Climate litigation: the temperature is rising

Who would be an executive or director in 2023? Inflation, war in Europe, banking turmoil and higher interest rates are just some of the challenges keeping business leaders up at night. 

Now added to this is anxiety about whether companies are doing the right thing in face of climate change. Concerns about corporate approaches to climate change are not new. First, we saw accusations of greenwashing – companies pretending to be greener than they were. This led, perhaps inevitably, to ‘green-hushing’ – companies refusing to publicise climate targets to avoid greenwashing accusations. This week, we even came across the term ‘green-botching’, where well-meaning corporate policies are so misconceived or poorly implemented that they backfire.

Climate risk is one area that practitioners, and especially litigators, have been watching closely. According to a June 2022 report by the London School Economics, the number of climate change-related cases is accelerating, with only 800 cases recorded globally between 1986 and 2014, but more than 1,200 since 2015 and roughly 500 between 2020 and 2022.  

So, what are we seeing in English courts, and what should we be watching for?

Last year, environmental charity ClientEarth threatened a claim against Shell’s directors by way of pre-action letter. It alleged that a failure to prepare properly for net zero represents a breach of duty under the Companies Act 2006 to promote the success of the company and exercise reasonable skill, care and diligence (sections 172 and 174). On 9 February 2023, ClientEarth announced that it had filed the claim in the High Court in its capacity as a shareholder, apparently with the support of institutional investors. Shell has said it does not accept the allegations.

ClientEarth’s claim is the first attempt to hold directors personally accountable for failing to prepare for the net zero transition, which ClientEarth argues risks Shell’s long-term viability. If successful, it could result in other activist shareholders seeking to put pressure on a company’s climate policies through litigation.

Bringing a claim against directors rather than a company is not straightforward. Claims against directors usually belong to the company itself because directors owe their duties to the company, not its shareholders. However, there exists a statutory mechanism for ‘derivative’ actions, enabling shareholders to pursue a claim on a company’s behalf.

This approach brings with it procedural obstacles; claimants require the court’s permission to continue a derivative action once issued. The claimants need to show a prima facie case. The court must weigh up factors such as whether the shareholder has a cause of action it could pursue in its own right, whether it is acting in good faith, and what importance someone acting in accordance with the duty to promote the success of the company would accord to the proposed claim. There are statutory tests to be applied, including that the court must refuse a claim permission to proceed where directors acting in accordance with their duties would decline to pursue the claim. All of this remains untested in a climate context, and many will follow this case with interest.

One route for investors complaining of greenwashing might be under the shareholder action regime in the Financial Services and Markets Act 2000. The two relevant provisions (sections 90 and 90A) differ in their requirements, but in broad terms, claims are brought where an offering document or regulatory announcement is untrue or misleading and consequently causes loss. One can imagine such claims arising from greenwashing, where statements around the environmental credentials of a business, perhaps touted in its offering prospectus, are later found to have been exaggerated, leading to share price falls and losses for investors. Such claims are often amenable to class actions.

This regime has not been widely used to date, with examples often either failing or settling before trial (for example, the Tesco shareholder litigation). The financial and reputational risks inherent in such claims remain, however. Litigation funders in particular have expressed interest, with the suggestion being that claims are waiting on the sidelines for a useful test case to provide a springboard.

Following decisions in cases such as Vedanta v Lungowe and Okpabi v Shell we anticipate further cases in the English courts where human rights and environmental claims are brought against parent companies for the actions of their subsidiaries in overseas jurisdictions.

In July 2022 for example, a group of Brazilian claimants, in the Court of Appeal, successfully overturned a strike-out ruling in the High Court (Municipio de Mariana v BHP Group Plc) and will proceed in their £5bn class action against BHP arising from the collapse of the Fundão Dam in November 2015. BHP argued, inter alia, that the case was an abuse of process on the basis that it would prove ‘irredeemably unmanageable’ due to its size and complexity (with some 200,000 claimants). The Court of Appeal disagreed, concluding that the significant burden on the court could not be an independent basis for a finding of abuse. The judgment includes important commentary on the conduct of large-scale group litigation such as this, emphasising that a claimant’s ‘unhindered right of access to justice’ is a ‘core constitutional right’.

Ultimately, decision-making around climate issues and ESG will often be a question of business judgement, balanced against other factors relevant to the success of the company; there must be a margin of discretion involved.

It seems clear activist shareholders will continue innovating. Victims of climate change and environmental disasters will also seek recourse in the English courts. No doubt the threat of such litigation will focus business leaders’ minds on their company’s strategy for climate change issues.  

What is certain is that climate litigation is here to stay. The above examples show that it appears in various forms, is high-profile, and invariably high-value. Ignore at your peril. 

Lizzie Shimmin is a partner and Oliver Thomson a senior associate in the litigation team at Jenner & Block, London