ClientEarth’s landmark action against the directors of Shell has failed

This case review was co-authored by Ellie Senogles, Trainee Solicitor, London.

An action by ClientEarth to bring what it heralded as a “world-first” attempt to hold a company’s board of directors personally liable for failing to properly prepare for the net zero transition has ended, after a decision handed down by the Court of Appeal on 14 November 2023.

Background

ClientEarth is a non-profit environmental organisation and a minority shareholder in Shell. It sought to hold a number of Shell directors accountable under sections 172 and 174 of the Companies Act 2006 for alleged failures to properly address the risks of climate change.

Our earlier articles set out further background and commentary on the case here and here. These include a review of the High Court decision in July 2023 to dismiss ClientEarth’s request for permission to pursue such proceedings by way of a derivative action.

In overview, ClientEarth alleged that the directors of Shell had breached the following duties under the Companies Act 2006 by failing to adopt a transition strategy that aligned with the Paris Agreement, having regard to the financial risk climate change presents to Shell:

1. Section 172 - to promote the success of the company for the benefit of its members as a whole, having regard to factors including the likely consequences of any decision in the long term and the impact of the company’s operations on the community and the environment.
2. Section 174 - to exercise reasonable care, skill and diligence.

The Court of Appeal's decision

In particular, it was determined that the appeal would have no real prospect of success and there is no other compelling reason for the court to hear it.

The Court of Appeal concluded that the High Court judge (Mr Justice Trower) had been justified in determining that ClientEarth had failed to show a prima facie case 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.

In respect of the section 172 duty to promote the success of the company for its members, a duty which is assessed subjectively, the Court of Appeal noted that whilst there was a prima facie case that Shell faces risks as a result of climate change, as the Judge explained:

In relation to the duties of care, skill and diligence owed by the directors, the Court of Appeal found the High Court was entitled to find that the evidence submitted by ClientEarth did not support a prima facie case in relation to section 174. The High Court had noted that ClientEarth’s evidence was unsupported by any expert analysis as to why the directors got the balancing exercise they are required to carry out so wrong as to be actionable.

Comment

This decision from the Court of Appeal is doubtless a relief to the Shell directors and may not come as a surprise to interested observers, having regard to the court’s reluctance to interfere with management decisions taken by directors.

The outcome also underlines the hurdles facing a shareholder when seeking to pursue a derivative claim.

However, despite the Court of Appeal’s decision, directors and their insurers would be wise not to ignore ClientEarth’s action. The High Court recognised the duty on directors to manage climate risk. In addition, a press release from ClientEarth since the Court of Appeal’s decision states it is undeterred and that:

ClientEarth has also referred to analysis from Fitch Ratings that oil and gas companies may be facing an era of credit downgrades due to elevated climate vulnerability over the next decade.

With an ever greater focus on ESG issues and shareholder activism, we anticipate more frequent attempts to pursue litigation of this kind. It will be fascinating to observe whether there is a movement in the approach of the judiciary in these types of cases. For insurers of directors and officers, ever greater scrutiny of ESG issues and potential exposures at the underwriting stage would be prudent.

Related items:

• ClientEarth and McGaughey: courts maintain reluctance to interfere in company management decisions
• Professions and Financial Lines Brief: latest decisions July 2023
• ESG shareholder activism on the rise?