News | October 5, 2023

PART 1 – Climate change update

Following our Spring and Summer updates, we report below on the latest environmental, social and governance (“ESG”) developments from recent months.

  1. Client Earth v Shell: The latest developments

[Key point: The judge rules that ClientEarth must pay Shell’s legal costs in a significant case that sought to hold corporate directors personally liable for environmental policies, setting a notable costs precedent in environmental litigation].

In the case of ClientEarth v Shell plc & Ors, the judge, Mr. Justice Trower, has ruled that the campaigning law charity, ClientEarth, must pay the costs incurred by Shell in their legal battle. ClientEarth had attempted to hold directors of Shell personally responsible for the company’s environmental policies. This case garnered significant attention because it was the first effort to make corporate directors personally liable under the Companies Act 2006 for alleged environmental shortcomings.

The judge rejected ClientEarth’s attempt to claim an exception from the standard “unsuccessful party pays” principle in civil litigation. Additionally, the judge found that ClientEarth’s grounds for appeal had no prospect of success.

One critical aspect of the case involved the costs associated with Shell’s defence, which were expected to be substantial. ClientEarth had argued that, according to Civil Procedure Rule PD 19A, costs should not normally be allowed if a company voluntarily submits or attends the prima facie stage of a derivative claim. However, the judge ruled that Shell had no choice but to respond to the allegations made against it, incurring substantial legal costs in the process.

Shell contended that the claim had garnered significant media attention, and ClientEarth had not engaged substantively with its responses before starting proceedings. Shell also alleged that the action was not pursued in good faith. 

The judge rejected ClientEarth’s argument that Civil Procedure Rule was designed to signal limited cost risks in derivative action cases involving corporate wrongdoing, stating that this case was exceptional due to the seriousness of the allegations against Shell.

Following this ruling, ClientEarth expressed disappointment and announced its intention to appeal to the Court of Appeal.

On the other hand, Shell welcomed the judge’s decision, asserting that the claim was “utterly misconceived” and that the costs decision highlighted the seriousness of the allegations, which the company had consistently refuted. 

The judge ruled that ClientEarth must pay Shell’s legal costs (which are reported as running into seven figures), emphasising the exceptional nature of the case due to its significant media attention and the seriousness of the allegations against Shell. ClientEarth intends to appeal the decision, although the judge has ruled such grounds of appeal have no prospect of success.

2. McGaughey v USS: High Court dismisses derivative actions

[Key theme -The Court of Appeal denies permission for derivative actions, making it more challenging for pension scheme beneficiaries to sue corporate trustees, reinforcing traditional approaches for redress].

In this case, two active members of the Universities Superannuation Scheme (“Pension Scheme”) sought permission to initiate a derivative action on behalf of the Trustee of USS, Universities Superannuation Scheme Limited (“USSL”), against USSL’s current and former directors. The members sought to sue the USSL directors for alleged breaches of duties through a derivative action. However, the Court of Appeal denied permission for the derivative action to proceed.

Derivative actions allow company members to bring a cause of action on behalf of the company against a third party (in this case a director) alleging the third party has harmed the company. Derivative actions are exceptions to the general rule that only the company as a separate legal personality can sue for wrongs done to it. The facts of the case did not fit the standard categories of derivative actions however, as the claimants were beneficiaries of a trust (the Pension scheme) for which USSL was the trustee, rather than shareholders of USSL seeking to sue on its behalf. The members also sought to rely on the “fraud on the minority” exception, where, if the wrong amounts to a fraud and the wrongdoers are in control of the company and benefit from the wrong, the aggrieved minority shareholders may be allowed to bring a minority shareholders’ action in the name of the company.

The court rejected the claimants’ arguments and upheld the traditional approach to derivative actions. The court ruled that the claimants did not have standing to bring the action because USSL and the Pension Scheme were separate entities, and the alleged harm to USSL did not directly affect all Pension Scheme members in the same way. Furthermore, the court did not expand the “fraud on the minority” exception as there was no evidence that the directors of USSL had improperly benefited.

The court considered four specific claims brought against the directors, including valuation, discrimination, fossil fuels, and costs claims. However, the court found that none of these claims met the necessary criteria for a derivative action.

this case  seems to block pension scheme beneficiaries from using derivative actions to sue directors of a corporate trustee. The more common methods of redress for pension beneficiaries will remain, such as directly suing the corporate trustee or bringing a complaint before the Pensions Ombudsman. 

3. Pensions Regulator (“TPR”) blog – How trustees can help make climate scenario analysis ‘decision-useful’

[Key themes – TPR’s blog addresses limitations in current climate scenario analysis, emphasizing concerns about data gaps, imperfect models, and the validity of outcomes. Trustees are urged to address these issues to ensure robust decision-making. However, easy to say but difficult to achieve]

In this blog, TPR discuss the challenges and limitations of climate scenario analysis used by pension scheme trustees for their annual climate reports, urging them to address these shortcomings and make their analyses more decision-useful in light of recent concerns about the integrity of climate scenarios. Here are the key points arising from TPR’s blog:

  • Recent research has highlighted limitations in current models and climate scenario analysis by questioning the validity of some outcomes and their alignment with established climate science.
  • While trustees have made progress in addressing climate change and sustainability issues due to reporting regulations, challenges remain (such as data gaps and imperfect models), these limitations need to be addressed.
  • The focus should be on informed decision-making and accelerated action on risk management, including transition planning and investment opportunities.
  • The window for action is closing fast, and future changes could be rapid, such as market re-pricing.
  • Trustees should aim to address a broader range of real-world risks and uncertainties in their models and scenario analysis.
  • Trustees should have an appropriate level of knowledge about climate issues, undergo regular training, and consider additional advisers or specialist input.
  • Trustees should review their scenario analysis regularly and update as necessary, explaining their decisions in their TCFD reports.
  • The DWP will carry out a review of the relevant pension regulations this year.

4. Strategic litigation – Driving environmental concerns up corporate and government agendas

The Law Society Gazette has reported on the increasing use of strategic litigation by climate change activists to raise environmental concerns on corporate and government agendas, even when such litigation fails.  It highlights the potential impact of recent legal cases and upcoming events in the field of climate litigation.

In a recent ruling by a State of Montana judge, a dozen young claimants successfully argued in the US Court that Montana’s continued development of fossil fuels violates the right to a ‘clean and healthy environment.’ This ruling is seen as a boost to the international trend of using litigation strategically to address environmental issues. Campaigners argue that even unsuccessful litigation helps bring attention to the issue and makes the risks associated with climate change more tangible to the public.

In September 2023 in Strasbourg where the Grand Chamber of the European Court of Human Rights heard a case brought by six young people from Portugal. The claimants are attempting to hold 33 national governments responsible for wildfires linked to climate change. The claimants are seeking a legally binding decision that would compel these governments to take more stringent measures against climate change.

These developments highlight the use of strategic climate litigation to draw attention to environmental issues and the potential impact, even when unsuccessful. 

WB concluding comments

It is clear from the decision in ClientEarth v Shell that environmental groups face an uphill struggle in attempts to hold corporate directors personally liable for environmental policies, whilst the decision in McGaughey v USS suggests it will be difficult in future to pursue derivative actions against corporate pension scheme trustees. However, TPR continues to encourage trustees to improve climate scenario analysis and decision making. 

Recent legal developments illustrate the challenges and opportunities in the ESG landscape. While it is difficult to hold corporate directors personally liable for environmental policies, trustees are encouraged to enhance climate scenario analysis. Strategic litigation continues to be a powerful tool in addressing environmental concerns, regardless of success, underscoring the evolving legal dynamics surrounding ESG issues. Scheme sponsors and trustees must stay compliant with evolving requirements to navigate this complex terrain and that is the point, the terrain is difficult as it is still evolving both legally and scientifically.