Climate Change Litigation: emerging risks for directors?
Although this week the High Court dismissed ClientEarth’s shareholder derivative claim against 11 directors of Shell (ClientEarth v Shell Plc and other [2023] EWHC 1137 (Ch)), climate litigation still poses a significant risk to directors. Below we consider the nature of director’s duties, what ClientEarth’s recent litigation has established and the extent to which B Corp certification can help boards navigate their ESG responsibilities.
Recent years have seen an increase in climate-related litigation claims. In 2022, over 2000 cases have been filed in 44 countries with the number of cases increasing rapidly in recent years and now with filings in the UK court.
The claimant landscape is well organised; NGOs and private individuals, with access to litigation funders, seek to bring governments, corporates, and their directors to account by launching litigation with the objective of changing the dial on climate change by any legal means necessary.
Breach of directors duties
Breach of directors’ duties was at the heart of ClientEarth’s recent litigation against Shell’s directors. It alleged that the directors were in breach of S172 of the UK Companies Act 2006 “to promote the success of the company for the benefit of its members as a whole” by failing to adapt and implement an energy transition strategy that aligns with the Paris Agreement and therefore putting at risk the long-term value of the company.
Corporate strategy and management are typically matters of business judgment that the court will not usually challenge (People and Planet [2009] EWHC 3020 at [35]) providing these have been made in good faith. Breach of this duty is more likely if a director has failed to consider all the relevant factors in the exercise of their judgment.
The duty is therefore one concerned more with process rather than outcomes. Shell had evidence that it had executed strong governance around climate risk, including publications such as Shell’s Climate Target, its Energy Transition Progress Report 2022 and other documented evidence of its considerations.
Not all businesses will be able to demonstrate this level of governance and those that can’t are more at risk from this type of litigation. It is worth noting that Client Earth was successful in establishing that climate change was a material and foreseeable risk that could have a material impact on Shell’s business.
Misleading disclosures
At present, only the largest UK companies and financial institutions are required by law to disclose in their annual report how they are addressing climate-related risks. It is anticipated that the disclosure requirements will encompass more categories of companies in the coming years.
In the meantime, many businesses choose to make these disclosures voluntarily or via impact reporting as these fit with their values and stakeholder expectations.
For legal liability to attach for misstatement or negligence, incorrect representations need to be directed to a claimant and relied upon to their detriment, which can be difficult to prove.
Although there have not been any notable greenwashing legal cases in the UK, there has been a significant wave of net zero pledges which on the face of it have little specificity in recent years, such that it is anticipated that there will be an uptick in litigation if these pledges transpire to be empty promises.
Risks for misleading disclosures also arise from increased regulatory interest whether from the Financial Conduct Authority, the Competition and Markets Authority or Advertising Standards Authority, all are themselves coming under increased pressure from climate litigation and activists. Increased regulatory scrutiny, therefore, appears inevitable.
Impact of climate lawsuits
Researchers at LSE Grantham Research Institute on Climate Change and the Environment have found that climate litigation - lawsuits filed and decisions involving climate as a material issue - against companies saw company value drop on average by 0.41%.
They also found that the largest stock market swings are observed for cases filled against the largest emitters operating in energy, utilities and materials (known as Carbon Majors).
These firms’ value was reduced by 0.57% following case fillings and by 1.50% following unfavourable judgements.
These findings highlight the need for greener corporate behaviour, but what do Best Practices look like?
Best Practices
The key takeaway for all directors is the need to have a best practice and governance process so they can be certain that they are taking all climate change factors into consideration and that their climate-related disclosures are accurate and not misleading.
One idea from Supreme Court Judge Lord Sales is to appoint a designated board member or Chief Sustainability Officer responsible for “environmental impact issues”, or a “non-executive director (NED) [that] could take responsibility for championing environmental matters for their company”.
The key takeaway for all directors is the need to have a best practice and governance process so they can be certain that they are taking all climate change factors into consideration.
- Lindsay Bowskill, Professionals for Good
A NED with specific expertise in ESG and the ability to keep abreast of the changing landscape could be invaluable to boards, as evidence of their process which ensures all relevant considerations are being considered as well as enhancing the decision making.
Best Practices may vary depending on the market in which a business operates. A separate Sustainability committee looking at reporting and risk management structure which reports directly to the board may also be appropriate.
Some businesses may consider seeking an environmental accreditation such as B Corp or ISO140001. Both these accreditations provide a framework that will mean consideration is being given to relevant environmental factors.
B Corp certification, unlike any other accreditation, encompasses environmental, social, and governance structures. The Business Impact Assessment, and it circa 200 questions, provides a framework for companies to build their own Best Practice with the reassurance that they are taking into account all relevant factors.
There is a comprehensive validation process by B Lab giving further comfort to directors. The statement of interdependence in the constitutional documents, also holds the board’s focus and acts as a beacon for making tough strategic decisions.