Climate Change and Directors’ Duties – ClientEarth v Shell decision provides comfort for directors17 May 2023

What duties did ClientEarth argue are owed by the directors?

ClientEarth was successful in demonstrating a prima facie case that Shell faces material and foreseeable risks as a result of climate change which have or could have a material impact on its business.

ClientEarth had also argued that “when considering climate risk for a company such as Shell”, the directors’ duties include duties to:

i) make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;

ii) accord appropriate weight to climate risk;

iii) implement reasonable measures to mitigate risks to the long-term financial profitability and resilience of Shell in the transition to a global energy system and economy aligned with the global temperature objective of 1.5oC under the Paris Agreement on Climate Change 2015;

iv) adopt strategies which are reasonably likely to meet Shell’s targets to mitigate climate risk;

v) ensure that the strategies adopted to manage climate risk are, reasonably, in the control of both existing and future directors; and

vi) ensure that Shell takes reasonable steps to comply with applicable legal obligations, which were held to include compliance with the order of the Dutch Court in the Milledefensie v Shell case.

ClientEarth argued that the directors had breached those duties by failing to:

i) ensure that Shell has a measurable and realistic pathway to meeting net zero targets so as to align with market conditions consistent with the Paris Agreement;

ii) establish, in its strategy for management of climate risk, a reasonable basis for achieving its net zero target aligned with the Paris Agreement; and

iii) put in place a plan for timely compliance with the order of the Dutch Court in Milledefensie v Shell.

However, relying on established principles, the court rejected ClientEarth’s arguments that:

• directors themselves must act in good faith to determine how best to promote the success of a company for the benefit of its members as a whole, having regard to many competing considerations; and
• a court will not generally look behind this unless there is a prima facie case that the directors could not reasonably have determined that their decision was in the best interests of the company as a whole.

ClientEarth also faced evidential issues, including that they had not filed expert evidence in accordance with the relevant procedural rules.

What was ClientEarth asking the court to order?

ClientEarth was asking the court to:

• make a declaration as to the duties owed by directors; and
• order the Shell directors to take certain steps to comply with those duties.

The court refused this on the basis that:

• the dominant purpose of the claim had not been demonstrated to be to benefit the company. Indeed, ClientEarth’s status as a campaigning entity created an inference that it was not. Further, the overwhelming support from a majority of Shell’s shareholders for climate plans proposed by the directors also weighed against this argument; and
• the mandatory orders sought were not specific enough to be capable of enforcement.

What happens next?

ClientEarth has already indicated that it will exercise its right to request an oral hearing to reconsider the decision.

If you would like to discuss the implications of this decision for your business, please contact the author or your usual WFW contact.