6/12/2023·4 mins to read
Directors’ duties and climate change: shareholder claims rejected by UK Court of Appeal
The UK Court of Appeal has recently dismissed two climate-related shareholder claims against company directors. The cases reflect the courts’ continued unwillingness to interfere with directors’ decision-making on climate grounds.
- Directors must make judgement calls when determining how to balance all risks faced by a company, including those involving climate factors.
- Courts are unlikely to interfere with directors’ judgement unless they blatantly disregard climate risk.
- Derivative claims by shareholders are only available for proper purposes: they cannot be misused by activist shareholders to avoid procedural hurdles.
Derivative claims by shareholders against directors
Both recent decisions concerned applications by shareholders for permission to bring “derivative proceedings” against company directors. The court’s permission is necessary as shareholders only have limited direct rights of action against directors, and for claims of this nature need to act in the name of the company. To obtain leave to bring a derivative proceeding, shareholders need to (among other things) have sufficient interest or standing to pursue the claim on behalf of the company, as well as show there is an arguable case on the merits that the directors have breached the relevant duties.
To date the English courts have consistently refused to allow derivative actions for breach of directors' duties based on directors’ climate-related decisions. In New Zealand, where directors are subject to similar statutory duties, the issue has yet to come before the courts.
Final dismissal of claim against Shell directors
In November 2023, the English Court of Appeal refused to hear an appeal against the High Court’s decision not to allow a derivative action against the Board of Shell plc.
The applicant was ClientEarth, an environmental law NGO, which holds 27 shares in Shell. It claimed that the directors had breached their statutory duties by adopting a climate plan that was inadequate to achieve Shell’s stated target of net zero emissions by 2050. As we have previously reported, ClientEarth’s application for permission to proceed was initially rejected on the papers in May 2023, and then failed again in July 2023. Key to the reasoning was that directors had put in place policies and targets to achieve net zero by 2050 and the High Court was unwilling to second-guess their decisions.
With the Court of Appeal’s refusal to hear an appeal, ClientEarth has confirmed that it will not be pursuing the claim any further.
Unsuccessful action against directors of pension scheme
The Court of Appeal came to a similar decision a few months earlier in McGaughey & Anor v Universities Superannuation Scheme Limited. The applicants, members of a pension scheme, sought permission to bring a derivative action against the directors of the scheme’s trustee company. The claims included that the directors had breached their duties in the following ways:
- Despite the goal of being carbon neutral by 2050, the scheme continued to invest in fossil fuels without an adequate plan for disinvestment. This was said to be a breach of the duty to act for proper purposes, including making investments that avoid significant risk of financial detriment, and having regard to the scheme’s long-term interests.
- The scheme’s long-term interests could only be met by an immediate plan for divestment, but the directors did not have one.
- The directors’ actions had caused and would continue to cause loss to the scheme, and the directors had put their own beliefs about fossil fuels above the interests of the members and the scheme.
The Court of Appeal upheld the High Court’s refusal to allow the derivative claim to proceed. Key reasons included the following:
- The applicants could not establish any arguable loss to the company. Loss is an essential requirement, without which a claim of this type cannot succeed.
- There was no evidence that the directors were acting in bad faith or putting their own beliefs about fossil fuels above the interests of the scheme or its members.
- Overall, the application was an “attempt to challenge the management and investment decisions of USSL as trustee without any ground upon which to do so”.
What does this mean for New Zealand directors?
The statutory duties owed by New Zealand directors are similar to those under English legislation and include acting in good faith and in the best interests of the company.
However, directors in the UK are expressly obliged to consider ESG factors when deciding what is most likely to promote the success of the company. This is not the case in New Zealand where recent amendments to the Companies Act (see our report here) simply permit consideration of ESG issues when deciding what is in the best interests of the company.
It follows that directors in this country can take a degree of comfort from the decisions in McGaughey and Shell, which make it clear that judges will not lightly second-guess board decisions involving climate risk. Both cases reflect an acknowledgement by the courts that directors themselves are best placed to weigh up and balance the considerations that go into corporate decision-making, of which climate implications are only one.
That said, there is no doubt that board decisions with climate implications will be under ever growing scrutiny as the effects and risks of climate change become increasingly evident. Directors and business leaders need to be proactive about incorporating ESG factors into their decision-making.
For more guidance on how boards can mitigate ESG risk and how ESG factors can contribute to the company's overall long-term success, contact one of our experts.
Thanks to Claudia Paterson for her assistance in preparing this article.