7 Min Read

Corporations must be alive to the growing threat of climate litigation

Read More

By Laura Berry, Simon Konsta & Francesca Muscutt


Published 17 July 2023


ESG, and particularly climate change, is now undeniably an essential plank of corporate business planning and reporting. Strategic reports demand a review of principal risks and uncertainties facing companies, and some larger corporates have mandatory climate-related financial disclosure obligations.  Climate pledges will be scrutinised to ensure they are not exaggerating or misreporting plans or progress.

The growth of climate litigation in the UK and internationally has been exponential. There are now well over 2000 climate-related cases issued around the world against governments and corporates.  This litigation is being prosecuted, in the main, by activists and the investor and asset management communities, and very often to force changes in boardroom behaviours, insulate businesses from climate risk and accelerate the transition to net zero. Claimants are sophisticated, motivated, and well resourced.

ClientEarth v Shell Plc

Climate-change litigation took centre stage in England in May when the High Court refused ClientEarth (as a minority shareholder in Shell Plc) permission to continue a derivative action against the directors of Shell for allegedly failing to manage climate change risks. Our full article on the decision is available here.

ClientEarth's case is that Shell's directors breached Section 172 Companies Act 2006 (imposing a duty to act to promote the success of the company), and section 174 (requiring the exercise of care, skill and diligence in the running of a company) when managing climate risks.  Mr Justice Trower dismissed the application for permission to continue the claim, finding ClientEarth could not demonstrate that Shell's directors were managing Shell’s risks in an unreasonable manner. ClientEarth’s evidence offered no engagement on how the directors’ alleged wrongful actions constituted an approach that no reasonable director could have adopted, given that directors are required to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere.

The decision endorses the UK courts' inherent unwillingness to interfere with the invariably difficult roles that directors must fulfil, particularly when confronted with the highly complex challenges of climate risks and carbon transition. 

ClientEarth has not reached the end of the road yet. Mr Justice Trower's preliminary decision will be reviewed at an oral hearing on 12 July 2023.

McGaughey v Universities Superannuation

Hot on its heels, in June, the Court of Appeal (CoA) heard the appeal by academics and contributors to the University Superannuation Scheme (USS), who used the common law company derivative claim procedure to bring proceedings against the directors of USSL (the corporate trustee of the pension scheme).  The High Court had previously refused permission to bring the derivative claim.

Similar to ClientEarth, the claimants allege the directors breached Companies Act and fiduciary duties when managing the pension fund and climate-related risks. Specifically, they allege the directors failed to implement a credible plan for the divestment from fossil fuel investments or achieving its net zero ambition by 2050, thereby prejudicing the success of the company.

The CoA's judgment is still awaited but having watched the hearing, it seems highly unlikely it will go in the claimants' favour. The Court was critical of the claimants' use of the company derivative claim procedure when there was no corporate nexus between the claimants and USSL. The claimants do not have the same rights and interests as shareholders; their rights derive from the trust instrument and these may differ between the beneficiaries. Accordingly, the CoA said a direct claim for breach of trust by each beneficiary would have been the appropriate route.

The CoA also discredited the suggestion that the trustee's adoption of conservative investment assumptions was an abuse of power or was not in the best interests of the company. The correct approach asks whether the directors' decision was outside the range of honest and reasonable views that directors would have and the Court made clear it would be a very strong allegation to say that a director who follows the advice of an expert actuary when making investment decisions (as USSL had) is acting in breach of its fiduciary duty. 

What's next?

All eyes will be on ClientEarth's oral hearing on 12 July and the Court of Appeal's written judgment in McGaughey, both of which will provide insightful commentary from our judiciary.

The courts' reluctance to interfere with the way directors exercise their professional judgment when engaging in complex corporate decision-making suggests the odds are stacked against permission being granted to allow these types of derivative claims to continue.  But this would not necessarily be a defeat for the claimants in the traditional sense of winners and losers in litigation.  Climate change activists are playing a longer game of raising awareness and bringing about corporate change, and they will continue to look for novel ways to challenge behaviour and continue their fight.  Change will not happen overnight but the publicity generated by these ground-breaking applications will help their cause and, despite the legal difficulties, it seems that more claims of this nature are inevitable. 

Corporations will increasingly be under the spotlight to factor climate change into their business strategy and mitigate the risk of litigation. The reputational damage and management time incurred defending climate litigation is vast, even when the defence is ultimately successful. Corporations will undoubtedly feel that it is better to implement appropriate climate change strategies now and use metrics to evidence progress.  The war on climate change is only in its infancy and it is not going to disappear.