Legal efforts by a not-for-profit to become the first to demonstrate how board executives have failed in their directors’ duties over climate change are set to fail, according to a corporate governance expert.
Last month environmental campaign group ClientEarth began the process of seeking permission to bring litigation against Shell, claiming the energy giant’s board members had failed in their section 172 duties by failing to “properly prepare” for transition to net zero. “Shell is seriously exposed to the physical and transitional risks of climate change, yet its climate plan is fundamentally flawed,” said Paul Benson, a lawyer with ClientEarth.
But a University of East Anglia academic argues that ClientEarth will likely fail significant legal hurdles before it can bring its case. Writing for the Oxford University corporate governance blog, David Gibbs-Kneller says: “While ClientEarth’s litigation may be novel, once it is appreciated how the court applies discretion, it poses no additional litigation risk that directors and insurers should be concerned with.
“The only outcome this litigation is likely to bring is that ClientEarth will be liable for Shell’s and their own legal costs.”
Shell directors’ duties
Gibbs-Kneller concedes that ClientEarth is able to demonstrate it has a prima facie case, thus passing the first test of being able to proceed. But it is likely to fail when it comes to a second hurdle of the court being satisfied that there are no “mandatory bars” to the case going ahead. The underlying test here is whether the claims are strong enough that “some directors” would push on with them.
“The answer to that question is mostly likely no,” says Gibbs-Kneller. And this because ClientEarth will struggle to prove Shell’s directors did not consider the “wider interests” of the company.
“ClientEarth’s evidence that the [Shell’s climate] strategy may impose increased risk to the company does not evidence they did not have regard to the wider interest of the company or the directors do not believe, in good faith, the strategy will promote the success of the company.
“In fact it is implicit in Shell’s strategy to lower carbon emissions that they have considered those wider interests in discharging their duty to the company.
“No director would consider this claim to be in the company’s interests when the evidence, at best, appears to be speculative.”
Similarly, Gibbs-Kneller says using section 174 of the Companies Act—which says directors must use “reasonable care, skill and diligence”—is also likely to fail. This time because there is no “objective criteria” to assess good judgment in a corporate context.
Shell has defended its position. The company says it is aiming to halve emissions from global operations by 2030. The company’s annual report says its governance is designed to reach net zero by 2050.
However, in May a Dutch court described Shell’s transition plan, approved by 89% of shareholders, as “rather intangible, undefined and non-binding”. The ruling added: “The court concludes that RDS [Royal Dutch Shell] is obliged to reduce the CO2 emissions of the Shell group’s activities by net 45% at end 2030, relative to 2019, through the Shell group’s corporate policy.” It added that the obligation “relates to the Shell group’s entire energy portfolio and to the aggregate volume of all emissions”.
This is not the first time legal experts have highlighted the difficulties in using section 172 as a stick to beat climate laggards. Others have pointed out the law is a blunt instrument while the enforcement regime around it is inadequate for the task.
Section 172 has also been the focus of much attention in recent years, though most of that concern is focused on what is perceived as the law’s insufficient attention to stakeholder interests.
In January the Trades Union Congress (TUC) called for the law to be reformed because the balance of company interests have swung too far towards shareholders “and away from working people who create wealth”.
Last year the Better Business Act campaign was launched also calling for reform of section 172. With members as high-profile as John Lewis and Innocent Drinks, the campaign seeks to changes a core part of directors’ legal duties from seeking the “success” of a company to “purpose of the company”.
The climate crisis remains the single biggest issue for politicians, regulators, company leaders and investors alike. While it does, pressure will continue on companies to adjust. Seeking recourse to the law seems an obvious route to achieve. However, as Gibbs-Kneller illustrates, it may not be as easy as it seems.