Climate Change and Derivative Claims – What’s Next after Client Earth v Shell?

In our Insight post of 14 September 2023 we looked at how derivative claims have become an increasingly popular tool for shareholders wanting to hold boards of directors to account. We also considered how derivative claims might trigger cover under D&O insurance.

The most high-profile recent attempt to use the derivative claim process in the UK was Client Earth’s claim against the board of Shell.  After having its claim twice dismissed by the High Court Client Earth sought permission from the Court of Appeal to appeal. Last month the Court of Appeal dismissed that appeal application putting an end to Client Earth’s claim. While the claim failed to get off the ground, it provides some insights into how future derivative claims based on directors’ obligations around climate change might be pursued. In this update we look at where the Client Earth claim failed, where future claims might be more successful and what the implications are for D&O insurance.

Why didn’t Client Earth succeed?

Amongst the legal analysis of why Client Earth didn’t reach the necessary thresholds to get its derivative claim up and running (which is beyond the scope of this update), there are a number of practical issues with its case that can be drawn out:

1. A part (some would say the majority) of Client Earth’s motivation to bring the derivative claim was to further its own agenda and this meant it fell foul of the need to bring the derivative claim in good faith in the best interests of Shell.
2. The evidence which Client Earth put forward in support of its claim was based on the opinions of its own in-house lawyer. Client Earth had not shown: (a) that the Shell directors were acting unreasonably in managing climate risks; or (b) that there is a general consensus about what those risks are and how they should be managed taking into account a company’s commercial aims. Both of these points were for expert evidence which Client Earth did not produce.
3. Client Earth and the other shareholders that supported its claim formed a very small percentage (0.17%) of Shell’s issued share capital, so it was not clear that any material percentage of the Shell shareholders, whose views had to be taken into consideration, were in favour of the action.
4. the principle remedy which Client Earth said Shell (as the “true” claimant) was entitled to was in the form of an injunction requiring the directors to adopt a strategy to manage climate risk in compliance with their statutory duties. The court explained that this was too vague a remedy and would effectively require the court constantly to supervise the directors’ conduct.

What could others do differently?

Every company is different and boards will need to assess how climate change might impact the company’s business and activities. However, there are a few pointers arising from the Client Earth claim which show how shareholders might need to approach derivative claims in future:

1. Shareholders will need to be aware that if the purpose (or part of the purpose) of the derivative claim is to advance the shareholders’ own agenda and not the commercial interests of the company then they are unlikely to succeed. In reality, activist shareholders will invariably be seeking to push their own agendas, so they may try to procure support from more “mainstream” shareholders with a view to adding credibility.
2. Expert evidence in the disciplines of directors’ duties and the impact/management of climate change issues will be important. Expert evidence on climate change may become easier to obtain as the science develops and more consensus is reached.
3. Linked with (1) above, the more support a shareholder can obtain from its fellow shareholders, the better its chances of showing that the derivative claim is in the interests of the company as a whole.
4. If shareholders can put forward specific remedies that are readily enforceable and measurable then they may have a better chance of progressing a derivative claim. That may be more straightforward where, for example, the company in question has a more narrow scope of business than Shell and/or where there are specific projects or initiatives that the shareholders can point to as being helpful or harmful.

What could the impact be for D&O insurance?

As highlighted in our Insight post of 14 September 2023, the cover for derivative claims is often hidden away in the detail of a D&O Policy. As to how important that cover may be as derivative claims based on climate risks develop and become more sophisticated, insureds may want to consider the following:

1. If more shareholders become involved in derivative claims then the exposure for directors is likely to increase (particularly to costs). The limits available (for Side A/non-indemnifiable loss in particular) will need to be considered carefully.
2. Expert evidence can be expensive and time-consuming, so again that is likely to drive up the costs involved, particularly if both the shareholders and directors need to obtain expert evidence and those experts need to be heard in court.

While the outcomes from the Client Earth claim do not necessarily change the landscape in terms of exposure to damages, directors can expect the remedies which shareholders seek to be more carefully considered and formulated.

Contacts us

David Jones, Associate Director

T: +44 7521 776930 | E: [email protected] 

Sam Vardy, Divisional Director

T: +44 (0)7719 928600 | E: [email protected]

Neil Warlow, Divisional Director

T: +44 (0)7923 208441 | E: [email protected]

Carey Lynn, Managing Director

T: +44 (0)7923 229882 | E: [email protected]