Directors beware! A world-first derivative shareholder action has been commenced by ClientEarth in the High Court of England and Wales against 11 Shell directors for breach of their directors’ duties. The claim is based on an alleged failure to implement an energy transition strategy in line with the Paris Agreement.
The action, which has the support of a group of institutional investors, is the first to target individual directors as personally liable for an alleged failure to manage material risks posed by climate change and alleges that the Board’s mismanagement of climate risk puts it in breach of its duties under the UK Companies Act.
Shell does not accept ClientEarth’s allegations.
The claims seek to hold directors accountable for their company’s contributions to climate change and illustrate the continued evolution and innovation in climate change litigation aimed at individual directors. This case highlights the importance of a board’s consideration of climate risks and the potential for claims against a board that it is ‘greenwashing’ and not duly executing climate commitments and net zero targets. It also confirms that the pace and complexity of climate change litigation is increasing.
What are the claims?
ClientEarth alleges that the Shell directors breached section 172 of the UK Companies Act which requires directors to act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Directors must consider, among other things, the likely consequences of any decision in the long term (section 172(1)(a)). ClientEarth also alleges that Shell’s Board is also legally required to exercise reasonable care, skill and diligence in the discharge of its duties (section 174).
ClientEarth is seeking orders from the High Court of England and Wales that would require the Board to adopt a strategy to manage climate risk in line with its duties under the UK Companies Act, and in compliance with the 2021 orders of the Hague District Court in the Netherlands that ordered Shell to reduce its emissions by 45% by 2030, relative to 2019 levels. [1] ClientEarth first requires the permission of the High Court before it can continue the claim.
What does this mean for Australian companies?
Australia is the second highest jurisdiction for climate change litigation globally. [2] A number of cases have been commenced in the Australian courts over the past few years by activists, including the world first greenwashing case against Santos. [3]
Although there are differences between directors’ duties in the UK and Australia, the Australian Corporations Act 2001 (Cth) (Corporations Act) prescribes broadly equivalent duties to those being tested in the ClientEarth/Shell case.
- Section 180 of Corporations Act requires directors to act with reasonable care and diligence. This duty is broad in scope and objectively measured which means that there is no need to prove dishonesty or actual knowledge. Additionally, barristers Noel Hutley SC and Sebastian Hartford-Davis have written extensively on the potential scope of this duty. In their most recent 2021 opinion (available here), they argue that the standard of care required of directors with respect to climate change continues to rise so that, in their opinion, directors must ensure positive action is taken with respect to climate risks.
- Section 181 of the Corporations Act requires directors to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose. Unlike section 172 of the UK Companies Act, section 181 does not expressly require directors to have regard to long-term consequences. Despite that, the Hon Mr Kenneth Hayne AC QC (a former Justice of the High Court) has commented that a director acting in the best interests of a company must take account of, and the board must report publicly on, climate-related risks and has warned against taking a short-term approach. [4]
The case commenced by ClientEarth in the UK may encourage activists, regulators or other stakeholders in Australia to commence actions against directors for a breach of sections 180 and/or 181 of the Corporations Act for a failure to adequately exercise their duties if, for example, they do not:
- proactively inform themselves of climate risks
- implement strategies and strong corporate governance to deal with those climate risks
- make accurate assessments and disclosures in relation to climate matters – i.e. ‘greenwash’, or
- have a credible plan to meet their company’s public commitments and net zero targets.
What remedies are being sought in these climate-related cases?
In the greenwashing case brought against Santos in Australia, [5] the remedies sought are not damages but rather declaratory and injunctive relief requiring Santos to issue a corrective statement regarding the environmental impacts of its operations and to prevent Santos from engaging in misleading and deceptive conduct in the future.
Similarly, ClientEarth is seeking orders that the Shell Board adopt a strategy to manage climate risk in line with its duties under the UK Companies Act, and in compliance with the 2021 orders of the Hague District Court in the Netherlands that ordered Shell to reduce its emissions by 45% by 2030, relative to 2019 levels. [6]
Are directors really exposed to activist litigation?
We expect Australian litigants will be emboldened by the ClientEarth proceedings and are likely to test an equivalent playbook in Australia. The ClientEarth lawsuit is a shareholder derivative action in the UK, which is one pathway for shareholders to directly sue directors. Australia has a similar regime which allows shareholders to bring actions on behalf of a company in certain circumstances. [7] Additionally, derivative actions are not the only ways in which activist litigants may pursue boards. And regulators can also commence climate-based litigation - as ASIC’s recent actions have illustrated.[8]
Key takeaways
Australian companies and their boards should take particular note of ClientEarth’s allegations regarding shortcomings in an energy transition strategy and net zero targets. Directors should seek to minimise litigation risk by ensuring that:
- climate targets are carefully scoped with reasonable care and due regard to the best interests of the company over an appropriate term
- those targets are regularly updated and reflected in the company’s operational strategy, and
- the communication of those targets and commitments is transparent and consistent with applicable disclosure requirements.
For an explanation on greenwashing, see our Explainer – including our Six Golden Rules for minimising risks.
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Want to know more? See our related insights.
Remarks by The Hon Mr Kenneth Hayne AC QC that were delivered at the Centre for Policy Development’s Business Roundtable on Climate and Sustainability on 21 November 2019 at https://cpd.org.au/2019/12/full-text-of-kenneth-hayne-ac-qc-remarks-to-cpd-climate-roundtable/
The requirements for bringing a derivative action include that the shareholders demonstrate that they are acting in good faith, it is in the best interests of the company, that there is a serious question to be tried, and that the company has notice and will not bring proceedings itself.
