClientEarth and McGaughey cases show, in English law attempting to use a derivative claim is not a successful strategy. It will be interesting to see which other legal routes climate activists may try.
While directors have a duty to have regard to the impact of their company’s operations on the community and the environment, this does not outweigh any other duty. However, a company’s response to climate change may be becoming more relevant to customers, suppliers, employees and other stakeholders, and therefore prudent directors may consider a company’s environmental credentials as increasingly important as a means to promote the success of their company.
[1] ClientEarth v Shell Plc and others [2023] EWHC 1897 (Ch)
[2] McGaughey and another v Universities Superannuation Scheme and others [2023] EWCA Civ 873
[3] Joana Setzer and Catherine Higham, LSE Global trends in climate change litigation: 2023 snapshot UN Environment Programme, Global Climate Litigation Report 2023 Status Review
