Director's Duties and Climate Change – Round One to the Directors?

The courts of England and Wales have recently refused two different attempts to challenge the decisions made by company directors in relation to climate change risks. In this article, we look at the reasons behind these two decisions, and consider what they might mean for the ever-growing area of climate and ESG litigation.

7 August 2023

The courts of England and Wales have recently refused two different attempts to challenge the decisions made by company directors in relation to climate change risks. In this article, we look at the reasons behind these two decisions, and consider what they might mean for the ever-growing area of climate and ESG litigation.

Key Takeaways

  • Courts will be very reluctant to set aside the decisions made by directors, or to impose specific obligations in relation to their management of the company. It is generally the responsibility of directors to make commercial decisions on how best to promote the success of the company;
  • It is not enough for shareholders to prove that the company faces material risks as a result of climate change (or other ESG considerations). They will need to prove that the directors' decisions in response to those risks is outside the range of reasonable responses open to them, in the context of the other factors that directors need to take into account as part of their statutory duties;
  • Unless claimants demonstrate that there is consensus on how to assess progress towards achieving the climate change or other targets that they want to hold the directors to then the claim is likely to fail;
  • The courts will not grant any order that would require it to keep the directors in question under constant supervision to monitor their compliance;
  • Claims will not be successful if the shareholders are trying to progress their own agendas or policy views, rather than genuinely to seek relief on behalf of the company's shareholders as a whole. The courts will take into account any available evidence of the views of the other shareholders.

What were the cases about?

ClientEarth. raised a claim against the directors of Shell Plc, alleging that the directors had breached their duties under the Companies Act 2006 to promote the success of the company for the benefit of its members, and failed to exercise reasonable skill, care and diligence. ClientEarth said that the directors did not have an adequate strategy in place to protect the company from the commercial and regulatory risks posed by climate change, and by not having the required plan to  reduce its emissions by 45% by 2030, as ordered by the Dutch courts.

Their claim was a 'derivative claim' under sections 260 – 264 of the Companies Act 2006. This is where shareholders raise claims that are vested in the company, against its directors, seeking relief on the company's behalf.

The court must first grant the applicant permission to proceed with the claim, and will only do so if the applicants can show a prima facie case that they will obtain the relief they are asking for, i.e. that the applicant would, in the absence of a response from the directors, be entitled to the relief. It will consider a range of factors, including:

  • Whether the shareholder bringing the claim is acting in good faith,
  • The importance that someone acting to promote the success of the company would attach to the claim,
  • Whether the company has decided not to pursue the claim;
  • And any evidence of the views of the other shareholders who have no personal interest in the matter.

The second claim, McCaughey v Universities Superannuation Scheme Ltd, was brought by two beneficiaries of a large UK pension fund, alleging amongst other things that the decision of the directors of the scheme's corporate trustee to continue to invest in fossil fuels, and its lack of a 'divestment' plan, was in breach of their duties. Their claim was a 'multiple derivative claim', as they could not bring a claim as shareholders under the 2006 Act. They still required the court's permission to continue the claim, and to prove that they had a prima facie case.

What did the courts decide?

The courts refused permission for both claims.

In ClientEarth, the court stated that it:

  • Should not interfere with commercial decisions taken by directors in good faith about how best to promote the success of the company, unless those decisions were outside the range of reasonable decisions that they could take in response to the risks faced by the company. This included decisions on how pre-existing company strategies should be implemented.
  • The court would not in this context add specific obligations to the directors' statutory duties.
  • It will also not make an order that would require it to constantly supervise the directors' actions. The court made clear that derivative claims were intended to deal with exceptional circumstances, and not as a way for shareholders to monitor the actions of directors.

In McCaughey, the Court of Appeal held that the applicants had failed to show a prima facie case of loss to the corporate trustee company, or that there was a connection between the scheme's continued investment in fossil fuels and the changes to the benefits the applicants would receive under the scheme that formed the basis of their loss.

Both courts were also critical of the lack of credible evidence put forward by the applicants, in particular the inability of ClientEarth to point to a "single universally accepted methodology" for monitoring progress against the Paris Agreement targets. The applicants in McCaughey were criticised for trying to bring a derivative claim to avoid the other procedural difficulties that they would face if they had brought it as a breach of trust claim.

Potential applicants will be particularly concerned by the court's criticisms of both applicants' reasons for bringing the claim. As noted above, the court must consider whether the applicant is acting in good faith in seeking to continue the claim.

ClientEarth had a de minimis shareholding in Shell Plc (only 27 shares), and even when the holdings of other shareholders who had written in support of their claim were taken into account, the percentage was 0.17%. The court contrasted this with the support of more than 80% of the shareholders for the directors' energy transition strategy at AGM's held in May 2021 and May 2022. The court came to the conclusion that ClientEarth's real motivation was to require the directors to follow their own policy agenda, rather than seeking relief for the benefit of the company's members. 

Similarly in McCaughey, the only evidence showing shareholder support for the claim was a survey conducted of less than 1% of the shareholders. The court held that there was a difference between the interests of the applicants, and any loss that would be suffered by the company.

What happens next?

At first glance, these decisions look like two clear victories for directors. /However rather than signal the end of claims by activist shareholders that directors might hope for, shareholders will no doubt learn lessons about how they might need to frame future claims. They may also be encouraged by the fact that the court in ClientEarth accepted that Shell did face a number of commercial risks as a result of climate change.

These two decisions may therefore represent the end of the beginning of the climate litigation story. ClientEarth have also already indicated their intentions to appeal to the Court of Appeal, so we will not have to wait much longer for the next chapter.

If you are interested in discussing these decisions or the future of ESG litigation generally, please contact your usual contact in our Commercial Disputes team.