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Pablo Iglesias-Rodríguez, ClientEarth v Shell plc and the (Un)Suitability of UK Company Law and Litigation to Pursue Climate-Related Goals, Journal of Environmental Law, Volume 35, Issue 3, November 2023, Pages 445–454, https://doi.org/10.1093/jel/eqad029
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Abstract
In February 2023, ClientEarth filed a derivative claim in the High Court of England and Wales against the Board of Directors of Shell plc for alleged breaches of their duties under the Companies Act 2006. According to ClientEarth, Shell’s Board of Directors has failed to put in place an energy transition strategy consistent with the Paris Agreement, increasing the exposure of Shell plc to climate risks and hindering its long-term commercial viability. This analysis assesses the legal grounds of ClientEarth’s claim in light of the UK’s company law framework, and the High Court’s judgements of May and July 2023 dismissing ClientEarth’s application. It argues that, despite the lack of solid legal grounds for ClientEarth’s derivative claim, this case may serve to advance climate-related goals. More generally, the analysis reflects on how this dispute evidences the growing gap between the objectives of environmental law on the one side and those of company law on the other side.
1. Introduction
On 9 February 2023, ClientEarth1 filed a derivative claim2 in the High Court of England and Wales against the Board of Directors of Shell plc (Shell’s Board) for alleged breaches of their duties under the Companies Act 2006 (CA 2006).3 According to ClientEarth,4 Shell’s Board has failed to put in place an energy transition strategy consistent with the Paris Agreement,5 increasing the exposure of Shell plc6 to climate risks7 and hindering its long-term commercial viability.8 For example, ClientEarth noted that although Shell plc continues to develop new gas and oil fields, it invests very little in renewable energies.9 ClientEarth further claimed that this is in contravention of Shell’s directors’ duties to act with care, skill and diligence and to promote the company’s success.10 In its claim, ClientEarth asked that the High Court orders Shell’s Board to put in place an energy transition strategy in line with a ruling of the District Court in The Hague from 26 May 202111 in the case Milieudefensie v Royal Dutch Shell.12 This ruling instructed Shell to adopt corporate policies which result in a 45% net reduction of its CO2 emissions by the year 2030, taking as baseline its emissions in the year 2019.13
On 12 May 2023, the High Court handed down a judgement refusing ClientEarth permission to continue its claim.14 ClientEarth then requested and was granted an oral hearing that took place on 12 July 2023 where it asked the High Court to reconsider its decision.15 On 24 July 2023, the High Court handed down a second judgement confirming its decision to dismiss ClientEarth’s application.16 According to the High Court, under UK law, directors have discretion to decide, acting reasonably and in good faith, the best way to promote the success of their companies for the benefit of their shareholders as a whole.17 In the view of the High Court, ClientEarth’s claim sought to impose specific obligations on Shell’s directors on how to manage Shell’s climate risks, impinging on their legitimate exercise of discretion.18 A related reason given by the High Court in support of its refusal to grant permission was that there were strong indications that the main driver of ClientEarth’s claim was not to protect and foster Shell’s success for the benefit of its shareholders as a whole but rather, ClientEarth had an ulterior motive consisting of advancing its policy agenda on the issue of climate change risks.19 The High Court also supported its decision on the views of most of Shell’s shareholders, noting that Shell’s energy transition strategy received the support of circa 80% of the shareholders casting votes in the 2021 and 2022 annual general meetings20 and that ClientEarth’s claim received minimal shareholder support.21
While ClientEarth’s lawsuit is one of the many examples of the growing global phenomenon of corporate climate litigation,22 it is the first UK shareholder derivative claim against the directors of a company for their alleged failure to put in place a sound and responsive energy transition strategy. More generally, it is the first UK shareholder derivative claim revolving around climate change issues. Consequently, ClientEarth’s lawsuit and the High Court’s judgements provide important insights on the suitability of company law and litigation to pursue climate-related goals.
This analysis assesses the legal grounds of ClientEarth’s claim in light of the existing UK company law framework, and the High Court’s judgements of 12 May 2023 and of 24 July 2023 dismissing ClientEarth’s application. It argues that, despite the lack of solid legal grounds for ClientEarth’s derivative claim, this case may serve to advance climate-related goals. First, ClientEarth’s lawsuit against Shell’s Board signals to companies that there is an increasing shareholder activism, through corporate litigation, in matters pertaining to sustainability and the climate. This, in turn, may incentivise company directors to rethink their climate strategies to reduce the risk of litigation and eventual personal liability. Secondly, this case may put increasing pressure on the UK government and legislature to introduce statutory changes aimed at tackling directors’ duties towards the environment and the climate. More generally, the analysis reflects on how this dispute evidences the growing gap between the objectives of environmental law on the one side and those of company law on the other side.
2. The Unsuitability of UK Company Law to Hold Directors to Account for Their Companies’ Climate Strategies
2.1. Shell’s Climate Strategy and Section 172, CA 2006
First, ClientEarth claimed that Shell’s Board is in breach of section 172 CA 2006.23 This provision encompasses the so-called enlightened shareholder value (ESV) approach24 whereby directors are required to act in the manner they deem in good faith ‘would be most likely to promote the success of the company for the benefit of its members as a whole’25 and, in doing so, they must have regard to, among other matters, ‘the likely consequences of any decision in the long term […]’26 and ‘the impact of the company’s operations on the community and the environment […]’.27 However, this does not mean that their decisions must actually embrace these objectives. While the ESV does not give shareholders ‘absolute superiority’ over other non-shareholder stakeholders,28 it nonetheless embraces the idea of shareholder primacy.29 The latter posits that directors should manage their companies with a view to maximising shareholder interests/wealth, and that shareholders should retain ultimate control of their companies.30
Under the ESV, directors must essentially pursue the company’s interest for the benefit of its shareholders but, in doing so, they must have regard to other objectives—eg, climate risk mitigation and environmental protection—as well as the interests of non-shareholder stakeholders—eg, employees, customers, suppliers and other stakeholders.31 While directors can pursue those other objectives and non-shareholder stakeholder interests as a tool to accomplish shareholder value maximisation,32 they are not required to do so.33 Therefore, in their decisions regarding or with an impact on climate or sustainability risks and the environment, directors must give due consideration to the long-term interests of the company and the impact of their decisions on the environment and the climate, but they are not bound by a general duty to pursue specific long-term climate- and/or environment-related goals.34 This approach has been confirmed by section 414 CZA CA 2006, introduced in the year 2018,35 that requires certain companies to publish annually a statement on ‘how the directors have had regard to the matters set out in section 172(1)(a) to (f)’;36 similarly to section 172 CA 2006, here the focus is on the idea of due consideration,37 and regard rather than actual pursuit.
That said, there is not an inherent trade-off between the interests of shareholders and those of other stakeholders, or between the former and the objectives of environmental protection and climate risk mitigation. On the contrary, some research suggests that there is a positive correlation between company decisions and actions aimed at addressing climate and environmental risks and impacts on the one side and shareholder value creation on the other side.38 Hence, there may be cases in relation to which some commentators could argue—as is the case of ClientEarth with respect to Shell—that addressing climate risks and impacts would promote the success of the company in the interest of its shareholders. However, if directors give due regard and consideration to those climate risks and impacts, it is highly unlikely that UK courts will hold them to account for their decisions regarding their companies’ energy and climate strategies.
In this respect, UK courts tend to embrace a business judgement rule-like approach39 whereby they do not second guess directors’ decisions.40 Hence, in principle, directors have substantial freedom to decide which decisions promote the success of the company as defined in section 172 CA 200641 without fear of committing a breach of the latter. Only when directors act in bad faith, disregardingly, perversely, or irrationally, their decisions may not be shielded by the business judgment rule.42 In order to answer the question of whether directors’ decision-making falls in any of those categories, UK courts may apply either a subjective test aimed at determining whether the directors honestly considered that they were acting in the company’s best interest43 or an objective test that assesses whether an honest, intelligent and reasonable person acting as a director could have reasonably believed that a given decision was in the company’s best interest.44 However, the honesty and reasonableness thresholds applied by UK courts to determine whether there has been a breach of the duty of section 172 CA 2006 tends to be rather lenient; therefore, UK courts will not deem that there has been such a breach unless the directors concerned have shown a ‘really bad behaviour’.45
ClientEarth’s claim regarding the alleged breach of section 172 CA 2006 appears to be largely based on the idea that while Shell’s Board acknowledges the existence of climate risks with an adverse impact on the company, ‘its transition strategy’ does not properly address them.46 While this may hold true, it is highly unlikely that the High Court will question the adequacy of a company’s board of directors’ environmental and climate strategy in addressing climate risks, as such. The decision of the High Court in Ewan McGaughey v Universities Superannuation Scheme Limited47 would seem to confirm such a judicial approach. In this case, the claimants argued, among other things, that the Universities Superannuation Scheme Limited (USS) investment strategy was in breach of section 172 CA 2006 because it involved investments in fossil fuels without adequately addressing the risks linked to those investments, hence increasing the financial exposure of USS, in detriment of the latter’s interest and success.48 The High Court’s judgement provided guidance on the test to be applied in the assessment of whether a board of directors’ investment decisions and strategy are in breach of section 172 CA 2006. This test establishes that, in order for a breach of section 172 CA 2006 to occur, the directors must have ‘committed a fraud on their powers’,49 ‘a deliberate or dishonest breach of duty’.50 This is a strict test which requires that the claimants provide strong arguments, not on the adequacy, appropriateness or success of a board of directors’ approach, strategy and decisions regarding sustainability and climate risks but on whether these involved fraud and/or dishonesty. Decisions that do not fall in the latter category will likely be deemed as part of the normal exercise of discretion by the board. Consequently, the High Court found that USS’ decisions as regards investments in fossil fuel companies ‘were well within the discretion of the Company in exercising its powers of investment’.51
The High Court’s judgements in ClientEarth v Shell Plc are consistent with the approach followed in Ewan McGaughey v Universities Superannuation Scheme Limited. In this respect, as regards the alleged breach of section 172 CA 2006 by Shell’s directors, the High Court argued that ClientEarth’s interpretation of the duty to promote the success of the company aims at imposing absolute duties on Shell’s directors that would impinge on their legitimate exercise of discretion on how to manage Shell’s business and, more particularly, on how to best promote Shell’s success for the benefit of its shareholders.52
2.2. Shell’s Climate Strategy and Section 174, CA 2006
ClientEarth’s second substantive claim alleged that Shell’s Board is in breach of section 174 CA 2006.53 This provision codifies the duty of care, whereby company directors must carry out their functions with ‘reasonable care, skill and diligence’.54
In assessing compliance with and potential breaches of section 174 CA 2006, UK courts are not particularly concerned with the specific outcome of directors’ decisions, the latter’s business/commercial merits, or whether they are based on or contain errors of judgement.55 Instead, the focus of UK courts is largely on the procedure followed to take those decisions and, notably, the extent to which, in the course of their decision-making, directors reasonably keep themselves properly informed about their companies’ business and risk exposure, duly consider such information,56 and properly monitor their companies’ activities.57 As long as directors comply with these requirements, it is extremely unlikely that they will be deemed in breach of section 174 CA 2006.58
In its claim, ClientEarth did not contend that Shell’s directors failed to monitor and keep themselves properly informed about Shell’s business and activities and the related environmental and climate risks and impacts. For instance, according to ClientEarth: ‘Shell’s Board has long accepted the existence of this type of climate risk to the company, and now also readily accepts the materiality of that risk in its annual reports. Yet its transition strategy fails to adequately address it’.59 This statement appears to acknowledge that Shell’s directors have duly complied with their information and monitoring duties. It also evidences that the core problem, according to ClientEarth, lies in the alleged inadequacy of Shell’s Board climate strategies—ie, on the substantive content of its climate risk-related decisions rather than on the decision-making process leading to those decisions.
Moreover, on its part, over the years Shell has published various documents and reports in the area of sustainability and energy transition that explain, in detail, the rationale of Shell’s decisions in these areas.60 These documents provide preliminary evidence of, at least, some degree of consideration of the problem of climate risks and the need for energy transition actions by Shell.61 Whether Shell’s related energy transition strategies are fit for purpose may be debatable, but even if they were not, that would not render the decisions adopting those strategies in breach of section 174 CA 2006. It is also worth noting that, under UK company law, directors are not bound by a general duty to minimise climate risks at any cost and, in relation to certain matters, Shell’s Board may be able to legitimately argue that, faced with two choices, one that embraces climate risk mitigation and/or environmental sustainability and another that does not do so, the latter better promotes the success of the company for the benefit of its shareholders. For instance, Shell’s Energy Transition Progress Report for the year 2022 stated: ‘Other investors told us they would like Shell to introduce medium-term targets to reduce absolute Scope 3 emissions produced by customers when they use our products. The Board has considered setting a Scope 3 absolute emissions target but has found it would be against the financial interests of our shareholders […]’.62 In any event, as explained above, the judicial test regarding section 174 CA 2006 will not focus on the assessment of the content of a board of directors’ final decision on a given matter but on whether, in reaching that decision, directors duly considered the issues at stake.
In its assessment of Shell’s compliance with section 174 CA 2006, the High Court’s judgements largely focused on the notion of reasonableness and, more particularly, whether the relevant decisions and strategies adopted by Shell’s directors to address climate change-related risks were ‘outside the range of decisions reasonably available to the Directors at the time’.63 The High Court pointed out that the burden of showing unreasonableness by Shell’s directors lies on ClientEarth that, in order to do so, must show that ‘there is no basis on which the Directors could reasonably have come to the conclusion that the actions they have taken have been in the interests of Shell’.64 According to the High Court, ClientEarth did not present any evidence of unreasonableness by Shell’s directors65 but, rather, it expressed a diverging view on which energy and climate strategy should be put in place by them.66 Implicit in the High Court’s judgements is the view that there are inherent difficulties in showing unreasonableness on mere substantive grounds, not only due to the legal protection afforded to the exercise of directors’ discretion67 but also because there are several material approaches through which directors may be able to accomplish a given target, such as climate risk mitigation, and it would be extremely difficult to offer solid arguments that by taking a specific approach to reach a certain target, Shell’s directors could not reasonably believe they were acting in the interest of Shell.68 More importantly, according to the High Court, the key issue when assessing reasonableness lies on procedural aspects. In this respect, the court’s reasoning established a link between the concepts of directors’ due consideration and directors’ reasonableness whereby the occurrence of the former constitutes evidence of the latter.69 It noted that ClientEarth did not question the exercise of due consideration by Shell’s directors but instead argued that the climate strategy resulting from such consideration was unreasonable.70 According to the High Court, this was a ‘fundamental defect in ClientEarth’s case’ because it put the focus on the specific content of Shell’s climate strategy, which falls within the scope of exercise of directors’ discretion with which courts do not interfere.71
3. Beyond Judicial Decision-making: The Political Economy of Clientearth’s Lawsuit Against Shell’s Board
As explained above, the High Court did not find any of the ClientEarth’s claims meritorious. It could be argued that this may reinforce the position of Shell’s Board as regards Shell’s energy transition strategy, reduce the pressure on companies to effect change towards more sustainable and climate conscious corporate strategies and limit the use of corporate law and litigation as a tool to pursue climate-related goals.72 However, there are reasons to think that ClientEarth’s lawsuit against Shell’s Board may, nonetheless, be useful to advance broad climate-related targets, which are at the core of ClientEarth’s mission.73 Indeed, Shell contended and the High Court’s judgements suggested that the main reason why ClientEarth brought the derivative claim against Shell’s Board was to promote its own climate policy agenda.74
First, ClientEarth’s derivative claim signals to companies subject to high physical risks and/or operating in climate-policy relevant sectors—ie, those vulnerable to transition risks—that there is an increasing shareholder activism in the area of sustainability and a shift in the shareholder instruments used to influence more sustainable company decision-making. Traditionally, those instruments consisted of and were limited to the use of voting rights to influence companies’ agendas and internal governance mechanisms as well as the use of shareholder information rights to request greater company transparency on sustainability and environmental issues.75 While litigation between shareholders and company boards on sustainability and environmental matters is not entirely new,76 the scope of ClientEarth’s claim against Shell’s Board embraces a major qualitative shift because, rather than focusing on specific decisions, it challenges a company’s board overall energy transition strategy. Hence, ultimately, it may incentivise directors, not only of Shell plc but also of other companies, to rethink their company strategies on sustainability matters and to further embrace climate goals to avoid the threat of litigation. Corporate climate litigation may result not only in directors’ potential personal liability for their actions or omissions in aspects relating to or with an impact on the climate and the environment, but also in reputational damage and high litigation expenses for the defendant companies.77 For instance, the response of BP to a complaint filed against it in 2019 by ClientEarth for alleged greenwashing of one of the BP’s advertisement campaigns78 is illustrative of the impact that the threat of climate litigation and the financial risks it involves for companies may have on their behaviour. In response to the complaint, BP ended its advertising campaign and announced that it would stop using corporate reputation advertising.79
Secondly, ClientEarth’s derivative claim may ultimately put mounting pressure on the UK government and legislature to introduce statutory changes aimed at addressing directors’ duties vis-à-vis the environment and the climate. The High Court’s dismissal of ClientEarth’s application has put the ball in the UK legislature’s court, which already faces growing pressure to legislate on aspects regarding corporate environmental issues and their long-term impacts.80 For example, Better Business Act, a coalition of circa 2,000 companies operating in the UK,81 is lobbying for an amendment of section 172 CA 2006 whereby companies would be bound to act in a way that ‘benefits wider society and the environment[…]’ and ‘reduces harms the company creates or costs it imposes on wider society or the environment[…]’.82 Likewise, there are influential voices within the judicature that advocate such changes. For example, Lord Sales has argued extra-judicially that ‘there is a clear case for these company laws to be modified, by legislation, to provide a greater impetus to boards and individual directors to accord greater attention and weight to climate issues than has until now been considered appropriate’.83
In assessing the potential impact of the High Court’s decision on the legislature’s attitudes towards statutory company law reforms, it is important to take stock of the fact that Shell plc is the fifth largest oil company worldwide by revenue84 and it has a controversial environmental record.85 Also, a survey conducted in March 2023 among the UK public showed that 73% of the respondents agreed that businesses should have a responsibility to protect the environment and 69% of them supported a change in the law requiring companies to act in a way that is beneficial for the environment.86 Hence, the High Court’s judgements dismissing ClientEarth’s application may be received with public backlash in the UK and strengthen the arguments of those who deem the existing UK’s statutory company law framework inadequate to deal with contemporary and future environmental realities.
4. Concluding Remarks: The Gap Between Environmental Law and Company Law, and the Way Forward
The dispute between ClientEarth and Shell’s Board exemplifies the growing tension between the objectives of environmental law, on the one side, and those of company law, on the other side. The evolution of the former over the last 30 years has largely revolved around the notions of sustainability/sustainable development and the avoidance of dangerous climate change.87 In contrast, company law’s objectives still remain largely anchored and focused on the mitigation of agency problems within companies, with a focus on the relationship between directors and shareholders. While the introduction, by the CA 2006, of the requirement that directors have regard to the impact of their companies on the environment has statutorily acknowledged the latter as a factor that falls within the realm of the corporate objective,88 the analysis above has shown that its practical application as an instrument to hold directors to account for their actions or omissions with an impact on the environment and the climate is extremely limited. At the same time, ClientEarth’s recourse to the CA 2006 directors’ duties regime, despite its limitations, reveals the scarcity of alternative remedies based on environmental law/regulation at the disposal of claimants who want to hold company directors to account for company strategies that do not embrace climate goals.
Under the current statutory framework, ClientEarth’s or similar claims are extremely unlikely to be successful. Such success would require either a reform of the system of directors’ duties—eg, as proposed by the Better Business Act—and/or the introduction of environmental law/regulations that bind company directors to take actions aimed at accomplishing specific environmental/climate targets. No doubt, regardless of the final outcome of the case, ClientEarth’s derivative claim will reignite the discussion on these issues.
ACKNOWLEDGEMENTS
I am very grateful to Agnieszka Machnicka, Joanna Bell and an anonymous reviewer for their feedback and suggestions. The usual disclaimer applies.
Footnotes
ClientEarth is a charity registered in England and Wales whose work focuses on environmental law; for information on ClientEarth, see, eg, ClientEarth, ‘Company registration details’ (2023) <https://www.clientearth.org/> accessed 23 August 2023.
A derivative action is a claim brought by shareholders of a company, on the latter’s behalf, against its directors for breaches of their duties. The rules applicable to derivative claims are found in part 11 of the Companies Act 2006.
For information on this lawsuit, see, eg, ClientEarth, ‘ClientEarth litigation against Shell’s Board: FAQs’ (February 2023) <https://www.clientearth.org/media/lf4mcv3v/shell-directors-case-faq-2023.pdf> accessed 16 August 2023.
ClientEarth is a shareholder of Shell plc and, hence, it has standing to bring the derivative claim, see CA 2006, s 260.
ClientEarth, ‘ClientEarth files climate risk lawsuit against Shell’s Board with support from institutional investors’ (Press Release, 9 February 2023) <https://www.clientearth.org/latest/press-office/press/clientearth-files-climate-risk-lawsuit-against-shell-s-board-with-support-from-institutional-investors/> accessed 16 August 2023.
Shell plc is a multinational energy company with registered office and headquarters in London, UK. For recent information on Shell plc, see, eg, Shell plc, ‘Annual Report and Accounts for the year ended December 31, 2022’ (2023) <https://reports.shell.com/annual-report/2022/_assets/downloads/shell-annual-report-2022.pdf> accessed 16 August 2023.
There are two main types of climate risks, namely physical risks and transition risks. Physical risks normally refer to risks linked to climate variability events, such as floodings or heatwaves, which ultimately have negative effects on the economy and society, see, eg, Basel Committee on Banking Supervision, Climate-related risk drivers and their transmission channels (Bank for International Settlements 2021) v, 6-7 <https://www.bis.org/bcbs/publ/d517.pdf>; and, Task Force on Climate-Related Financial Disclosures (TCFD), ‘Recommendations of the Task Force on Climate-related Financial Disclosures’ (June 2017) 6 <https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf>. Transition risks generally refer to risks sourcing from changes (eg, in the applicable rules, technologies, or consumer behaviour) driven by the shift towards a net-zero economy, see, eg, Basel Committee on Banking Supervision, Climate-related financial risks –measurement methodologies (Bank for International Settlements 2021) vi <https://www.bis.org/bcbs/publ/d518.pdf>; and TCFD, ‘Recommendations of the Task Force on Climate-related Financial Disclosures’ (June 2017) 5-6. All accessed 16 August 2023.
ClientEarth (n 3) 1. Climate risk and climate change bring about important economic risks—eg, sourcing from business disruptions, lower profits, and adaptation costs—and financial risks—eg, related to increased credit risk/losses, a decline in the price of securities, and a decrease of property values; see Glenn D. Rudebusch, ‘Climate Change Is a Source of Financial Risk’ (2021) 2021/03 FRBSF Economic Letter 1, 2-3. On the links between climate risk and financial risk see also TCFD (n 7) 5-10; Hugues Chenet, ‘Climate Change and Financial Risk’ in Constantin Zopounidis, Ramzi Benkraiem, and Iordanis Kalaitzoglou (eds) Financial Risk Management and Modeling (Springer 2021). The main potential financial effects of climate change are asset devaluations, decrease of corporate profits, and both financial market and credit market losses—see, eg, TCFD, ‘Task Force on Climate-related Financial Disclosures: Overview’ (December 2022) 4 <https://assets.bbhub.io/company/sites/60/2022/12/tcfd-2022-overview-booklet.pdf>. On the impact of climate change on financial stability, see, eg, European Central Bank, ‘Climate-related risk and financial stability’ (July 2021) <https://www.ecb.europa.eu/pub/pdf/other/ecb.climateriskfinancialstability202107~87822fae81.en.pdf>; and Celso Brunetti and others, ‘Climate Change and Financial Stability’ (Board of Governors of the Federal Reserve System 2021) <https://www.federalreserve.gov/econres/notes/feds-notes/climate-change-and-financial-stability-20210319.html>.All accessed 16 August 2023.
ClientEarth (n 3) 2.
ibid 2. In addition, ClientEarth claimed that, in the context of Shell’s directors’ actions pertaining to climate risk, these duties embraced other specific duties, such as a duty to assess climate risk in light of generally accepted scientific evidence, a duty to give climate risk appropriate weight, or a duty to put in place reasonable measures aimed at mitigating transition risks—see ClientEarth v Shell Plc [2023] EWHC 1137 (Ch) [16].
ClientEarth (n 3) 3–4.
The Hague District Court Commerce Team, case number/cause list number: C/09/571932/ HA ZA 19-379 (engelse versie), Judgment of 26 May 2021 <https://en.milieudefensie.nl/news/verdict-climate-case-milieudefensie-shell-26-may-2021-1.pdf> accessed 16 August 2023. On the date of the ruling, Shell was headquartered in the Netherlands and its name was ‘Royal Dutch Shell’.
ibid.
ClientEarth v Shell Plc [2023] EWHC 1137 (Ch).
See, eg, ClientEarth, ‘Our groundbreaking case against Shell’s Board of Directors’ (Press release, 19 May 2023) <https://www.clientearth.org/latest/latest-updates/news/we-re-taking-legal-action-against-shell-s-board-for-mismanaging-climate-risk/> accessed 23 August 2023; and ‘Environment campaigners in latest round of fight with Shell directors’, The Independent (12 July 2023).
ClientEarth v Shell Plc [2023] EWHC 1897 (Ch). ClientEarth announced that it will appeal the High Court’s judgement—see ClientEarth, ‘ClientEarth to appeal High Court decision in case against Shell’s Board’ (Press Release, 24 July 2023) <https://www.clientearth.org/latest/press-office/press/clientearth-to-appeal-high-court-decision-in-case-against-shell-s-board/> accessed 16 August 2023.
[2023] EWHC 1137 (Ch) [19]-[20].
ibid [19]; and [2023] EWHC 1897 (Ch) [27], [37].
[2023] EWHC 1137 (Ch) [65]; and [2023] EWHC 1897 (Ch) [93].
[2023] EWHC 1137 (Ch) [68]; and [2023] EWHC 1897 (Ch) [96].
[2023] EWHC 1137 (Ch) [69]; and [2023] EWHC 1897 (Ch) [97].
On this topic, see, generally, Geetanjali Ganguly, Joana Setzer, and Veerle Heyvaert, ‘If at First You Don’t Succeed: Suing Corporations for Climate Change’ (2018) 38 OJLS 841; for recent trends on corporate climate litigation, see, eg, Joana Setzer and Catherine Higham, Global Trends in Climate Change Litigation: 2021 Snapshot (Grantham Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy, London School of Economics and Political Science 2021) 27–31; and, Joana Setzer and Catherine Higham, Global Trends in Climate Change Litigation: 2022 Snapshot (Grantham Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy, London School of Economics and Political Science 2022) 14, 18–21. For an example of a climate-related derivative claim in the USA, see, eg, In re Exxon Mobil Corp. Derivative Litig., No. 3:19-cv-01067-K (N.D. Tex.) where the plaintiff argued that Exxon misrepresented the impact of climate change on its business.
ClientEarth, ‘ClientEarth shareholder litigation against Shell’s Board. FAQs’ (March 2022) 2 <https://www.clientearth.org/media/puojyzvy/clientearth-shareholder-litigation-against-shell-s-board-faqs.pdf> accessed 16 August 2023.
On the ESV, see, eg, David Millon, ‘Enlightened Shareholder Value, Social Responsibility and the Redefinition of Corporate Purpose Without Law’ in PM Vasudev and Susan Watson (eds) Corporate Governance after the Financial Crisis (Edward Elgar 2012) 68-100; Andrew Keay, The Enlightened Shareholder Value Principle and Corporate Governance (Routledge 2013).
CA 2006, s 172(1).
CA 2006, s 172(1)(a).
CA 2006, s 172(1)(d).
BTI 2014 LLC (Appellant) v Sequana SA and others (Respondents) [2022] UKSC 25, on appeal from [2019] EWCA Civ 112 [386(4)].
See, eg, Lucian A. Bebchuk, Kobi Kastiel and Roberto Tallarita, ‘Does enlightened shareholder value add value?’ (ECGI Law Working Paper N° 643/2022, May 2022) 17 <https://www.ecgi.global/sites/default/files/working_papers/documents/shareholderfinal_0.pdf> accessed 16 August 2023. Lisa Benjamin in ‘The Responsibilities of Carbon Major Companies: Are They (and Is the Law) Doing Enough?’ (2016) 5 TEL 353, 359 argues that section 172 CA 2006 codifies the shareholder primacy approach.
See, eg, Henry Hansmann and Reinier Kraakman, ‘The End of History for Corporate Law’ (2001) 89 Georgetown LJ 439, 440–441; Andrew Keay, ‘Shareholder Primacy in Corporate Law: Can It Survive – Should It Survive’ (2010) 7 ECFR 369, 375-376; Robert J Rhee, ‘A Legal Theory of Shareholder Primacy’ (2017) 102 Minn L Rev 1, 2; and Mark J Loewenstein and Jay Geyer, ‘Shareholder Primacy and the Moral Obligation of Directors’ (2021) 26 Fordham J Corp & Fin L 105, 108–113.
CA 2006, s 172(1). On the meaning of ‘having regard to’ of s 172(1), see Andrew Keay, ‘Having Regard for Stakeholders in Practising Enlightened Shareholder Value’ (2019) 19 OUCLJ 118, 126–131.
See, eg, Bebchuk, Kastiel, and Tallarita (n 29) 4. Carrie Bradshaw in ‘The environmental business case and unenlightened shareholder value’ (2013) 33 LS 141 argues that s 172 CA 2006 gives environmental protection a purely economic, financial value, instrumental to the generation of wealth for shareholders.
See, eg, Keay (n 24) 136.
See, eg, Lisa Benjamin and Stelios Andreakidis, ‘Corporate Governance and Climate Change: Smoothing Temporal Dissonance to a Phased Approach’ (2019) 40 BLR 146, 153.
The Companies (Miscellaneous Reporting) Regulations 2018, SI 2018/860, s 4.
This could also include information on how directors considered the impact of the company’s decisions and operations on climate change—see, eg, Daniel Attenborough, ‘Corporate Disclosures on Climate Change: An Empirical Analysis of FTSE All‐Share British Fossil Fuel Producers’ (2022) 23 EBOLR 313, 318.
See, eg, Keay (n 31) 126.
See, eg, Witold Henisz, Tim Koller and Robin Nuttall, ‘Five Ways that ESG Creates Value’ (2019) 11/19 McKinsey Quarterly 1 <https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx>; and Chitru S Fernando, Mark P Sharfman and Vahap B. Uysal, ‘Corporate Environmental Policy and Shareholder Value’ (2017) 52 J Financial Quant Anal 2023. However, there are cases where there may be a trade-off between environmental protection and shareholder value maximisation—see, eg, Bradshaw (n 32) 149–153, who gives the example of how encouraging consumers to purchase less—eg, to produce less household waste—would run against supermarkets’ economic interests; on this potential trade-off, see also Frank Figge and Tobias Hahn, ‘Is Green and Profitable Sustainable? Assessing the Trade-off Between Economic and Environmental Aspects’ (2012) 140 Int J Prod Econ 92. Christina E Bannier, Yannik Bofinger and Björn Rock in ‘The Risk-Return Tradeoff: Are Sustainable Investors Compensated Adequately?’ (2023) 24 J Asset Manage 165, studied a large sample of US listed firms in the period 2003–2017 and found that investment portfolios that embraced low corporate social responsibility (CSR) strategies resulted in higher returns than those investment portfolios with stronger CSR strategies.
The Business Judgement Rule is a judicial doctrine establishing that courts must not interfere with directors’ decisions unless these involve a breach of directors’ duties—see, eg, SM Bainbridge, ‘The Business Judgment Rule as Abstention Doctrine’ (2004) 57 Vanderbilt LR 83. For some comparative law insights regarding the impact of the business judgement rule on directors’ duties in relation to climate change risks and impacts, see, eg, Climate Governance Initiative and Commonwealth Climate and Law Initiative, Primer on Climate Change: Directors’ Duties and Disclosure Obligations (2nd edn, July 2022) 40–42, 71–72, 76, 97–98, and 128–129 <https://commonwealthclimatelaw.org/wp-content/uploads/2022/07/CCLI-CGI-Primer-2022.pdf> accessed 16 August 2023.
See, eg, Andrew Keay and Joan Loughrey, ‘The Concept of Business Judgment’ (2019) 39(1) LS 36, 37. For example, in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, Lord Wilberforce noted that ‘it would be wrong for the Court to substitute its opinion for that of the management, or indeed to question the correctness of the management’s decision, on such a question, if bona fide arrived at’.
See, eg, Marc Arnold QC and Marcus Haywood, ‘Duty to Promote the Success of the Company’ in Simon Mortimore (ed.), Company Directors: Duties, Liabilities, and Remedies (3rd edn, OUP 2017) 282.
ibid 282–286. See also Climate Governance Initiative and Commonwealth Climate and Law Initiative (n 39) 17.
Arnold and Haywood (n 41) 282–283.
ibid 283–286.
Andrew Keay, The Corporate Objective (Edward Elgar 2011) 155.
ClientEarth (n 3) 1. Notably, ClientEarth contended that the main source of climate risk for Shell is the ‘anticipated value destruction of Shell’s fossil fuel business’ but that, despite this, Shell is not properly addressing such risk through an appropriate resizing of that business and an adequate diversification into low carbon business activities, see [2023] EWHC 1137 (Ch) [43].
[2022] EWHC 1233 (Ch).
ibid [120].
ibid [193].
ibid [192].
ibid [196].
[2023] EWHC 1137 (Ch) [19], [25]; and [2023] EWHC 1897 (Ch) [27]-[28], [37].
ClientEarth (n 23) 2.
CA 2006, s 174(1).
Mark Arnold, ‘Duty to Exercise Reasonable Care, Skill, and Diligence’ in Simon Mortimore (ed.), Company Directors: Duties, Liabilities, and Remedies (3rd, edn OUP 2017) 337-338.
Joan Loughrey, ‘The Director’s Duty of Care and Skill and the Financial Crisis’ in Joan Loughrey (ed.), Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis (Edward Elgar 2012) 26.
ibid 21–26. See, eg, Re Barings plc and others (No 5), Secretary of State for Trade and Industry v Baker and others (No 5) [2000] 1 BCLC 523, 536: ‘Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors’.
Loughrey (n 56) 33–40.
ClientEarth (n 3) 1.
See, eg, Shell plc, ‘Shell plc Energy Transition Progress Report 2021’ (2022) <https://reports.shell.com/energy-transition-progress-report/2021/_assets/downloads/shell-energy-transition-progress-report-2021.pdf> accessed 23 August 2023 and Shell plc, ‘Shell plc Sustainability Report 2021’ (2022) <https://reports.shell.com/sustainability-report/2021/_assets/downloads/shell-sustainability-report-2021.pdf> accessed 16 August 2023.
For example, according to Shell’s 2021 Energy Transition Progress Report, ‘In 2021, the Board convened on 12 occasions and continued to regularly oversee the Powering Progress strategy and net-zero initiatives, including at the Board Strategy Day in June 2021’, see Shell plc, ‘Shell plc Energy Transition Progress Report 2021’ (2022) 27.
See Shell plc, ‘Shell plc Energy Transition Progress Report 2022’ (2023) 2 <https://reports.shell.com/energy-transition-progress-report/2022/_assets/downloads/shell-energy-transition-progress-report-2022.pdf> accessed 16 August 2023.
[2023] EWHC 1137 (Ch) [20], [26]; and [2023] EWHC 1897 (Ch) [32].
[2023] EWHC 1137 (Ch) [26]; and [2023] EWHC 1897 (Ch) [38].
[2023] EWHC 1137 (Ch) [46]-[47]; and [2023] EWHC 1897 (Ch) [59].
[2023] EWHC 1137 (Ch) [47]; and [2023] EWHC 1897 (Ch) [64].
[2023] EWHC 1137 (Ch) [18]-[19]; and [2023] EWHC 1897 (Ch) [25]-[28].
[2023] EWHC 1137 (Ch) [25], [47]; and [2023] EWHC 1897 (Ch) [37], [62], [64].
[2023] EWHC 1137 (Ch) [48]; and [2023] EWHC 1897 (Ch) [65].
[2023] EWHC 1137 (Ch) [48]; and [2023] EWHC 1897 (Ch) [65]-[66].
ibid.
For instance, in the USA, the decision of the Supreme Court in Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164 (1994) ended the right of private parties to bring claims against aiders and abettors—eg, accounting firms—in securities fraud cases. This, in turn, resulted not only in a major decrease in such claims but also in an increase of risky behaviours by accounting firms, see Daniel R Tibbets, ‘Tarnished Reputations: Gatekeeper Liability After Janus’ (2015) 20 Fordham J Corp & Fin L 745, 760–763.
See, eg, ClientEarth, ‘Tackling climate change’ (2023) <https://www.clientearth.org/what-we-do/why-we-fight/climate/> accessed 16 August 2023.
[2023] EWHC 1137 (Ch) [61], [64]-[65]; and [2023] EWHC 1897 (Ch) [87], [92]-[93]. The High Court largely justified its view in this respect by arguing that ClientEarth brought a highly complex, challenging and expensive claim despite holding only 27 shares of Shell, see [2023] EWHC 1137 (Ch) [65]; and [2023] EWHC 1897 (Ch) [93].
See, eg, Kai HE Liekefett, Holly J Gregory and Leonard Wood, ‘Shareholder Activism and ESG: What Comes Next, and How to Prepare’, Harvard Law School Forum on Corporate Governance (29 May 2021) <https://corpgov.law.harvard.edu/2021/05/29/shareholder-activism-and-esg-what-comes-next-and-how-to-prepare/> accessed 16 August 2023.
See, eg, Ewan McGaughey v Universities Superannuation Scheme Limited (n 47).
See, eg, Ganguly, Setzer, and Heyvaert (n 22) 865-866.
See, eg, ClientEarth, ‘Lawyers take action against BP’s climate “greenwashing” advertising campaign’ (Press Release, 4 December 2019) <https://www.clientearth.org/latest/press-office/press/lawyers-take-action-against-bp-s-climate-greenwashing-advertising-campaign/> accessed 23 August 2023.
See, eg, BP, ‘BP sets ambition for net zero by 2050, fundamentally changing organisation to deliver’ (12 February 2020) 4 <https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/12-feb-2020/bp-sets-ambition-for-net-zero-by-2050-fundamentally-changing-organisation-to-deliver.pdf> accessed 23 August 2023; and ClientEarth, ‘BP pulls advertising campaign just months after our legal complaint’ (Press Release, 14 February 2020) <https://www.clientearth.org/latest/latest-updates/news/bp-pulls-advertising-campaign-just-months-after-our-legal-complaint/> accessed 16 August 2023.
For a related argument, in the context of climate litigation, on how negative judicial outcomes for plaintiffs may increase the pressure on policy makers to address the underlying matters through ad hoc policy reforms and how policy makers may respond positively to such pressures, see, eg, Ganguly, Setzer and Heyvaert (n 22) 866.
On the Better Business Act, see, eg, Better Business Act, ‘Campaign Overview’ (2022) <https://betterbusinessact.org/wp-content/uploads/2022/04/Better-Business-Act-Campaign-Overview.pdf> accessed 23 August 2023.
See Better Business Act, ‘The Better Business Act’ (2021) <https://betterbusinessact.org/wp-content/uploads/2021/04/The-Better-Business-Act-2021.pdf> accessed 23 August 2023.
Justice P Sales, ‘Directors’ duties and climate change: Keeping pace with environmental challenges’, Speech before the Anglo-Australasian Law Society, Sydney (27 August 2019) 16 <https://www.supremecourt.uk/docs/speech-190827.pdf> accessed 16 August 2023.
See, eg, Oil & Gas IQ, ‘The Top 10 Oil Companies in the World: 2022’ (28 July 2022) <https://www.oilandgasiq.com/operational-excellence/articles/the-top-10-oil-companies-in-the-world-2022> accessed 23 August 2023.
See, eg, Kathryn Nwajiaku-Dahou and Engobo Emeseh, ‘Finally, Shell can no longer shirk responsibility for Niger Delta oil spills’, African Arguments (18 February 2021) <https://africanarguments.org/2021/02/finally-shell-can-no-longer-shirk-responsibility-for-niger-delta-oil-spills/> accessed 23 August 2023.
See Better Business Act, ‘Wake Up to Better Business: study exploring UK public opinion around the role of business’ (April 2023) <https://betterbusinessact.org/wp-content/uploads/2023/04/BBA-Opinium-The-role-of-business-Executive-Summary-2023.pptx.pdf> accessed 23 August 2023.
See, eg, Chris McGrath, ‘The Role Played by Policy Objectives in Environmental Law’ in Douglas Fisher (ed.), Research Handbook on Fundamental Concepts of Environmental Law (Edward Elgar 2016) 372–9.
The corporate objective is a concept that relates to the perennial question of the interests and objectives that companies should pursue and maximise. For an overview of this topic, see, eg, Margaret M Blair, ‘Whose Interests Should Corporations Serve?’ in Max BE Clarkson (ed.), The Corporation and Its Stakeholders: Classic and Contemporary Readings (University of Toronto Press 1998) 47–70.
