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We consider what this decision may mean for the future of principled outcome litigation in the UK.
In our Managing ESG Regulatory and Litigation Risk webinar and subsequent article, we discussed the significant global increase in ESG-related litigation as a growing number of companies set sustainability goals and are subject to an increase in ESG related disclosure. We also discussed the fact that we are no longer seeing litigation being conducted in its conventional sense - it is not all about the “winning”. Instead, Claimants such as ClientEarth are looking to drive behavioural change and to raise awareness of ESG related issues through court litigation, which is indicative of this new trend in litigation.
ClientEarth alleged that the Directors had failed in certain duties under the Companies Act (CA) 2006 and in doing so had failed to act in the best interests of Shell and had failed to act with reasonable skill and care when considering climate risk. They argued that the directors needed to take a more robust approach to combating company emissions to comply with their legal duties. In particular, ClientEarth alleged that the Directors’ breaches fell into three main categories:
1. A failure to set an appropriate emissions target;
2. A failure to prepare a reasonable climate strategy in terms of the Paris Agreement and the transition to net zero; and
3. A failure to comply with an order under Dutch law which imposed a 45% emissions reduction on Shell by 2030 (the Dutch Order).
ClientEarth needed to demonstrate a prima facie case for the Court to grant it permission to continue with its derivative claim against Shell. This is a high burden of proof and if the threshold is not met and the evidence filed does not disclose a prima facie case, the Court must dismiss the application for permission to continue with the claim.
In considering the application, the Court applied the tests set out under section 263 CA 2006. In particular, the Court must refuse permission if they are satisfied that:
The Court was not convinced by ClientEarth’s arguments and largely agreed with Shell’s submissions. Emphasis was placed on the well-established principle that it is for a company’s directors to determine how best to promote the success of a company.
The Court also focused on the lack of a universally accepted methodology against which to assess the Directors’ approach to climate risk strategy and a sufficient explanation as to how the Directors went so wrong in weighing up climate risk against the other business risks. Consequently, ClientEarth could not evidence that a reasonable board of directors would have acted differently to the Directors.
The Court further ruled that the CA 2006 imposed no obligation on the Directors to ensure that Shell must comply with the Dutch Order, and that this was largely irrelevant to these proceedings governed by English law.
Overall, ClientEarth failed to evidence a prima facie case and permission to continue the claim was not granted.
This was the first notable attempt in the UK courts to hold directors personally liable for failure to properly prepare for transition to net zero. However, this is not the end of the matter. Since dismissing the case, the Court has granted ClientEarth’s application for an oral hearing at which its application will be reconsidered - so watch this space!
Regardless of the outcome of this oral hearing and despite the hurdles that an applicant such as ClientEarth must overcome in seeking to pursue these sorts of claims, we envisage that principled outcome litigation will continue as an emerging trend. There will always be other motivating factors. For example, a desire to influence climate strategy through litigation in the courts, a desire to hold corporate organisations accountable, and a desire to raise awareness of ESG more generally.
However, the recent High Court judgment does dampen the future of derivative claims where the primary motive is to promote climate risk policy or agenda. In addition, the Court also criticised the remedies sought by ClientEarth, commenting that: “It is not the court's function to express views as to the Directors' conduct which have no substantive effect and which fulfil no legally relevant purpose. The proper forum for generating those types of view as to the Directors' conduct is by vote of the members in general meeting, a remedy which ClientEarth is entitled to take steps to procure in its capacity as a shareholder.” This embodies the underlying message of the judgment – that the court will very much respect a company’s autonomy to make commercial decisions and will only rule on matters of law.
While ClientEarth’s claim has been unsuccessful on the papers so far, it did receive substantial backing from institutional investors. Investor support is a growing trend in the ESG space which indicates that shareholders are taking EGS obligations seriously. This, together with recent developments in ESG litigation funding, suggests that ESG claims are here to stay (even if directors in a personal capacity are not necessarily the most appropriate target).
Article contributors: Alice Mete, Maisie Dodds, Shelley Bishop & Tori Mills
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.
30 May 2023