Over the last couple of months I looked twice into the ‘trend’ of Climate Litigation. Once at the cases directed towards governments, notably the land mark case against the Netherlands, and once directed at corporate sector, giving prominence to the Shell case currently being raised across the Dutch judiciary system.
In football terms, after a little bit more than the half time of the full spectacle, I am tempted to say: the climate litigations are somewhat better positioned.
Governments as well as legal persons such as companies are undoubtedly important players in this whole societal shift towards climate mitigation and adaption. When it comes to corporates though, and notably stock quoted companies, there is a group of people that is most prominently exposed in regards to the legality and societal ‘license to operate’ of a company: the Board of Directors (BoD).
The question hence for this blog post is: How is this climate litigation business shaping up to affect the Board of Directors of publicly listed companies?
Those that have watched the excellent documentary ‘Duty of Care: the Climate Trails’ by Nic Balthazar, on the ‘behind the curtain’ of the two Dutch court cases, may remember its main character, the Dutch lawyer Robert Cox, saying towards the end: ‘the next phase will be the individuals on the boards of directors. They are responsible. They have a duty of care. There is no doubt about it’.
The question therefore is in as far relevant, as it is not an if, but when, such a court case will be successfully filed.
Internationally, the possibly first such case is ClientEarth v. Shell’s Board of Directors, filed in the UK’s High Court of Justice, and referencing the country’s 2006 Companies Act.
The reason why the case was filed in the UK, as opposed to say the Netherlands, is simple: Shell moved in 2021 is principle headquarters, and therefore tax residency, from the Netherlands to the UK – whether or not the Dutch climate litigation cases may have played a role in this will forever remain an enigma. The official reason given is the 15% tax withholding charge on dividends, as well as the intent to streamline a hugely complex corporate structure.
The drawback for Climate Litigation is evident: the Dutch court system has been reasonably trialled and the arguments ‘that work’ for climate litigation have been refined.
In the UK system there is hardly any such precedent. In fact, by sheer bad (?) luck though, a precedent on boards’ responsibilities on Climate Strategies of organisations does exists, dating from 2021, and the court’s decision did not go in favour of the claimants (see: McGaughey & Davies v. Universities Superannuation Scheme Limited).
What were the claims that ClientEarth brought forward against Shell?
The claims brought forward refer to different sections of the UK’s 2006 Companies Act:
- Section 172: ClientEarth alleged that the directors had breached their general duties to promote the success of Shell
- Section 174: ClientEarth alleged that the directors had failed to exercise reasonable care, skill and diligence
- Other aspects: breach of specific or ‘incidental’ duties such as a duty to make judgements regarding climate risk that are based upon a reasonable consensus of scientific opinion.
What do these sections of the UK’s 2006 Companies Act say?
- Section 172 enshrines the principle of enlightened shareholder value (‘ESV’) into UK company law by appending to the directors’ duty to ‘promote the success of the company for the benefit of its members as a whole’ a list of matters to which directors are required to ‘have regard’ in discharging the duty. The core principles in doing so are:
- the likely consequences of any decision in the long term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and the environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between members of the company.
Important: While this may sound as if ‘stakeholder capitalism’ in its legal implementation, it is not: Directors are only required to ‘have regard’ to the ESV principles – their implementation in full depth is not mandatory as such. Therefore, the provision maintains the idea of shareholder primacy.
Further reading on the ESV, here.
- Section 174 codified the ‘Duty To Exercise Reasonable Care, Skill, and Diligence’ of board directors. The assumption thereby is that a ‘reasonably diligent person’ having the following 2 qualifications
- [objective test = minimum standard] the general knowledge, skill and diligence that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
- [subjective test] the general knowledge, skill and experience that the director has.
Would exercise the ‘duty, skill and care’ in question.
Where is the status quo of the lawsuit at?
The UK court system has rejected ClientEarth’s case at the first review, in its hearing, and subsequently also rejected to cause to continue to appeal.
In addition, ClientEarth was ordered to pay Shell’s costs.
Why did the UK courts reject ClientEarth’s claims so far?
Fundamentally – and extremely simplified – , the courts decided that Shell’s presently published Net Zero Pathway – whether realistic or not, whether they will comply with it or not – is sufficient to show that
- They have ‘regard’ for the stakeholders listed under section 172. Additionally, it was deemed that climate trajectories are a decision within the realms o the executives and the board to decide upon (and that it did not matter whether these would be in line with 2050 targets), and that hence it was none of the courts’ business.
- that the very same published targets and reports did show that the board ‘was doing its job’.
What will be next?
To quote an analysis of the case published in Journal of Environmental Law in late August 2023:
The dispute between ClientEarth and Shell’s Board exemplifies the growing tension between the objectives of environmental law, on the one side, and those of company law, on the other side. The evolution of the former over the last 30 years has largely revolved around the notions of sustainability/sustainable development and the avoidance of dangerous climate change.
Pablo Iglesias-Rodríguez, ClientEarth v Shell plc and the (Un)Suitability of UK Company Law and Litigation to Pursue Climate-Related Goals, Journal of Environmental Law, 2023; https://doi.org/10.1093/jel/eqad029
In contrast, company law’s objectives still remain largely anchored and focused on the mitigation of agency problems within companies, with a focus on the relationship between directors and shareholders.
The result will be at least two-pronged:
- Policy Impact: In the UK, lobby efforts notably of the business community focus on the Better Business Act. The focus of said act would be to amend section 172 of the Companies Act, and embed 4 aspects into it:
- Establish a new principle of fiduciary duty;
- Empower directors to exercise their judgement in weighing up and advancing the interests of all stakeholders;
- Make section 172 applicable to all businesses by default – contrary to the ESV it would be no longer be optional for businesses to benefit wider stakeholders beyond shareholders;
- Require an impact or strategic report: on how they balance people, planet and profit.
-> In can be assumed that for other jurisdictions such analysis will be made subsequently, and similar lobby and policy efforts will be undertaken (if not already on their way).
- Climate Litigation Impact:
In terms of Climate Litigation impacts, the affair will further the learning – not just in the UK, but globally – as to ‘read’ currently valid law and its application to climate and environmental issues, as well as how to use existing legislation more efficiently to further the process of holding corporate players accountable.
This is a moving set of puzzle pieces: the Strasbourg court case of the ‘Swiss Climate Senior Women vs Switzerland’ – if deemed indeed that human right to health was infringed – could open new doors. If indeed health impacts by climate change are considered human rights infringement by said court, a number of jurisdictions could see new court cases being filed. Both against governments, but also against large scale users of fossil fuels. And no doubt among them again Shell.
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For a short reminder:
the Columbia University data base organises its information along two fundamentally different types of litigations:
- Against governments, and
- against natural and legal persons, i.e. individuals or companies.
As at mid October 2023, the database records a global total of 2840 cases. Of these, 716 are brought globally against governments, 195 are brought globally against corporations, and another 20 or so against individuals; additionally 2124 cases are brought forward in the US.
Side note: Sadly the US cases contained in the database do not offer the primary differentiation attribute (suing target: government, or natural or legal person?) – likely a case of ‘not seeing the wood for the trees’ as the database is evidently maintained by a US law school.
In other words: while the largest number of cases on a global level are brought forward against governments, the number of cases against corporations is not negligible either. But let’s drill a little bit into the type of cases brought forward against companies. As at September 2023, the above Columbia University database lists the following numbers and categories [ordered by number of cases]:
- Misleading Advertisement: 42
- Environmental assessment and permitting: 34
- Climate damage: 31
- GHG Emission Reduction: 28
- Disclosures: 14
- Carbon Credits: 4
- Financing and investment: 2
- Just Transition: 3
- Pollution: 1
What we can learn from this list is: With a combined total of
- 76, the largest number of cases are brought forward against corporate non-compliance with environmental and permitting law, or with fair competition law.
- 59 Climate Impact related litigation follows as a second.
- Note: technically, the 4 cases in regards to Carbon Credits could be added to this category, bringing the total to 63.
It is probably save to assume that these numbers are on the rise. In fact between August 2023 when I first checked the database, and found a total of 163 cases against corporates or individuals, in October 2023 there are already 195 such cases listed in the database.
The fact that compliance related cases are found at the top of this list, tells us that governments apparently not always doing a good job in terms of enforcement, therefore opening the door to such law suits. And indeed, looking across the law suits listed in these two categories, it is invariable either the individual citizen – or a group thereof – at the helm of filing the case.
Strangely the same does not hold true for the Climate Impact category, where governments are surprisingly often the ones filing the case, albeit probably at level with campaign groups and citizen’s groups
