In March 2022, Shell shareholder ClientEarth announced a landmark claim against the energy company’s directors, accusing them of failing to prepare the company properly for the transition to net zero and manage climate risk.
Francesca Berry and Matt Caples spoke to online publication The CFO about the case and the potential for similar claims to be brought in the future (the full article is available here). Francesca and Matt now provide further insight on the implications of this shareholder action.
What makes the ClientEarth vs Shell case unique?
The use of the provisions of the Companies Act 2006 ClientEarth appears to be relying on makes the case unique. In particular, the parts that require directors to consider in good faith the impact of their and the company’s operations on the community and the environment when complying with their duty to promote the success of the company (s172(1)(d)). Our understanding is that there is no published case law yet on the application of this provision.
What is the basis of ClientEarth’s claim?
ClientEarth will most likely allege Shell’s directors are failing to meet their duty to promote the success of the company by not properly preparing for or meeting its environmental duties in keeping with the commitments of the Paris Agreement. It will likely claim that a failure to do so will cause medium to long-term loss to the company and its shareholders, even if its actions lead to increased shorter-term gain. It will claim such an approach is a clear failure to promote the company’s success.
We have not seen a copy of the letter before action but would expect it to refer to Shell’s annual report, which sets out what it claims to be doing in respect of its environmental duties. There may also be specific reference to the considerable caveats that preface the annual report, which effectively suggest that what is set out in the report is not in keeping with Paris Agreement targets.
Is this the first case of its kind involving a shareholder and environmental, social and governance (ESG) claims?
This would appear to be the first case of shareholders making claims against directors for allegedly breaching their duties due to ESG failings. Others could follow as more companies are asked to make solid ESG (particularly environmental) commitments in their published information and at annual general meetings.
If companies are unwilling to do so, they are at risk of pre-emptive action by shareholders alleging directors are not: (a) considering the impact of their actions on the environment and community and (b) promoting the success of the company insofar as their actions are likely to lead to future loss for the company.
If companies make commitments but fail to stick to them, there will be other litigation risks if that failure causes loss to the company and its shareholders.
What lessons can directors take from the case?
Shareholders care about ESG, particularly climate-related issues, and are prepared to hold directors to account personally for related failings.
Also, directors need to take the Paris Agreement’s goals seriously and put realistic plans in place to meet those goals. Directors could be held to high standards when assessing whether they have considered in good faith the impacts of their actions on the community and climate while promoting the success of a company.
Even if most shareholders in a company are not sufficiently concerned by these issues to take legal action while no losses are being suffered:
(a) they will be if and when they suffer loss in the future, and
(b) activist shareholders will become members of companies with a view to effecting change from within, which will increase litigation risk exposure for those companies.
What important messages are there for chief financial officers?
Take ESG seriously now.
Carefully consider what their company is doing and what it could be doing to improve or lessen its environmental impact.
A failure to consider this at all, or properly in good faith, exposes them to this kind of litigation from activist shareholders and even institutional investors once they develop and solidify their own ESG and climate investment mandates.
Even if a company is not subject to the attention of activist shareholders in the short term, there is still a longer-term risk. Failure to act appropriately in the short term may increase the risk of more significant litigation in the longer term if a company’s historical ESG failings cause loss to the company.
What will happen if ClientEarth wins its case?
If ClientEarth wins, a judicial standard by which directors will be held accountable for their actions should be established under s172(1)(d). Companies, boards and executives will need to consider what steps they must take to ensure their actions are compliant with s172, with a particular focus on showing they have had regard to the impact of the company’s operations on the community and environment.
A win for ClientEarth and a judgment might make the clearest actionable connection yet between directors’ duties and ESG in this jurisdiction.
Is this case likely to lead to more claims by shareholders/investors?
Appetite for claims of this kind are potentially more limited from a claimant perspective, given that pre-emptive action is unusual as investors tend to expose themselves to litigation risk only when they have already suffered loss. However, this may change as ESG and environmentally-related losses come closer.
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