13/02/2023·3 mins to read
Storms ahead for directors: Shell’s board sued for failing to manage climate risk
In this article we discuss the recent lawsuit against Shell’s Board, explain why directors must turn their mind to climate-related issues, and offer some practical steps that directors can take to manage liability.
Lawsuits relating to climate change are among the fastest growing areas of litigation worldwide. The range of targets is expanding just as rapidly. In a landmark development with significant consequences for those involved in corporate governance, shareholders have sued the board of Shell plc personally. The claim alleges that the directors have put the company at risk by failing to make a quick enough shift away from fossil fuels.
- Directors owe wide duties to their companies, including to act in the best interests of the company and to exercise reasonable skill and care.
- These duties require directors to identify and manage climate-related risks.
- Directors who fail to do so are at risk of legal action by shareholders leading to awards of damages against them personally.
- Climate activists are increasingly making strategic share purchases in order to exert pressure on boards.
- Now, more than ever, directors must ensure that they have climate plans in place and are actively managing risks.
What is the case about?
Client Earth is an environmental law NGO which has brought a number of high profile climate cases. After purchasing a token shareholding in Shell, Client Earth has used its shareholder status in the company to bring legal action against 11 Shell directors in the UK. The claim alleges that the directors have breached their duties to the company.
Under UK law, company directors have a duty to promote the success of the company and to act with reasonable care, skill and diligence. Analogous duties are owed by directors in New Zealand. Shareholders can similarly enforce these duties by bringing what is known as a “derivative action” in the name of the company itself.
Client Earth’s case is that breaches of duty arise from the Board’s failure to adopt a climate strategy that adequately reduces Shell’s emissions. It claims that in failing to properly prepare the company for the net zero transition, the Board has increased the company’s vulnerability to climate risk, putting its long-term value in jeopardy and risking the investments of shareholders, including pension funds. The claim has the support of a number of institutional investors.
It is very early days in the litigation and the directors have yet to file any response with the Courts, although they have said they will defend their position robustly. Meanwhile, the company has appealed the 2021 verdict of a Dutch Court in another landmark case, which ordered Shell to cut carbon emissions by 45% by 2030.
The prospect that directors could be sued personally in relation to climate harm has long been recognised but to date no such lawsuits have been brought in Aotearoa New Zealand. It is likely that it is only a matter of time before claims of this nature hit our shores. The Shell case is a striking reminder that directors need to turn their mind to climate issues when making governance decisions.
The 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. As the effects of climate change become increasingly tangible, it is critical for directors to ensure they comply with those duties by identifying and managing climate-related risks. Failure to do so may lead to personal liability.
The good news is that there are a number of practical steps that directors can take, including:
- 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 understand their obligations and how to manage them.