Empty Link Skip to Content

ESG Litigation – A New Dawn for Shareholder Activism

Environmental, social and governance (ESG) compliance is of ever-increasing importance for company boards, with pressure mounting from consumers, investors, employees and regulators, as well as the legislature. Against that background, directors outside of Ireland are beginning to face progressively creative challenges from activist investors seeking to influence corporate behaviour.

Litigation is being used more and more as a mechanism to put boards, companies, financial services institutions and regulators under pressure to change their behaviour and drive the climate agenda. The use of strategic litigation in this way serves as a reminder of the importance of companies and their boards taking steps to ensure their ESG strategy and associated disclosures can withstand the range of potential challenges they may subsequently face. 

Litigation driving the net zero agenda

We have been monitoring climate-related litigation, of which there has been one case in Ireland and several more in other jurisdictions. Climate activists are targeting both governments and corporations to drive change in this area. Directors can expect an organisation's proposed green energy transition strategy, as well as its plans to safeguard its assets and investments from climate change concerns, to be the subject of increasing investor scrutiny. There may be a risk of climate-related litigation if directors are not taking appropriate action in line with the Paris Agreement on Climate Change (the "Paris Agreement").

Although such litigation has had mixed success so far, plaintiffs are making increasingly novel and creative legal arguments.  

In what has been described as a "world first", in the UK an environmental charity, ClientEarth, recently sought to bring a derivative claim against Shell's board of directors in the English High Court with the aim of changing Shell's climate action strategy by attempting to hold its directors personally liable. ClientEarth, in its capacity as a minority shareholder, alleged that Shell's current ESG strategy does not comply with the Paris Agreement and therefore puts the company's longer term commercial viability at risk. ClientEarth alleged that Shell's directors have therefore breached their fiduciary duty to act in good faith to promote the success of the company for the benefit of its shareholders as a whole (including the requirement in doing so to have regard to the likely consequences of any decision in the long run) (section 172 of the UK Companies Act 2006), as well as their duty to exercise reasonable care, skill and diligence (section 174 of the UK Companies Act 2006). Further details in relation to the basis of ClientEarth's claim can be found in its published FAQ document.

Under Irish law there is an equivalent directors' duty to exercise care, skill and diligence (section 228(1)(g) of the Companies Act 2014), although there is no direct equivalent duty to section 172 of the UK Companies Act 2006 (to promote the success of the company for the benefit of its shareholders as a whole).  Under Irish law, directors owe a duty to act in good faith in the interests of the company set out at section 228(1)(a) of the Companies Act 2014. Additionally, under the current EU proposal for a Corporate Sustainability Due Diligence Directive, directors would be obliged to consider human rights, climate change and the environment in their decision making.

In order to bring a derivative action (ie bring proceedings in the company's name for the company's loss), the claimant must be a shareholder in the relevant company.  They need not have a significant shareholding nor do they need to be a shareholder of longstanding.  Procedurally, the action must be given prior approval by the court if it is to be advanced and this will require demonstrating there is a reasonable case to be tried – ie is there a reasonable case for the minority shareholder to bring at the expense (ultimately) of the company?  If so, it may be allowed to proceed.

The requirement for permission of the English High Court to continue such a derivative action has, so far, presented an insurmountable procedural obstacle for ClientEarth as the English High Court this week confirmed its prior refusal to grant the permission needed for the claim to continue, following oral submissions.

This judgment will make it difficult for environmental and other campaign groups to use the derivative action procedure to challenge directors’ strategic and long-term decision-making requiring directors to balance competing considerations. The court has made it clear it will not generally interfere in directors’ decision-making, noting that the law respects the autonomy of directors on commercial issues - it will not intervene in decisions honestly arrived at by the board unless no reasonable director could properly have adopted the same approach (an approach that is also taken by the courts in Ireland). 

The detailed judgment explains that a derivative action is an "exceptional procedure". There is a requirement under English law that the court must consider if the derivative claim is being brought in good faith (section 263(3)(a) of the UK Companies Act 2006).  The court confirmed that the motive and associated purpose for the action (including whether there is a real interest in promoting the success of the company or whether there is an ulterior purpose) will be a factor in determining whether permission to bring a derivative action should be granted. The size of the applicants shareholding will bring with it a certain inference in this regard.

The relevant Irish rules are not identical but there is a similar requirement (set out in Order 15, Rule 39(5)(v) of the Rules of the Superior Courts) that it is "reasonable and prudent in the interests of the company" that leave be given for the intended derivative action.

This is in contrast with decisions in other jurisdictions where courts have been prepared to read international norms, particularly the Paris Agreement, into domestic law and interpret the European Convention on Human Rights as requiring emissions reductions targets to be met more swiftly.

At the time of writing, ClientEarth has stated that it intends to seek permission to appeal the English High Court's refusal of permission. Should they manage to successfully overturn the decision, this could set the tone for other shareholder activists seeking to drive similar agendas. However, even if not ultimately successful, the impact of ClientEarth’s actions should not be underestimated, particularly as it has received substantial support from institutional investors holding more than 12 million shares in Shell. Those institutional investors include, for example, Nest, the UK’s largest workplace pension scheme. The support of such significant institutional investors is demonstrative of the increased shareholder interest in fossil fuel divestment, as well as an accompanying appetite to litigate in order to bring about change.   

While climate-related litigation cases in Ireland has been limited to date, this kind of litigation poses a significant reputational risk to companies of being perceived by employees, customers and investors to be failing to appropriately and responsibly address climate and sustainability issues. There is broad international consensus that every company should independently work towards the Paris Agreement target of net zero emissions by 2050.  Companies need to be seen to be responding to the specific challenges that climate change and carbon reduction present and "business as usual" is no longer considered acceptable.

Traditionally-polluting industries such as fossil fuel extraction are no longer the only target. There have, for example, also been recent cases against producers of plastics, as well as retailers and consumer goods companies, for their alleged contributions to plastic pollution, raising issues of public nuisance, breach of warranty and negligence.  There has also been a substantial increase in 'greenwashing' claims grounded in misrepresentation and misleading advertising against not only financial services companies and airlines, but also the food industry, based on claims that these companies have overstated the climate-friendly status of their products.

Financial services companies and institutional investors, as well as other large corporations, should be live to this risk.  For example, in what is also being described as a first of its kind, French NGOs, Oxfam, Friends of the Earth and Notre Affaire à Tous, have filed a claim at the Paris Judicial Court against BNP Paribas, alleging that it is in breach of French environmental vigilance laws (that demand companies avoid human rights and environmental violations in supply chains) by continuing to financially support the expansion of fossil fuels. It alleges BNP Paribas is Europe’s largest and fifth worldwide funder of fossil fuel expansion and is urging the bank to adopt an oil and gas exit plan. This is the world's first climate lawsuit against a commercial bank.

ClientEarth has also recently filed a judicial review claim against the UK's Financial Conduct Authority ("FCA"), challenging its decision to approve the prospectus of Ithaca Energy Plc, a UK oil and gas company, on the basis that Ithaca's prospectus failed to provide adequate climate risk related disclosures. The claim highlights the conflict between Ithaca's intention to develop new fossil fuel infrastructure and its incompatibility with goals set out in the Paris Agreement. ClientEarth argues that the failure to provide sufficient information on these risks deprives investors of the opportunity to make an appropriately informed assessment of Ithaca Energy's financial position, breaching the FCA's legal requirements for prospectuses. This is the first time ClientEarth has targeted the UK regulator. 

In addition, a recent press release from ClientEarth shows it is separately questioning whether the accounting standards being applied by auditors are resulting in sufficiently transparent disclosure of climate-related matters in financial reporting and audit.

Mitigation of risk

Directors should assess the risk of climate-related litigation and regulatory enforcement as both public and investor support for a low-carbon/carbon-neutral economy and accompanying environmentally-sound business practices grows.  It may be the case that in the future Irish directors will increasingly be held to account for any failure to deliver a viable energy transition strategy that is consistent with the Paris Agreement.

In assessing these risks, Irish directors should consider: 

  • conducting relevant risk assessments at an early stage and evaluating the company's financial and operational exposure to climate change issues;
  • incorporating climate and other ESG risk assessments into strategic decision-making processes;
  • ensuring the data on which the company is basing its decisions, and the data it publishes in relation to its own activities in these areas, is robust;
  • developing viable strategies to achieve a low-carbon/carbon-neutral economy;
  • setting relevant targets and commitments that are achievable;
  • being transparent in any disclosures and prospectuses, including in particular in relation to forward-looking statements;
  • encouraging engagement with investors to achieve constructive dialogue on ESG issues;
  • keeping reputational risk management for ESG on the board agenda; and
  • checking D&O policies (as insurers start to identify and map out the litigation risks they are exposed to, assessing materiality amongst different groups of clients).

If you have any questions or would like to discuss the issues raised here further, please contact Julie Murphy O'Connor, Partner in the Commercial Litigation and Investigations Group, Susanne McMenamin, Partner in the Corporate M&A Group, or your usual Matheson contact.