On July 24th, the High Court in London refused to allow the environmental charity ClientEarth to bring a case against the board of directors of the global oil giant Shell. ClientEarth, which holds 27 shares in Shell, was attempting to sue the directors on behalf of the company for breaching their duties, using a procedure known as a derivative action which allows shareholders to do so if they obtain prior permission from a court. The charity alleged that the directors had failed to implement a climate transition strategy that could achieve the company’s goal of net zero carbon emissions by 2050. This claim marked the first time ever that a derivative action was attempted against a company’s directors in a climate litigation.
In refusing ClientEarth’s application, Judge William Trower held that there was a lack of a prima facie case, as directors of a company of the size and complexity of Shell are forced to consider numerous competing factors when deciding corporate strategies, and that there was no evidence that they had acted unreasonably in setting the company’s climate transition strategy. Interestingly, he also observed that ClientEarth was not acting in good faith, since its “primary purpose” in bringing the claim was “advancing ClientEarth’s own policy agenda.”
While this groundbreaking claim was ultimately (for now) unsuccessful, Shell’s victory is nevertheless a Pyrrhic one. The case garnered truly massive media attention and gave ClientEarth a platform to criticise the company’s perceived lack of action on climate issues. ClientEarth have already promised to appeal the decision, thereby keeping the spotlight firmly fixed on the company and the investors holding it accountable on its climate commitments. This saga illustrates how activist investors can use creative legal strategies to damage the reputation of a company, state, local authority or financial institution over perceived lack of climate action, regardless of the ultimate outcome in court.
However, this is not the first time that an unconventional climate claim has been dismissed, and the High Court’s decision further highlights just how reluctant courts have been so far to intervene in the commercial strategies of corporations or the national climate strategies of states (although it is worth noting that the reasons for courts’ non-intervention in claims against states are usually very different, such as the doctrine of non-justiciability). Another example is the recent failed attempt by the environmental NGO Deutsche Umwelthilfe to sue Mercedes-Benz in the Regional Court of Stuttgart for failing to commit to a phasing out of internal combustion engine vehicles by 2030. Rejecting the claim, the court found that it was the legislature’s role to decide what measures were appropriate to protect the climate, not the court. Other recent examples include ClientEarth’s attempt to seek judicial review of the UK Financial Conduct Authority’s approval of the prospectus of the oil and gas company Ithaca Energy, and Friends of the Earth’s judicial review of UK Export Finance’s decision to allocate $1.1 billion in export finance for an LNG project in Mozambique.
Reputational impacts of climate litigation
Most novel climate litigations are still being heard or are being appealed, and it remains to be seen whether groups like ClientEarth will unlock new ways to compel companies and states to effect greater reforms towards net zero (it is worth noting that some successes have already been scored, such as ClientEarth’s blocking of the Polish state-controlled energy group Enea from participating in the construction of a coal-fired plant). In the meantime, the impacts of such strategies remain primarily reputational, but these are nevertheless very serious. A recent working paper by the Centre for Climate Change Economics and the Grantham Research Institute analysing 108 climate change lawsuits filed worldwide against US and European-listed corporations between 2005 and 2021has shown that climate litigation has a negative impact on a company’s valuation, regardless of whether the litigation succeeds or not. The study found that a “filing or an unfavourable court decision in a climate case is estimated to reduce firm value by -0.41% on average, relative to expected values.” The study highlights how effective climate litigation can be as a tool to inflict reputational harm that results in loss of value for a company. That harm can linger even after a first victory in court, as the case slowly moves through the appeals process.
Corporates seeking to defend against climate litigation must therefore give equal weight to their legal and reputation protection strategies to ensure victory both in and out of the courtroom. Effective reputation protection strategies go beyond briefing the press proactively and with consistent messaging; they should also consider the mobilisation of all relevant stakeholders, including regulators, politicians, employees and investors, while understanding and addressing the concerns of each community.
For activist investors and civil society, the widespread media coverage of the case against Shell’s directors highlights the effectiveness of novel legal strategies to promote climate accountability. However, it remains to be seen whether such strategies will eventually come with diminishing returns from a reputational standpoint, especially if courts continue to express reluctance to intervene in these matters. This, combined with the multiplication of climate claims around the world, could potentially make it more difficult for charities and activists to capture the public’s attention and even to secure litigation funding. Targeting the most egregious examples of inadequate corporate stances on climate risk and mobilising a greater number of shareholders before making a claim may be key to a future landmark victory for activist investors.