Climate-related shareholder activism: legal claim against Shell directors falls at first hurdle

The UK High Court (on 12 May 2023) refused permission for environmental group ClientEarth to continue its claim against the directors of Shell plc (Directors) for their alleged failure to manage climate change commitments and risk.

This decision adds to the growing array of novel causes of action brought by climate activists as litigants. While we are yet to see climate litigation against directors in Australia, the High Court's decision may prove instructive in future Australian cases concerning breaches of directors’ duties for management of climate impacts.

The case against the Shell Directors

ClientEarth, in its capacity as a shareholder of Shell, commenced a derivative action earlier this year against the Shell Directors. ClientEarth’s claim alleged that the Directors had breached their core directors’ duties in sections 172 and 174 of the UK Companies Act 2006, being the duty to promote the success of the company and to exercise reasonable care, skill and diligence.

Directors’ duties are primarily owed to and are enforceable by their company. Under English (and Australian) law, a shareholder can only litigate a breach of directors’ duties if they obtain leave from a court to bring the litigation as a derivative claim. The question before the Court in this case was therefore whether ClientEarth should be allowed to bring a derivative claim against the Shell Directors. In order to answer this question under English law, the High Court had to determine whether ClientEarth had demonstrated that there was a prima facie case against the Directors (i.e., a viable cause of action for breach of directors’ duties).

In its decision of 12 May, the High Court determined that ClientEarth had not discharged this requirement. The Court’s reasons highlight the challenges that will confront activists who wish to base climate change litigation on alleged breaches of directors’ duties.

Decision of the High Court

ClientEarth argued that the Shell Directors’ duties to act with care and diligence and to promote the company’s success required the Directors, in the climate change context, to comply with various “incidental” duties. These included a duty to accord appropriate weight to climate risk, a duty to implement reasonable measures to mitigate the risks flowing from compliance with the Paris Agreement, and a duty to adopt strategies that are reasonably likely to meet Shell’s climate change targets.

ClientEarth argued that the Directors had breached these incidental duties and, by extension, their primary duties to act with care and diligence and to promote the company’s success. According to ClientEarth, this was because the Directors had failed to:

• set an appropriate emissions target;
• implement a strategy that provided a reasonable basis for achieving the company’s net zero target aligned with the Paris Agreement; and
• comply with the order of the Hague District Court in the 2021 case of Milieudefensie v Royal Dutch Shell plc which determined that Dutch law required Shell to achieve a 45% reduction in emissions by 2030.

The Court rejected these arguments. It held that the incidental duties pleaded by ClientEarth were an “unnecessary and inappropriate elaboration of the statutory duty of care”. Moreover, the prescriptive nature of the alleged incidental duties conflicted with the well-established legal principle that it is for company directors themselves to determine in good faith how best to advance a company’s interests. The Court noted how the law provides directors with considerable latitude to determine how to do this.

It therefore followed that the Shell directors would only be in breach of their duties if their climate change-related decision-making fell outside the range of decisions reasonably available to the directors at the time. The Court held that ClientEarth had not established that this was the case. The Court pointed out that the Directors did in fact adopt policies and targets to achieve net zero by 2050, and thus had turned their mind to the best interests of Shell with respect to climate change transition. In relation to Shell’s response to the judgement in Milieudefensie, the High Court noted that the order of the Dutch court provided Shell with discretion as to how it complies with reduction obligations imposed by Dutch law. The High Court held that there was no prima facie case that the Shell Directors had failed to approach this task with due care and a good faith regard for Shell’s interests.  

On 19 May, the Court agreed to give ClientEarth an oral hearing at a later date to re-argue its application for permission to bring a derivative claim against the Shell directors. Given the approach adopted by the Court in its 12 May judgment, it remains to be seen whether it reaches a materially different conclusion following oral argument.

Relevance of the decision

For company directors, managing the transition to a low carbon future can give rise to difficult commercial and strategic issues. The High Court’s decision recognises this reality and indicates that the English courts will be slow to entertain claims that directors who have attempted to navigate this task have breached their duties. As the court noted, the “management of a business the size and complexity of that of Shell will require the Directors to take into account a range of competing considerations, the proper balancing of which is [a] classic management decision with which [the] court is ill-equipped to interfere”. 

The duties of Australian directors are broadly similar to the duties litigated in this case. Australian barristers Noel Hutley SC and Sebastian Hartford Davis have opined that ignoring foreseeable climate change risks may expose Australian directors to claims for breaches of their duty of care and diligence. However, directors who diligently address the issue of climate change risks and transition management are likely to be in a different position. Like the English High Court, Australian courts will typically give due deference to director decision-making that is undertaken in good faith and on an informed and considered basis, even if reasonable minds might differ about the final decision reached by directors. That said, science, technology and market practices are constantly evolving in the area of climate change and transition strategy, and directors must ensure that their decision-making in this area remains up-to-date and responsive to such developments.

Climate-related shareholder litigation in Australia

The Shell case is a reminder of the diverse tactics available to climate-related activists. This includes divestment and boycott campaigns and activism centred on companies’ annual general meetings. Australia has also witnessed various examples of climate change-related shareholder litigation.

Although we are not aware (as yet) of claims for breach of directors’ duties, we have seen instances of disclosure-based litigation, such as the claim brought by the Australasian Centre for Corporate Responsibility against Santos for allegedly misleading claims in its annual report and investor presentations regarding the sustainability of its gas production and its emission reduction strategy.^[1] In 2021, a shareholder of Commonwealth Bank successfully obtained access under section 247A of the Corporations Act 2001 (Cth) to the bank’s board and management papers for the purpose of scrutinising the accuracy of the bank’s public-facing sustainability disclosures.^[2]

It is important to appreciate that, in bringing climate change-related litigation, activists are not solely motivated by the objective of winning cases. They also seek to bring litigation to highlight their concerns, subject corporate behaviour to scrutiny, and increase pressure on companies to manage climate change risk. For these reasons, climate change litigation against companies is likely to continue for the foreseeable future.

^[1] Australasian Centre for Corporate Responsibility v Santos Ltd (2021) NSD858/2021 (unreported procedings).

^[2] Guy Abrahams v Commonwealth Bank of Australia (2021) NSD864/2021 (unreported proceedings).