Court of Appeal blocks ClientEarth climate case against Shell

ClientEarth, which owns 27 shares in Shell, initially accused the company’s board of not handling climate risks well enough, and sought a court order to make Shell’s directors adopt a new climate strategy. However, as claims for breaches of directors' duties are typically for the company to pursue rather than shareholders, ClientEarth's claim was categorised as a ‘derivative claim’ that required court approval to proceed.

In a High Court ruling earlier this year, permission for ClientEarth’s claim to advance was denied. Mr Justice Trower emphasised the complexity of directors’ duties in balancing various considerations when acting in the company’s best interests. The court held that ClientEarth’s argument sought to impose absolute duties on directors, potentially conflicting with their broader duty to promote Shell’s success for the benefit of its members as a whole, albeit taking into account environmental and community impacts.

The judge also considered discretionary factors, including the issue of good faith. He suggested that if the primary motive behind the claim was to advance ClientEarth’s policy agenda rather than Shell’s success, it could be considered lacking in good faith. The judge concluded that ClientEarth’s modest shareholding indicated an ulterior motive that was not aligned with the broader interests of Shell’s other members.

ClientEarth later sought permission to appeal to the Court of Appeal, but its application was rejected last week - with no further avenue for appeal.

Emilie Jones, litigation expert at Pinsent Masons, said: “The High Court’s judgment highlighted the duty of company directors to act in a way which promotes the success of the company as a whole, and that this requires the balancing of a large number of competing and complex interests. This is a particularly difficult task in the context of climate change, where there are a wide range of views and uncertainties, including as to the financial implications of fossil fuel investment or divestment.”

“Directors will welcome the fact that the Court of Appeal has not seen fit to interfere with the High Court’s judgment, thereby continuing to respect the considerable measure of discretion afforded to directors in carrying out the balancing act entrusted to them,” Jones added.

Michael Fenn of Pinsent Masons said: “Activists are deploying novel methods to bring climate change litigation. This litigation and the similar case of McGaughey v USS, a claim by pension scheme members against directors of the scheme’s corporate trustee, were the first known UK attempts to use the derivative action procedure to bring claims in relation to alleged failures to manage climate risks appropriately. Both claims have now failed, casting serious doubt on the viability of derivative claims as a litigation strategy for activist groups.”

“Indeed, it may prompt activist groups to reach the view that it would be more advantageous to deploy their capital on such ‘strategic litigation’ in jurisdictions other than England & Wales. Nevertheless, companies and their directors must remain alive to their duties and to the risks of failing to give proper consideration to the risks which climate change poses to the business, and should also take care to avoid making any public statements which might be perceived as ‘greenwashing’,” Fenn said.

He added: “Activists are likely to continue to pursue these issues – whether through court litigation, regulatory action or, for shareholders, in the use of their voting rights – as even where such activity is unsuccessful, it can generate considerable publicity, as the press attention around the Shell litigation has illustrated.”