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

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 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”.

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 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) [2019] UKSC 20 (“Vedanta”) and Okpabi & Ors v Royal Dutch Shell plc and Shell Petroleum Development Company of Nigeria Ltd [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.