ClientEarth v Shell: The ‘End of the Road’ may be just the beginning

Summary

On 14 November 2023,[1] the Court of Appeal refused environmental NGO, ClientEarth (CE) permission to appeal the High Court’s July 2023 judgment that CE had failed to make out a prima facie case enabling the court to grant permission under the Companies Act 2006  (CA 2006) for it to continue a derivative claim against Shell plc (Shell)’s directors for alleged breach of their duties in connection with the company’s climate change risk management strategy.

With no further recourse to appeal, this marks the end of the road for this landmark piece of litigation. However, CE should take comfort in all that the claim has achieved, particularly in raising the profile of climate risk for directors across the jurisdiction and worldwide and in significantly progressing the debate around what directors’ duties should include.

Ultimately, relevant to this particular case, the role of the court is to interpret and apply statute laid down by Parliament. CE’s claim has shown that the law may well need updating to reflect societal change in respect of the awareness and acceptance of climate risk.

ClientEarth’s claim

CE holds a small number (27) of shares in Shell and as such sought to bring a derivative claim against Shell’s directors. CE sought a declaration that Shell’s directors had breached their duties and a mandatory injunction requiring the directors to adopt and implement a strategy to manage climate risk in compliance with their statutory duties.

There is a two-stage process to derivative claims: a court must grant permission for the claim to continue before a substantive assessment of the merits.

The court’s permission is required because derivative claims are only available in limited circumstances, considering that they are an exception to a foundational principle of company law (which is that it is ultimately at the company’s directors’ discretion to make management decisions).

CE argued that Shell’s current climate risk mitigation plan failed to deliver the reduction in emissions required to keep global climate goals within reach, which ultimately would put the company’s long term commercial viability at risk. CE’s claim relied on the fact that this allegedly breached Shell’s directors’ duties under CA 2006, namely, to promote the success of the company (s.172) and to exercise reasonable care, skill and diligence (s.174).

The court’s decision

In May 2023 and again in July 2023, the High Court dismissed CE’s claim, holding that CE had failed to make out a prima facie case for giving permission for a derivative claim.

The Court of Appeal, in dismissing CE’s application for permission to appeal, confirmed the High Court’s view that, among other things, the application for permission to continue a derivative claim should be refused given CE’s status as an environmental NGO and its small shareholding may indicate that the claim was brought for a collateral ‘policy agenda’ and therefore not in ‘good faith’ for the benefit of the members as is required.

The court generally indicated an unwillingness to ‘interfere’ with the decision-making of directors and found CE’s approach to be tantamount to imposing absolute duties. The court also found that CE had not established a universally accepted methodology as to how Shell might achieve its energy transition and that it could not grant the mandatory injunctions sought because they would require continuous supervision by the courts.

Takeaways

Importantly, the Court of Appeal’s judgment should not be seen as condoning Shell’s climate risk mitigation plan nor suggesting that the claims did not have merit. It is of course unfortunate that CE’s claim could not surmount the procedural hurdles required to bring a derivative claim, which perhaps points to a need for legislative change.

The courts could not have interpreted the law in a different way to how it was intended by Parliament, which is to provide directors with wide discretion within their duties, particularly where competing interests must be balanced. What now may be required is for legislation to enshrine consideration of environmental impact into fiduciary/directors’ duties, as campaigned for by the Better Business Act.

This claim has shown that even if not ultimately successful, strategic litigation can have huge benefit in raising the profile of these issues. Charities are uniquely placed to achieve this, and CE’s actions have progressed the discussion around directors’ duties and the prominence of climate risk as an issue for board members.

Directors should not interpret this judgment as an excuse to deprioritise the consideration of climate risk. The growing trend of climate and other strategic litigation is unlikely to abate given the prominence of these issues in public discourse and the urgency of the climate and other humanitarian crises the world is facing.

[1] ClientEarth v Shell Plc and others [2023] EWCA 1866