We comment below on the implications of this decision in the context of the rising tide of litigation and regulatory action on climate action, net zero transition and greenwashing.
Climate litigation – an increasingly complex global landscape
The UK High Court has dismissed a “world-first” derivative action case brought by environmental charity ClientEarth against Shell’s board of directors for breach of alleged duties to manage climate-related risks. The case is part of an increasingly nuanced international climate change litigation landscape.
While the Court defends directors’ broad discretion to make decisions in the best interests of the company, the case provides an insight into the increasingly detailed focus on businesses’ emissions reduction targets and net zero transition plans. Businesses in New Zealand should expect greater scrutiny of targets and transition plans from shareholders, lenders, activists and market commentators.
ClientEarth v Shell – background to the claim
In February 2023, environmental NGO ClientEarth applied to the Court for permission to bring derivative action proceedings against the directors of Shell; the first case globally seeking to challenge corporate directors directly over their failure to prepare for the energy transition. The case followed the novel 2021 Dutch case of Milieudefensie v Shell in which the Hague District Court ordered Shell to reduce its CO2 emissions by 45% within 10 years (currently under appeal).
ClientEarth alleged that the Board’s energy transition strategy was flawed – and that a failure to implement the Dutch court order – put the company’s long-term commercial viability at risk. ClientEarth asserted breaches of sections 172 (duty to promote the success of company) and 174 (duty to exercise reasonable skill, care and diligence) of the UK Companies Act.
ClientEarth sought the UK High Court’s permission to sue eleven directors personally over Shell’s climate strategy. Its proposed proceeding asked for a mandatory injunction requiring Shell’s Board to adopt a transition strategy to manage climate risk aligned with the Paris Agreement and a declaration that the directors had breached their duties. The claim was publicly supported by some institutional investors including the UK’s largest workplace pension scheme.
UK High Court decision
The Court refused to allow the derivative action against Shell’s directors to proceed. The decision indicates that Courts will be slow to interfere with director decision making where there has been good faith consideration of the competing issues involved in managing climate risk.
In dismissing the claim, the Court rejected ClientEarth’s argument that directors were subject to additional “climate risk” duties on top of statutory duties. The Court upheld the traditional view that it is for directors to determine how they achieve the company’s best interests and weigh competing considerations,1 and that this is not an area in which the Courts should interfere.
While it is plain that there are fundamental disagreements between ClientEarth and the Directors as to the right way to achieve the [net zero] 2050 targets that Shell has set itself, the law respects the autonomy of the decision making of the Directors on commercial issues and their judgments as to how best to achieve results which are in the best interests of their members as a whole.2
The Court also recognised that that there is no universally accepted methodology as to how Shell might achieve the targeted emission reductions3 and expressed concerns that the relief sought was not appropriate given the need for ongoing Court supervision.4
The Court also criticised the ClientEarth strategy, stating that, due to ClientEarth’s small stake in Shell, “its real interest is not in how best to promote the success of Shell for the benefit of its members as a whole”, and that it was instead taking a “single-minded” approach to what was the right strategy for dealing with climate change risk.5
Where to from here?
ClientEarth has been granted an oral hearing at the High Court to seek a reconsideration of the decision, and, if refused, may appeal the decision.
More broadly, the case highlights the increasing focus on businesses’ emissions reduction targets and net zero transition plans. Transition planning will be mandatory for New Zealand’s large listed issuers, banks, insurers and fund managers from FY25, as part of the introduction of New Zealand’s new mandatory climate-related disclosure regime.
Both regulators and activists are turning their attention to greenwashing challenges particularly focussed on targets and transition plans: the New Zealand, Australian and UK advertising standards regulators and capital markets regulators have greenwashing as a policy and enforcement focus. For example:
- In February, the Australian Securities and Investment Commission launched its first prosecution against Mercer Superannuation for misleading ESG-related claims in relation to its investments.
- In the UK, the Advertising Standards Authority banned advertising by HSBC in late 2022 for making statements about its role in the net zero transition without properly disclosing its ongoing funding of fossil fuels.
- In Australia, energy company Santos was sued in August 2021 by the Australian Centre for Corporate Responsibility on the basis its claims regarding its net zero target – including that it had a “clear and credible plan” to achieve that target – were unsubstantiated.
Increasingly, lenders, investors and insurers are requesting further detail on corporate transition plans – as will be required by mandatory climate-related disclosures in New Zealand from 2025 – to respond to climate risks and opportunities identified.
Directors of New Zealand boards will be focussed on ensuring their businesses are appropriately assessing their strategies to identify, assess and manage material climate-related risks to avoid similar claims in future, as detailed in our original published legal opinion (2019) and guidance for directors (2020), most recently supplemented by Chapter Zero’s Climate Change Director Tool Kit (2023).
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