The duties of company directors are set out in the Companies Act 2006 and include the duties to promote the company's success and to act with reasonable care, skill, and diligence. In carrying out these duties, directors must have regard - amongst other things - to the impact of the company's operations on the community and the environment, and the likely consequences of any decision in the long term. These, and other recent developments in the expectations of how directors should perform their duties, mean that promoting a company's success includes paying due regard to the impact on the environment. However, do directors have a duty to be "green"?
Directors owe their statutory duties to the company, not the shareholders. But, if shareholders believe that directors have failed in their responsibilities, they may bring a claim on behalf of and in the name of the company for a breach of duty. This is called a derivative claim. Unlike any other claim, permission must first be obtained from the Court before such a claim is allowed to proceed. This is because such a claim is an exception to the basic principle of company law that it is for the company (acting through its directors) to determine whether to pursue a cause of action. A two-stage process is followed in a derivative claim: firstly, the Court will decide on the papers whether there is a valid claim that can be pursued; and secondly, it may determine that question at an oral hearing. There is no minimum number of shares that must be held for a shareholder to bring this claim, but the process is stringent, and the bar is set high for permission to be granted.
ClientEarth is a non-profit environmental law organisation that owns 27 shares in Shell Plc. In February 2023, it attempted to bring a derivative claim on behalf of Shell Plc against its directors for an alleged breach of their duties by failing to properly manage the company's climate change risk strategy. In May 2023, the Court refused this application saying that ClientEarth had not sufficiently made out its claim on the papers. ClientEarth has now applied for an oral hearing to determine whether its derivative claim can proceed.
Although ClientEarth has, so far, been knocked back by the Court, it is nevertheless a very interesting case as it demonstrates how the interpretation of statutory director duties, which are openly drafted, are potentially evolving in light of climate change considerations. It is the second derivative action to be brought in the climate change sphere in the UK. In the previous case in 2021, two academics issued a derivative claim against the directors of the corporate trustee of the Universities Superannuation Scheme, the largest private pension scheme in the UK, for failing to create a credible disinvestment plan for its fossil fuel investments. This claim also failed, but both cases form part of a wider trend of activist shareholder action being pursued against directors concerning climate change risks and net zero emissions targets and strategies. Directors today should therefore give due regard to climate change risk and factor this into their business strategy.
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