It is a challenging time to be a company director. Environmental, social and governance (ESG) litigation is on the rise, and directors are increasingly finding themselves the subject of these claims. The climate-related regulatory space is also developing fast, with directors responsible for ensuring their businesses comply with the myriad of new rules currently or soon likely to be in force. This article by Elisa Wahnon, first published in Sustainable Investment, considers director liability around sustainability.

The government’s recently published Green Finance Strategy consolidates some of the new and planned rules and regulations relating to ESG and climate issues. A significant part of its vision for a green future for the finance industry involves holding the key players in the industry to account. This includes companies and their directors.

Alongside regulation, companies and directors are being held to account for sustainability-related claims in the courts. Civil litigation is proving to be a powerful weapon in the armoury of climate activists; they are using existing laws to force change through the justice system.

When a business does something wrong, the company is usually the target of a claim. This is because directors are generally not liable for the company’s acts.

The company is still likely to remain a target of sustainability-related litigation even when the claim stems from the directors’ actions (or lack thereof). However, in certain circumstances, directors can be sued in their personal capacity. The examples below are not exhaustive but highlight some of the ways directors are currently being (or could potentially be) pursued in the courts for sustainability-related claims.


Derivative actions

English law imposes many duties on directors (for example, directors are under the duty to promote the success of the company and exercise reasonable care, skill and diligence). These duties are owed to the company; directors generally do not owe duties to shareholders. So, if a director breaches their duties, it is for the company to sue the director.

The problem with this is that the directors are the ones who decide whether the company pursues litigation or not, and they are unlikely to decide to sue themselves. This is where derivative actions come in. They allow a shareholder to bring a claim on behalf of the company against a director where that director has been negligent or breached its duties.

Client Earth’s claim against Shell Plc’s board of directors filed earlier this year is perhaps the first example of derivative actions being used by climate activists to target the board of a large company for its failure to properly prepare for the transition to net zero. Having purchased shares in Shell, Client Earth is now a minority shareholder and, by way of a derivative action, is seeking to hold the board to account for these failures.

Client Earth’s claim may not get past the procedural hurdles (it needs permission from the court to proceed with the claim), but it does bring global attention to its cause. As the claim progresses, we will get a better sense of how viable derivative actions are in this context. In the meantime, it shows that directors’ actions regarding sustainability will be closely scrutinised.


Statutory claims by investors

The Financial Services and Markets Act 2000 allows current or former shareholders to bring claims against listed companies where they have suffered a loss as a result of untrue or misleading information in (or omissions from) prospectuses or documents such as annual reports. These types of claims are often brought as group actions, and there has been an upward trend in these types of claims assisted by the buoyant litigation funding market.

These claims are predominantly made against the issuer, but we are seeing directors being made defendants to these claims too. There is significant scope for these types of claims to be used to target misleading or inaccurate statements made by listed companies about their sustainability credentials.

Now that large listed companies are required to report on their governance, strategy and targets relating to climate risks, investors will have more opportunity to target those companies, and potentially their directors, if their disclosures are inadequate.

The more the parliament and regulators impose rules on companies relating to sustainability (as they plan to do), the more scope there is for directors to fail to meet those requirements. If that failure causes loss to shareholders, directors may find themselves increasingly listed as defendants in sustainability-related securities actions.


Common law claims

Tackling greenwashing is a major agenda point for the government and regulators. Although there is no specific greenwashing law in England, it is possible that misrepresentation claims stemming from greenwashing will increase as demand for green products grows.

In some circumstances, investors or customers may be able to claim against a director in their personal capacity for misrepresentation. Directors can also be personally liable for fraudulent misrepresentation. The long-awaited UK Green Taxonomy should help define terms such as “sustainable” and “green”, which should assist in these types of claims.



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