On 9 February 2023, environmental law charity ClientEarth announced that, as a shareholder in Shell, it had filed a derivative claim in the UK High Court against Shell’s Board. ClientEarth argues that Shell’s Board is in breach of its legal duties under UK company law to manage climate risk facing the company.
This is the first time a board has faced legal action for alleged breaches of their directors’ duties entailing potential personal liability.
According to ClientEarth, Shell’s current emission reduction strategy does not reduce Shell’s emissions in line with the 1.5 degree temperature goal of the Paris Agreement, and this shows that Shell’s Board is failing to manage climate risk in accordance with the Board’s duties under UK company law to promote the success of the company and to act with reasonable care, skill and diligence. ClientEarth is asking the Court to order the Board to strengthen Shell’s emission reduction strategy by setting stronger short and medium term targets.
The case, which has received support from a number of Shell’s institutional shareholders, is the latest development in a global push from investors to hold companies accountable for their climate transition strategies. If successful, the action may open the door for similar claims against Australian companies whose emissions reductions plans are considered insufficiently ambitious or unsupported by commensurate action.
In this article, we discuss the significance of the claim for directors of Australian companies, and steps that Boards can take to mitigate the risk of similar actions in Australia.
Nature of ClientEarth’s Claim
ClientEarth has brought its claim as a derivative action, which is a claim brought by a shareholder of a company that is seeking to step into the company’s shoes and pursue its Board for wrongs allegedly committed against the company. Under UK law, leave of the Court is needed to continue this type of claim. The UK High Court has not yet determined if such leave should be granted to ClientEarth.
ClientEarth argues that Shell’s Board has failed to comply with its legal duties under the UK Companies Act 2006 to exercise reasonable care, skill and diligence, and to act in good faith in a way that promotes the success of the company for the benefit of its members as a whole. These duties are based on common law rules and equitable principles, and are to be interpreted and applied accordingly.
Remedies for breach of these duties are not set out in the UK Companies Act 2006 but are determined by the Court in accordance with common law rules and equitable principles.
Could directors of Australian companies face a similar claim?
Directors and officers of Australian companies could face a claim similar to that being pursued by ClientEarth against Shell’s Board, albeit on slightly different grounds.
In Australia, directors’ legal duties are a combination of common law rules and statutory duties set out in the Corporations Act 2001 (Cth) (Corporations Act). Significantly, the Corporations Act contains similar provisions to the UK Companies Act 2006, requiring directors to exercise their powers and discharge their duties:
- with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of the company (section 180); and
- in good faith in the best interests of the company, and for a proper purpose (section 181).
Notably, these duties apply not only to directors, but also to company officers.
Like the UK, the Corporations Act empowers shareholders to bring derivative actions on behalf of a company, with the leave of the Court. The Court will only grant leave where it is satisfied of various factors, including that it is in the best interests of the company to do so, the shareholder is acting in good faith and there is a serious question to be tried.
Therefore, it is possible that a shareholder could seek to bring a derivative action against directors or officers of an Australian company for failing to comply with their duties under the Corporations Act as a result of failing to have adequate emission reduction plans. Whether an Australian Court would grant leave to bring such a derivative action and, if leave was granted, whether an Australian Court would determine that the company’s Board failed to comply with the director duties remains to be tested.
It would also be open to ASIC to take regulatory action against directors or officers for breaches of duties on a similar basis. As any such action would not be a derivative action, ASIC would not require leave from the Court to do so.
A number of statutory and common law remedies, including damages (for civil claims) or civil penalties (for regulatory claims), are available for breaches of the duties to act in good faith and with care and diligence. A reckless or dishonest failure to act in good faith in the best interests of the company can also lead to criminal liability.
Managing climate risk: a rising standard of care for Australian directors?
The link between directors’ duties and the need to manage climate-related risks was highlighted in the Australian context in a 2016 legal opinion by barristers Noel Hutley SC and Sebastian Hartford-Davis (Climate Change and Directors’ Duties: Memorandum of Opinion). They foreshadowed that the duty of care and diligence both under general law and the Corporations Act could be expected to feature in future climate-related litigation against company directors. A subsequent legal opinion observed the rising standard of care expected of directors with respect to actively considering climate change risks, disclosing them and responding appropriately.
Recently, we have seen a particular focus from strategic litigants and Australian regulators, including ASIC and the ACCC, on the potential exposure of companies to claims of ‘greenwashing’. This is where companies make decarbonisation commitments that are misleading or made without a reasonable basis. In their further legal opinion, Noel Hutley SC and Sebastian Hartford-Davis noted the potential for directors to face personal liability for breaching their duties where their company is going to engage in misleading or deceptive conduct, through ‘stepping stone liability’. (More information about the opinion is available in our article here.)
While we are yet to see Australian shareholders rely on directors duties under the Corporations Act to bring a claim against a Board for failure to manage climate risk, we have seen activist shareholder groups bring claims against Australian companies for breaches of the Corporations Act and Australian Consumer Law arising from the company’s emissions reductions plans.
For example, in 2021, the Australasian Centre for Corporate Responsibility (ACCR) commenced proceedings in the Federal Court against Santos Ltd (Santos). ACCR claims that Santos has breached the prohibitions on misleading or deceptive conduct under the Corporations Act and Australian Consumer Law in relation to its strategy for achieving ‘net zero’ scope 1 and 2 greenhouse gas emissions by 2040. That proceeding is ongoing, after ACCR added additional grounds to its claim last year. Shareholder group Market Forces has also separately asked ASIC to investigate Santos’ conduct for evidence of greenwashing.
Beyond litigation: the rise of shareholder climate action
Outside of court action, the past two years have seen shareholders in Australia and overseas explore other innovative avenues for holding companies accountable for the robustness of their decarbonisation plans.
In 2021, the ‘Say on Climate’ initiative launched by hedge fund activist investor Chris Hohn’s Children’s Investment Fund Foundation saw ACCR, among others, file shareholder resolutions with a number of large resources companies, calling on them to introduce Paris Agreement-aligned energy transition plans and for these to be subject to an annual advisory shareholder vote (among other things). A number of companies have committed to this ‘Say on Climate’ vote.
Shareholders have also used their powers to change the composition of Boards and/or cause the Board to prioritise companies’ progress toward net zero:
- In 2021 in the US, activist investor hedge fund Engine No 1 made headlines by successfully campaigning for a change in Exxon Mobil’s Board to include independent directors that would push Exxon to develop a viable low-carbon business strategy.
- In 2022, climate activist investor and billionaire Mike Cannon-Brooks, successfully campaigned for four new directors to be included on AGL’s Board, with a mandate to accelerate the company's transition to green energy. This change in directors followed AGL not proceeding with a proposed demerger of its electricity generation and retail businesses following pressure by Mr Cannon-Brooks and institutional shareholders to vote against the proposed demerger.
- In late 2021, Andrew Forrest used his shareholding in a Tasmanian salmon company to call on the company and its parent to improve their environmental and animal welfare practices. Mr Forrest then went on to acquire renewable energy developer CWP Renewables in late 2022 through his company Squadron Energy, with a view to helping Australia ‘step beyond fossil fuels’.
What does this mean for Australian Boards?
Given the parallels between directors’ duties under UK law and Australian law, it can be expected that activist shareholders in Australian companies will be closely monitoring the outcomes of ClientEarth’s claim against Shell’s Board and otherwise looking for opportunities to bring similar claims in Australia.
Cases such as ACCR v Santos show that climate activist shareholders are already actively seeking ways to hold companies to account for the robustness of their decarbonisation strategies in court (and have funding and/or pro bono legal support to so do), and may be interested in testing a similar claim under Corporations Act provisions. Further, recent moves by high net worth individuals to use their shareholder power to push companies to accelerate their decarbonisation trajectories indicates not only that shareholders are interested in their companies’ climate commitments, but also that they have the necessary funds to exercise significant influence over company decision-making in relation to climate action.
What can Australian Boards do?
Against this background, directors of Australian companies should monitor the outcomes of ClientEarth’s claim, and consider what steps need to be taken to ensure that their company has a robust decarbonisation plan in place so as to minimise shareholder litigation risk. Key considerations may include:
- whether robust processes are in place to monitor and report on emissions (including supply chain), and whether TCFD-aligned climate related financial risk reporting is undertaken (or can be introduced);
- what governance processes are in place for identifying and managing risks (for example, through a designated climate risk management committee), and whether there is robust Board involvement in decision-making in relation to climate risks;
- whether short and medium-term decarbonisation targets (across scope 1, 2 and 3 emissions) have been set and if not, how these can be set (having regard to the importance of having reasonable grounds to make any particular decarbonisation or ‘net zero’ commitments); and
- ensure that the company’s decision-making processes in relation to its decarbonisation strategy, including the assumptions underpinning that strategy, are well documented.
As we look ahead to the 2023 AGM season, Australian Boards may also wish to consider assessing their approaches to engagement with their shareholders, and adopting an approach that facilitates transparent information sharing with their shareholders about their strategy for managing climate risk.