The recent case of ClientEarth v Shell plc , in which environmental charity ClientEarth attempted to bring a challenge against the British multinational oil and gas company Shell plc within the remit of the Companies Act 2006, serves to highlight a number of developing trends in national and global environmental litigation.
In ClientEarth v Shell plc, ClientEarth, acting in its capacity as a shareholder (with a holding of 27 shares) in Shell plc, sought permission from the High Court to bring a claim, on behalf of the company, against the directors for a breach of their statutory duties under the Companies Act 2006, seeking a mandatory injunction which would require the directors to implement a strategy to manage climate risk. In its proposed claim, ClientEarth aimed to evidence that, by failing to implement a climate change risk management strategy in accordance with the Paris Agreement, the directors of Shell plc had breached their statutory duties to exercise reasonable care, skill and diligence and to act in a manner that promoted the success of the company.
This case highlights an increasing shift in the focus of environmental litigation from challenges to decisions made by governments and public bodies (which have historically comprised 70% of climate litigation cases) to challenges against decisions made by corporate entities.
This traditional approach of challenging the decisions of public bodies, using mechanisms such as judicial review, has previously been effective for claimants, as demonstrated by the successful challenge against the UK government’s decision to expand Heathrow Airport, and the successful challenge resulting in the High Court’s finding that the UK government’s Net Zero Strategy was unlawful under the Climate Change Act 2008. However there appears to be growing frustration amongst claimants with the limitations of such actions, given that this approach cannot focus on the merits of a decision, but only whether that decision was reached lawfully.
Increasingly, and perhaps in response to these frustrations, claims are instead directed against corporate entities and focus on challenging the merits of a decision. These claims are generally characterised by novel or inventive approaches, both to the legal arguments raised in these challenges and the types of relief sought by claimants, such a requirement for the business to comply with the targets of the Paris Agreement.
Ultimately the High Court did not grant leave for ClientEarth to bring these proceedings before the court, holding that ClientEarth had failed to establish a prima facie case. The High Court stated that this was due to a number of reasons including: a failure to clearly illustrate that the directors had failed to act in the shareholders’ best interests; a lack of expert evidence provided by ClientEarth to substantiate its claims relating to carbon pricing, carbon markets or related fields; and a failure to establish that the relief sought from the court was appropriate. In addition to ClientEarth, recent cases of note also include McGaughey v Universities Superannuation Scheme , in which the court also refused to grant leave for two individuals, with crowd-funding support, to bring a derivative claim against the directors of the corporate trustee of their pension fund for a breach of their statutory duties, holding that the individuals had failed to establish a prima facie case.
Notwithstanding the fact that the courts did not grant leave in either ClientEarth or McGaughey, these cases represent a cultural shift on behalf of claimants, demonstrating a willingness to think ‘outside the box’ in relation to challenges against environmental decisions of corporations, particularly in the absence of any express legal remedies to address the same. It may also be that case that recent and/or future developments in respect of corporate Environmental and Social Governance (ESG) obligations effectively ‘raise the bar’ as to what is considered to be a reasonable standard of care and consideration for directors. Further, advances in technology and understanding may also mean that claimants can be confident that they can provide appropriate expert evidence regarding applicable industries, related environmental factors and causation. If so, we could see claims in which claimants can successfully demonstrate a prima facie case to the court, thereby allowing both the claim to proceed and the courts the opportunity to examine the merits of the arguments that ClientEarth intended to raise in its claim.
Additionally, and despite the decisions in ClientEarth and McGaughey, the UK courts have previously demonstrated an expansive approach to claims relating to companies’ ESG obligations. This was recently illustrated by the Court of Appeal’s decision to allow a group of over 200,000 claimants to bring a claim in England against the mining company BHP for losses from the 2015 collapse of the Mariana dam in Brazil, despite a similar claim being brought before the court in Brazil. This decision to allow one of the largest group claims in English legal history to proceed, was made, in part, on the basis that the Court of Appeal did not believe the claim in Brazil would provide the claimants with the ability to access a sufficient remedy, emphasising the importance the court places upon the right for a claimant to decide, not only what claim to bring, but also who this claim should be brought against. This approach has also been adopted by the court in the cases of Vedanta Resources PLC and Anor v. Lungowe and Ors (in which the court gave leave for the claimants, 1,826 Zambian villagers, to bring a claim regarding the discharge of toxic matter from mines into waterways for drinking and irrigation against the UK parent company of the Zambian entity that owned the mine) and Okpabi and others v Royal Dutch Shell Plc and another (in which the Supreme Court gave leave for the claimants, citizens of Nigeria, to bring a claim against Royal Dutch Shell Plc in respect of the discharge of oil spills and pollution from pipelines operated by its Nigerian subsidiary).
If the court continues to adopt this expansive approach, we may see a corresponding increase in the number of claims being brought by affected individuals and entities, regardless of jurisdiction.
Outside of the UK, in the case of Lliuya vs. RWE AG, the courts in Germany are currently focusing on the issue of causation in respect of global emitting greenhouse gases (GHG) emissions produced by businesses, and claims for allegedly related environmental risks. In Lliuya, the claimant, a Peruvian farmer, brought a claim against RWE AG (a German energy provider), for costs for preventative measures to protect his property against flooding, in proportion to the company’s alleged contribution to the flood risk (i.e. if RWE contributed 0.47% to global GHG emissions, then it should contribute costs to counter 0.47% of the risks to the current state of the local flooding). The German court initially held this claim to be inadmissible due to a lack of evidence as to the causal chain between RWE and the flooding risk, and the court’s inability to grant an effective remedy. However on appeal, the German court allowed the claim to proceed and judgment is currently pending. If the German court finds in favour of the claimant, this would demonstrate a shift in the general legal reasoning of the courts in cases of this nature. While not binding in UK law, the reasoning of the German court could be significant for similar cases going forward, regardless of jurisdiction. It may also precipitate “forum shopping” by strategic climate change litigants pursuing multi-national operators.
These developing trends are of particular importance in a landscape in which businesses are subject to increasingly stringent regulatory and legal ESG obligations, including through the introduction of standards such as the UK Sustainability Disclosure Standards (SDS), and in which regulatory bodies are given increased powers to impose penalties for non-compliance.
These considerations are wide-ranging and require directors to consider their compliance across various aspects of the business, from reporting requirements in the company’s financial statements to the advertising of its products and services. Most recently in the UK, the Competition and Markets Authority (CMA) has been given new powers which could impose direct civil penalties on businesses for misleading or unsubstantiated environmental claims (commonly known as ‘greenwashing’). These penalties, along with heightened consumer awareness as to the environmentally sustainable nature of products and services, should encourage businesses to continue to review their existing marketing practices in light of the same.
As extreme weather headlines bring the issue of climate change under the spotlight, businesses should expect increased awareness from consumers, shareholders, investors and regulatory bodies as to the compliance of businesses with their ESG obligations. As this increased vigilance continues to bring the issue of corporate ESG compliance to the top of the agenda, businesses should be alive, not only to the standard penalties for any non-compliance, but also to the potential increase in claims arising from the same.
In light of the above, there continues to be a clear incentive for businesses to be aware of ESG developments and to review and monitor their compliance with the related obligations. For further information and recent updates in the arena of ESG obligations, and advice relating to the same, please contact Maria O’Loan or Aoife Murray.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.
