With the growing climate emergency, environmental responsibility is a focal point for manufacturing industries worldwide.
The UK government is committed to reaching net zero by 2050, and manufacturing companies are expected to be challenged if they fail to implement sustainable practices and 'green' initiatives.
Our Manufacturing Solicitors explore the growing impact of ESG and the lessons from ClientEarth v Shell PLC [2023], emphasising that addressing climate risks is no longer optional for manufacturing businesses. To stay ahead, board members must navigate increasing shareholder scrutiny, ensure compliance with climate initiatives, and lead the way toward a more sustainable future.
Shareholder Activism and Environmental Issues
Shareholder activism is not new, but the emphasis on environmental, social, and governance standards has expanded its scope.
Shareholders of companies may have a legitimate expectation that directors must meaningfully commit to long-term sustainability goals.
Typically, minority shareholders have limited influence on corporate governance, of which directors are responsible.
However, shareholders may demand greater accountability from directors for failure to comply with their duties to the company, which can result in legal action being taken.
A recent example of this form of shareholder activism may be seen in the case of ClientEarth v Shell PLC [2023] EWHC 1137 (ch).
ClientEarth v Shell PLC
In February 2023, ClientEarth, a UK-based environmental law charity, brought a derivative claim against Shell PLC's board of directors.
A derivative claim is a statutory claim brought by shareholders on behalf of a company.
It is made pursuant to Section 260 of the Companies Act 2006. Whilst ClientEarth held only 27 shares in Shell, it was, in accordance with the Companies Act, legally entitled to bring a derivative claim and stand in the shoes of the company to bring an action in its name.
It was alleged that Shell's directors had breached their duties by failing to adequately manage climate risks in the context of Shell's commitment to becoming a net-zero business by 2050.
ClientEarth argued that Shell's interim targets and reliance on technologies like carbon capture and offsets were insufficient and placed the company at significant risk, including exposure to stranded assets, regulatory action, and shifting investor sentiment.
The claim asserted that Shell's directors breached duties to promote the company's success and to exercise reasonable care, skill, and diligence in connection with their decision-making.
ClientEarth alleged that Shell's board had breached these duties by:
- Insufficiently addressing risks associated with climate change.
- Failing to establish credible strategies to meet Shell's net-zero goals.
- Continuing significant investments in fossil fuel projects.
- Not adhering to an earlier Dutch Court ruling requiring Shell to reduce emissions by 45% by 2030.
Accordingly, the charity sought a declaration of breach of duty and an injunction compelling the board to adopt an improved climate strategy.
The Decision
On 12 May 2023, the High Court denied permission to proceed with the derivative action.
Key points from the ruling include:
- Deference to commercial judgement of directors: The Court emphasised that decisions about how to balance various business considerations, including climate risks, are within the board's discretion. ClientEarth failed to demonstrate that Shell's directors had acted irrationally or in bad faith.
- High threshold for derivative actions: Shareholders bringing a derivative claim need to establish a prima facie case that advancing the claim would promote the company's success. The Court found that ClientEarth had not met this threshold, particularly as Shell had already implemented a climate strategy (even if flawed).
- Earlier ruling: Whilst the Dutch Court ruling obliged Shell to reduce emissions, the Court noted that it was for the company to determine its own methods of compliance with that ruling.
- The motivation of minority shareholders: The Court queried ClientEarth's motives and whether the claim was part of a broader policy agenda rather than an effort to protect the company itself.
The Rise of Shareholder Activism: A Wake-Up Call for Manufacturing Boards on Climate Accountability
Whilst ClientEarth's derivative action was unsuccessful, it attracted significant media attention and brought into focus the growing role of shareholder activism in influencing corporate responses to climate change.
For manufacturing businesses, addressing climate risks appears no longer optional, and board members may need to prepare for increased shareholder scrutiny, ensuring they are compliant with climate initiatives and leaders in the transition to a more sustainable future.
Contact Our Manufacturing Solicitors
Ensure your business stays ahead of evolving shareholder expectations and sustainability demands.
Contact our expert Manufacturing Solicitors for tailored legal advice on ESG compliance, corporate governance, and risk mitigation strategies. Let us help you protect your business while driving sustainable success.
01619414000
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Robert Brothers
Partner
Rob has experience acting as a Dispute Resolution solicitor. Rob has specialist expertise in professional negligence disputes, shareholder and partnership disputes, complex contractual disputes, intellectual property, reputation management and commercial agency claims.
About Robert Brothers