ESG shareholder activism on the rise?

On 15 March 2022, ClientEarth issued a pre-action letter of claim against the board of directors of Shell, arguing that their failure to properly prepare the company for net zero puts them in breach of their duties to the company.

The threatened claim is premised on an unprecedented application of the provisions related to directors’ duties in the UK Companies Act 2006, and it is amongst the first climate-related claims to be threatened against a company in the UK. ClientEarth has reported that it will be seeking a judgment to “compel Shell's board to strengthen its climate transition plans, in the best interests of the company in the long-term”.

The threatened claim would be brought under section 172 of the Companies Act. This provision requires company directors to act in a manner that they consider would “promote the success of the company for the benefit of its members as a whole”, having regard to factors including the impact of the company's operations on the community and the environment. Directors also have a separate duty to exercise reasonable care, skill and diligence in the discharge of their duties under section 174 of the Act.

In most cases where a claim is brought for a breach of a director’s duty, it is the board of directors, or a liquidator (acting on behalf of the company), who issue the claim. However, in the present circumstances, ClientEarth (a shareholder in Shell) would have to pursue a derivative action against the directors in their personal capacities. A derivative action is an exception to the rule which allows a shareholder to bring a claim, on behalf of the company, against its directors. This requires the court to provide prior consent, and the court will not give permission if the board can show that a director acting in accordance with the duty to promote the success of the company would not seek to continue the claim (or if Shell’s climate strategy has been authorised or ratified by the company).

Whilst the claim is still in the very early stages, it demonstrates that the attention given to environmental, social and governance (ESG) issues, and the appetite for related litigation, is undoubtedly increasing in the UK, following a more active litigation landscape in the US, and Europe. Therefore, corporations and their directors in the UK are potentially more exposed to claims being initiated against them by shareholders on the basis of perceived failings in their ESG strategy, or on the basis of allegedly misleading “ESG statements”, brought on the basis of either the Companies Act, or section 90 of the Financial Services Markets Act 2000.

Whilst not necessarily in relation to ESG issues, the last few years have seen an increase in claims brought by shareholder groups directly against companies that they invest in. Albeit it is important to remember that there are various hurdles to bringing these types of claims.

In Manning & Napier Fund, Inc & Anor v Tesco plc [2020] (the Tesco Litigation) a group of institutional investors sued Tesco under section 90A of the Financial Services and Markets Act 2000 (FSMA) for losses they allegedly suffered following Tesco’s announcement in 2014 that its profits had been overstated by £263 million. Following a Pre-Trial Review in August 2020 (where they requested a split trial to allow for the issues of reliance, causation and loss to be determined at a later stage and Tesco’s conduct to be dealt with first), the claimants in the Tesco Litigation agreed a settlement and dropped the action. It is thought that the refusal of the split trial triggered settlement as it is challenging for shareholders to provide documentary and witness evidence to support their arguments.

More recently, in McGaughey & Anor v Universities Superannuation Scheme Ltd & Anor [24.05.22], lecturers and members of the Universities Superannuation Scheme filed a legal action against the directors of the Universities Superannuation Scheme (USS) for breaches of their directors’ duties, and sought the court's permission to pursue those claims by way of derivative action. The directors were accused of multiple failings with respect to a 2020 valuation, and of inaction around climate change commitments, including an alleged failure to create a credible plan for the divestment from fossil fuel investments, which the claimants alleged to have prejudiced the financial success of the company.

At a hearing on 28 February 2022, it was decided that there was a prima facie case to answer, that the claimants were acting in good faith, and that their claim could continue to an inter-partes hearing to determine whether permission should be given for the claim to proceed. At the subsequent inter-partes hearing, the claimants’ action failed to obtain permission to proceed. The judge commented that the claimants needed to prove that the USS suffered a loss mirroring that suffered by the members, and that this was because of a deliberate or dishonest breach of duty, or otherwise as a result of USS directors’ improperly benefiting themselves at the scheme’s expense. The judge found no evidence that the USS had suffered such a loss.

Importantly however, the judge agreed that beneficiaries of a pension fund corporation do have the right to sue directors for breach of duty, but in this case, there was insufficient evidence to support the claimants’ claims.

And whilst we have not commented in detail on the judgment here, the case of Autonomy and others v Lynch and another [17.05.22] provided useful guidance on what is required to pursue a section 90A claim where an investor has relied on a company’s published statement that was allegedly untrue or misleading. It will no doubt be put to use by shareholders considering bringing ESG claims against companies.

Comment

So, whilst group shareholder actions are still relatively uncommon in the UK, particularly in comparison with the US, we consider that we are likely to see more frequent attempts to bring group litigation here in the future, including litigation with a focus on ESG issues. It remains to be seen if the UK judiciary are willing to act as a watchdog on ESG issues. Watch this space.

Related items: 

• Rewriting the risk: Addressing the challenge of climate change
• Climate disclosures: a global risk driver in financial lines
• Causing climate change... a new tort? A cross-jurisdictional review

Read other items in Professions and Financial Lines Brief – October 2022