Climate Litigation Comes for Directors

Whether directors have a fiduciary duty to review and approve the company’s strategy for addressing climate change has not been tested in court. However, in a global first, ClientEarth, an environmental NGO headquartered in London, is seeking to do just that. In February of this year, ClientEarth filed a derivative action in the High Court of England and Wales against the board of directors of Shell plc (Shell) alleging that Shell’s climate strategy is unreasonable.

ClientEarth is seeking the permission of the High Court of England and Wales to bring its claim alleging that Shell’s directors breached their duty under the U.K. Companies Act to promote the success of Shell for the benefit of its members as a whole and to act with reasonable care, skill and diligence by failing to adopt and implement a climate strategy that is consistent with the Paris Agreement. Shell denies the allegations, stating that its climate strategy (which 80% of its shareholders approved in a say on climate vote in 2022) includes a net-zero emissions plan with a 2050 target that is consistent with the Paris Agreement’s 1.5˚C goal.

An illustration of climate litigation activism

Climate activists have targeted Shell in a number of climate-related lawsuits and claims around the world over the last two years.

In May 2021, the Hague District Court ordered Shell to cut its greenhouse gas emissions from its oil and gas products by 45% by 2030, relative to its 2019 levels. The Court noted that Dutch companies are subject to a standard of care under the Dutch Civil Code which imposes a duty not to act in conflict with what is generally accepted as proper social conduct. The Court held that in order to meet that standard, Shell had a standalone responsibility to reduce greenhouse gas emissions, regardless of any country’s ability and/or willingness to fulfill their own human rights obligations.

Earlier in February 2022, Global Witness, another non-profit group, lodged a greenwashing complaint against Shell with the U.S. Securities and Exchange Commission (SEC), alleging that the company had overstated how much it is spending on renewable energy. Global Witness requested the SEC to investigate Shell’s “Renewables and Energy Solutions” (RES) accounting and reporting, claiming that a significant portion of Shell’s RES spending funds natural gas, not renewable energy.

Climate activists have taken action in Canada as well. In 2021, Greenpeace Canada submitted a complaint against Shell to the Competition Bureau of Canada alleging that the company’s Drive Carbon Neutral program makes false and/or misleading representations to the public in contravention of the federal Competition Act. Greenpeace Canada alleges that Shell’s claim (that customers can reduce the carbon emissions from their fuel purchases by offsetting those emissions through forest-based offset projects supported by Shell) is misleading as it distracts from the need to reduce the use of Shell’s fossil fuel products and for Shell to take its own actions to reduce greenhouse gas emissions.

A global first

ClientEarth’s claim is the first lawsuit against any company where a company’s directors are being personally sued based on a company’s climate strategy. It brought the action as a derivative action in its capacity as a (token) shareholder of Shell, but it is not acting alone. The lawsuit is also being supported by a number of institutional investors with over 12 million shares in the company and managing assets of more than €450 billion, including U.K. pension funds Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS, Belgian asset manager Degroof Petercam Asset Management (DPAM) and Danish asset manager Danske Bank Asset Management, as well as pension funds Danica Pension and AP Pension.

It will not be easy for ClientEarth to proceed under the U.K. Companies Act, under which a claimant must apply to the court for permission to pursue a derivative claim. At this first stage, the claimant must persuade the court there is enough evidence to support a legal claim, assuming the allegations are all true. Factors to be considered by the court include:

• whether the claimant is acting in good faith in seeking to continue the claim;
• whether the company has decided not to pursue the claim;
• whether the act or omission gives right to a cause of action that the claimant could pursue in their own right rather than on behalf of the company; and
• the importance that a person acting in accordance with the duty to promote the company’s success would attach to the claim.

The court must refuse permission to continue the claim if it is satisfied that a person acting in accordance with the duty to promote the success of the company would not bring the claim or if the act or omission complained of has been authorized or ratified by the company.

Climate litigation risks in Canada

Directors owe fiduciary duties under Canadian corporate laws which are very similar to the fiduciary duties of U.K. directors. Canadian directors are required to act honestly and in good faith with a view to the best interests of the corporation and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The Supreme Court of Canada stated that Canadian directors, when determining what is in the best interests of the corporation, may, among other things, consider the environment — something that has now been expressly added to the Canada Business Corporations Act. 

Canadian corporate statutes also permit shareholders and other claimants to bring derivative actions against directors. Like derivative actions under U.K. law, a claimant in Canada must seek leave from the court before a derivative action can proceed. The claimant must show that it notified the corporation’s directors within the time frame provided, that it is acting in good faith and that it is in the interests of the corporation to bring the action, which are significant procedural hurdles.

Although climate lawsuits are not new in Canada, corporate climate litigation is still in an infancy stage. Most climate lawsuits to date have targeted governments and governmental actors. It remains to be seen whether any copycat suits along the lines of ClientEarth’s case will be attempted in Canada. But the case bears watching as the outcome of the proceedings could materially impact the likelihood of similar claims being made against Canadian corporate directors.