The UK High Court has again refused permission to allow an activist shareholder to sue the directors of Shell over its climate risk management plan.

While not binding in this country, the decision should provide some comfort to New Zealand directors, as climate issues continue to make their way up board agendas.

Key takeaways

  • The Court found that directors do not owe climate-specific obligations on top of their general statutory duties to the company.

  • Courts will not lightly second-guess or interfere in decision-making by directors.

  • Boards can mitigate the risk of personal liability by having climate risk policies and plans in place, and considering them when making decisions.

Client Earth’s application

As we have previously reported here, the proceeding was filed by ClientEarth, a high-profile environmental law NGO, which holds 27 shares in Shell. ClientEarth claims that Shell’s directors have breached their statutory duties to the company by adopting a climate plan that is inadequate to achieve Shell’s stated target of net zero emissions by 2050 and fails to comply with an earlier order made by a Dutch court, requiring Shell to cut its emissions.

As shareholders do not have a direct right of action against directors, ClientEarth had to seek permission from the Court to bring a “derivative claim” against the directors in the name of the company.

In deciding whether to allow the claim to go ahead, the Court had to take into account various factors including whether ClientEarth had a prima facie case (meaning a case that, in the absence of an answer by the defendant directors, would entitle ClientEarth to judgment) and whether ClientEarth was acting in good faith in seeking to bring the action.

After considering the papers filed by the parties, the Court dismissed the application in May 2023. At ClientEarth’s request, it subsequently allowed the parties to present their cases at a hearing so that it could reconsider that initial decision. In a judgment released on 24 July 2023, the Court again found that the claim could not proceed. ClientEarth has pledged to appeal.

Why did the application fail?

The key reasons for the Court’s decision were as follows:

  • No new climate-specific duties: ClientEarth claimed that the directors owed climate-specific duties, such as obligations to accord appropriate weight to climate risk and to adopt strategies reasonably likely to meet Shell’s mitigation targets.

    The Court disagreed. ClientEarth was wrongly seeking to impose absolute duties which cut across the general duty to have regard to the many competing considerations as to how best to promote Shell’s success for the benefit of its shareholders.

  • Court unwilling to second-guess directors’ decisions: ClientEarth had failed to make out a prima facie case that any duties had been breached. Particular findings included:

    • The directors had put in place policies and targets to achieve Net Zero by 2050. The evidence did not establish a prima facie case that there is one universally accepted methodology for Shell to achieve the targeted reductions.

    • The law respects directors’ autonomy to make decisions on commercial matters and how best to achieve results in the best interests of shareholders.

    • The size and complexity of Shell’s business required the directors to take account a range of competing considerations. Balancing those is a management decision that the courts are ill-equipped to deal with.

  • Ulterior motive behind the claim: The Court was sceptical that ClientEarth was proposing it should be entitled to seek relief on Shell’s behalf in such a large, complex and important claim when it only held 27 shares. The Court found this gave rise to a clear inference that ClientEarth’s real interest was not how best to promote Shell’s success for the benefit of its shareholders. ClientEarth had adopted a single-minded focus on imposing its views as to the right strategy for dealing with climate change risk. This pointed strongly to an ulterior motive behind the proceedings.

  • Orders sought not appropriate: ClientEarth sought orders that Shell adopt and implement a climate risk strategy in compliance with its statutory duties and that it comply immediately with the Dutch order. These orders were too imprecise to be enforced. The disruptive impact of disputes over compliance would have a serious adverse impact on the success of Shell for its shareholders - the very thing ClientEarth said the proceedings were designed to avoid.

What does this mean for your business?

Statutory duties owed by New Zealand directors include to act in good faith and the best interests of the company, and to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances. 

The Government has introduced the Companies (Directors Duties) Amendment Bill which would allow directors to consider ESG factors when determining the best interests of a company (see our earlier article here.) The Bill is currently before Parliament and the Green Party has moved that it be made mandatory for directors to consider matters other than the maximisation of profit when considering the best interests of the company. 

The intersection between existing duties and climate risk management has long been foreshadowed as an area of potential liability to watch. The same goes for the potential for activist shareholders to effect change in companies’ climate strategies.

While, to date, the action by ClientEarth has been unsuccessful, it seems likely that further shareholder actions of this kind will be filed and fine-tuned to try to overcome some of the criticisms in this case.

Depending on their circumstances (such as the size of the company, nature of its business and areas of operation), boards may wish to consider the following practical steps which are likely to assist in mitigating the risk of directors’ personal liability for climate-related breaches of duty:

  • having climate-related risks as an item on each board agenda;

  • ensuring they understand the risks that climate change poses to the business and how those risks are being managed;

  • checking that both transition and physical climate-related risks have been identified (over the short, medium and long-term) and are being effectively managed;

  • taking external advice if the board does not include members with the necessary expertise;

  • establishing risk management committees to consider and address climate-related issues;

  • ensuring assets and supply chains are resilient to foreseeable physical climate risks;

  • reviewing insurance arrangements from the perspective of potential climate-related impacts (including damage to physical assets, short term business closures, and director liability should litigation eventuate); and

  • confirming that steps taken in relation to these issues are adequately documented.

Simpson Grierson’s team of expert advisers are here to assist directors to better understand the scope of their legal obligations. If you would like advice on these issues please get in touch. We would be delighted to assist.


Special thanks to Claudia Paterson for contributing to this article.


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