Doing the Right Thing: How ESG failures could result in director personal liability


At the beginning of the year in our Article 'Directors' Outlook 2023: ESG' we referred to the possibility that increased shareholder activism may well see the policing of corporate behaviours and Board decision making. We now have a live example of this phenomenon, which while may currently be an outlier, is we predict indicative of a direction of travel.

Details of the derivative action  by ClientEarth.Org have this week (20 February 2023) been released which are heralded as the first lawsuit in the world that will seek to hold directors personally liable for preparing their company for the transition to net zero. Net zero being a global policy adopted by 196 state signatories to the Paris Agreement of 2015 at the UN Climate Change Conference (COP21).

ClientEarth, while a token shareholder, is supported by a group of pension funds and institutional investors who contend that Shell is failing to move fast enough towards the net zero commitment by 2050, in that it continues to invest in the development of new fossil fuel projects and is paying insufficient attention to sustainable investments. This they claim fails to promote the long-term interests of the company.

While undoubtedly the claim is motivated by a belief in the 'triple bottom line' of people, planet and profit, and a belief that long term sustainable economic development requires an equivalent balance of all three, the derivative claim rests on the breach of statutory duties owed by a director to promote the success of the company. The claim rests on the premise that the failure to adequately address known long-term obligations imperils the success (and profitability) of the company in the future, even if it is for short term gain. It is argued that Shell's transition strategy to net zero is fundamentally flawed and, as a result of failing to manage the risks faced, the directors are in breach of their duty to the company.

Shell will undoubtedly vigorously resist the claim, relying on the not currently unreasonable proposition that they are abiding by current legislative and regulatory requirements. However, calling directors to account for failure to abide by more general environmental objectives can already been seen in a 2021 Dutch Court judgment, again against Shell. Here Shell faced a lawsuit brought by Friends of the Earth, 6 other bodies and 17,000 Dutch citizens that alleged that Shell were guilty of climate inaction. The claim resulted in an order that Shell cut overall omissions by 45% by 2030 (relative to 2019 levels). This order (which is being appealed) relates to the global commitment to be reached in 2050 and shows how directors could increasingly be judged on the appropriateness of their ESG strategies.

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