ESG Disputes in England: ClientEarth’s Derivative Action Against Shell’s Board Signals That The English Courts May Be Considered An Increasingly Attractive Forum

[Gunnar Larson]

ClientEarth’s claim

The 2021 decision in *Milieudefensie et al. v Royal Dutch Shell plc*,
handed down by the Hague District Court, marked the first major case to
hold a multinational corporation responsible for environmental damage.
While the Netherlands remain some way ahead of England as a forum of choice
for ESG-related litigation, recent developments suggest that the position
is beginning to change.

On 15 March 2022, ClientEarth, a non-profit environmental law organisation
that is also a shareholder in Shell plc, took the first steps in commencing
a derivative action
<https://www.clientearth.org/latest/latest-updates/news/we-re-taking-legal-action-against-shell-s-board-for-mismanaging-climate-risk/>in
England against Shell’s 13 executive and non-executive directors.
ClientEarth asserts that Shell’s board of directors is personally liable
for the company’s failure to manage its climate risk; that is, to implement
a climate strategy that truly aligns with the Paris Agreement, including
its failure to produce operating plans and budgets that reflect the
company’s “target to become a net-zero emissions energy business by 2050
<https://www.shell.com/media/news-and-media-releases/2021/shell-accelerates-drive-for-net-zero-emissions-with-customer-first-strategy.html>
”.

Pointing to a number of issues that it describes as “serious shortcomings”
ClientEarth asserts that, in failing to manage the company’s climate risk,
the board members have purportedly breached their statutory duties under
English law, specifically the duty to promote the success of the company
pursuant to section 172 of the Companies Act 2006. Section 172 of the
Companies Act 2006 provides that a director must act in the way that he
considers, in good faith, would be most likely to promote the success of
the company for the benefit of its members as a whole. In doing so,
directors must have regard to a non-exhaustive list of matters, including
the likely consequences of the decision in the long-term and the impact of
the company’s operations on the community and the environment.

In the present context, where a company’s climate risk poses a foreseeable
and material financial risk to the company, and where the board of that
company fails to properly consider that risk, or unreasonably fails to act
in response to that risk, they could potentially face liability under
section 172. What makes ClientEarth’s present claim particularly
interesting is that it marks the first attempt to hold a company’s board of
directors personally liable for mismanagement of the company’s climate risk.

Interestingly, this development comes just a few months after Shell’s
shareholders approved the relocation of the company’s headquarters to
London from the Netherlands (a decision which, according to various
unconfirmed press reports, may have been partly intended to mitigate the
company’s exposure to future climate litigation in the Netherlands, bearing
in mind the country’s precedent for ESG-related proceedings and following
the 2021 *Milieudefensie *decision).

At present, the English claim is in its infancy. ClientEarth’s FAQs
statement
<https://www.clientearth.org/media/puojyzvy/clientearth-shareholder-litigation-against-shell-s-board-faqs.pdf>
relating
to the claim indicates that a pre-action letter has been sent to Shell’s
board, notifying it of the claim and giving it an opportunity to respond.
ClientEarth has stated that it will review that response, before formally
filing the claim in the English High Court.
Further recent developments in England

In addition, two recent procedural decisions by the Supreme Court have
demonstrated the English courts’ willingness to entertain claims that
target UK parent companies for the ESG-related transgressions of their
foreign subsidiaries. The Supreme Court’s judgments in* Vedanta Resources
PLC and another (Appellants) v Lungowe and others (Respondents)
<https://www.supremecourt.uk/cases/docs/uksc-2017-0185-judgment.pdf>* [2019]
UKSC 20 (“Vedanta”) and *Okpabi & Ors v Royal Dutch Shell plc and Shell
Petroleum Development Company of Nigeria Ltd
<https://www.supremecourt.uk/cases/docs/uksc-2018-0068-judgment.pdf>* [2021]
UKSC 3 (“Okpabi”) confirm that, in certain cases, statements in published
documents and policies may provide some basis on which to find UK parent
companies liable in tort for harm caused by their subsidiaries in foreign
jurisdictions. The claimants in these cases relied on such statements to
assert that the parents themselves owed a duty of care in connection with
their subsidiaries’ ESG-related breaches.

   - In *Vedanta*, a group of Zambian citizens brought a claim against
   Vedanta Resources plc (a UK mining company, formerly listed on the London
   Stock Exchange) after a mine owned and operated by its Zambian subsidiary
   (KCM) discharged toxic matter into watercourses used for local irrigation
   and drinking. The English courts considered that the claimants were able to
   show a “good arguable case” (based on the specific facts) that Vedanta had
   exercised a sufficiently high level of supervision and control of
   activities at the mine so as to owe a duty of care to the claimants,
   meaning that the English courts had jurisdiction over the claim. In
   reaching its decision, the Court relied upon various public statements made
   by Vedanta demonstrating its involvement in KCM management (including a
   report entitled “Embedding Sustainability” which stated that oversight of
   all Vedanta’s subsidiaries rested with the Vedanta board, public statements
   regarding Vedanta’s commitment to addressing group-wide environmental
   control and sustainability standards, and the existence of a management
   services agreement between Vedanta and KCM).
   - In *Okpabi *it was alleged that numerous oil spills had occurred from
   oil pipelines and infrastructure operated in the vicinity of the claimants’
   communities in Nigeria, causing widespread environmental damage including
   serious water and ground contamination. The claimants asserted that the
   spills were caused by the negligence of the pipeline operator, a Nigerian
   registered subsidiary of Royal Dutch Shell Plc, a UK domiciled company and
   the parent company of the multinational Shell group. Overturning the
   decision of the Court of Appeal, the Supreme Court held that, based on the
   specific facts, the UK parent exercised a degree of control over its
   subsidiary that was sufficient to establish that a duty of care existed. In
   reaching its decision, the Court placed weight on internal published
   documents said to demonstrate that the Shell group was deliberately
   structured in a way that enabled the UK parent to direct, control and
   intervene in the management of its subsidiaries’ operations.

The judgments above relate to jurisdictional challenges where the claimants
first needed to establish a “good arguable case” that a duty of care was
owed by the UK parent in order that the English courts could then assert
jurisdiction over the underlying claims. As at April 2022, neither
*Vedanta *or *Okpabi *have been subject to a full trial on the merits and
there are no substantive updates, although we continue to monitor
developments. More broadly, we anticipate that these decisions will
continue to pique the interests of claimant law firms and litigation
funders who operate in the ESG sphere and, in due course, encourage similar
claims in the English courts.
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