Director Duties and Climate Change

Decisions earlier this year from the English courts in ClientEarth v Shell Plc et al., and the recent appeal decision from the Court of Appeal of England and Wales, shed light on climate change issues and how directors can fulfill their duties to the corporations they serve in the face of environmental risks and concerns. These decisions also highlight some constraints on shareholders who seek to bring a derivative action against directors for alleged failures to adequately address climate change, and the latitude that directors have to balance competing corporate interests provided they satisfy their fundamental duties to the corporation.

Overview of Director Duties and Derivative Actions

Directors in Canada owe statutory duties to the corporations they serve, including a fiduciary duty and a duty of care. The fiduciary duty is a standard of behaviour that directors must meet when they exercise their powers and discharge their duties. The duty of care sets an objective standard requiring directors to exercise care, diligence and skill. The Canada Business Corporations Act sets out those duties in subsections 122(1) and 122(1.1), and England has similar (but not identical) provisions in its Companies Act, 2006. The Supreme Court of Canada in its 2008 decision, BCE Inc. v. 1976 Debentureholders, held that directors of Canadian corporations owe their duties to the corporation and, in considering what is in the best interests of the corporation, may consider “the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment”. Canadian directors are explicitly permitted (but not necessarily obligated) to consider the environment when exercising their powers to act in the best interests of the corporation.

Where directors breach their duties to the corporation, it is generally the corporation itself that can seek redress. If the corporation does not bring such a claim, corporate statutes typically permit certain stakeholders (including shareholders) to ask the court to permit them to bring the claim in the name, and on behalf, of the corporation for the purpose of seeking the corporation’s relief against the directors. In Canada, such proceedings are called derivative actions.

Proposed Derivative Claim Against Shell

ClientEarth v. Shell Plc concerned an attempt by a UK environmental non-profit, ClientEarth (which held 27 shares of Shell), to bring a derivative claim (as derivative actions are called in England) against all of the directors of the oil and gas supermajor, Shell. ClientEarth alleged Shell’s directors breached their duties under English law in, among other things, considering and addressing Shell’s climate change risk management strategy.

ClientEarth argued that its small shareholding should permit it to bring a derivative claim in Shell’s name against the directors. It sought injunctions requiring the directors to, among other things, adopt policies that ClientEarth said would meet Shell’s own climate change risk management strategy. In particular, it argued that, when considering climate risk for a company like Shell, the directors owed six “necessary incidents” of the statutory duties, including a duty to make judgments on climate risk based on reasonable scientific consensus. According to ClientEarth, the Shell directors breached these duties when they, among other things, failed to set appropriate emission targets for Shell to meet its goal of net zero by 2050.

Decision of the English Court

The English first instance court twice refused to grant ClientEarth permission to bring the derivative claim. The English court accepted that the Shell directors had a duty to consider climate risk under the general duties espoused by the Companies Act, 2006. However, it rejected the notion of the six specific “incidental” duties on the basis they were too vague and that imposing such specific obligations on directors “is inconsistent with the well-established principle that it is for directors themselves to determine (acting in good faith) how best to promote the success of a company for the benefit of its members as a whole.” The English court held that management of climate risk, while important, does not have an “overriding status”. Moreover, the directors’ need to have regard to a range of competing considerations meant that a court is “ill-equipped to intervene with its own assessment of how best to proceed save in a clear case.”

In determining that ClientEarth had not demonstrated a prima facie case that the Shell directors had breached their duties in how they managed Shell’s climate change risks, the English court considered whether the directors’ decisions fell outside the range of what was reasonable in the circumstances. It highlighted several reasons including:

1. the lack of a universally accepted methodology of achieving targeted emissions reductions which made it difficult to assess whether the directors’ actions were unreasonable;
2. the clear evidence that the directors, through their implementation of Shell’s climate risk strategy, had indeed contemplated climate risk;
3. the nature of the directors’ decision-making which must balance factors other than climate change alone; and
4. the lack of reliable expert evidence regarding the assertions of a breach of duty.

The English court also considered the practicality of ordering the relief sought, stating that the request for a mandatory injunction required constant supervision and was too imprecise to be suitable for enforcement.

Finally, the English court considered that ClientEarth was not acting in good faith in bringing the claim. Despite its honest belief that the derivative claim was in the best interest of Shell, given ClientEarth’s de minimis shareholding and its interests in environmental causes, the dominant purpose of its claim was advancing ClientEarth’s own agenda.

Court of Appeal Dismissed ClientEarth’s Appeal

The ruling of the English court was subsequently upheld in a brief appellate decision. In dismissing ClientEarth’s appeal, the Court of Appeal of England and Wales sided with the trial judge’s assessment on all grounds, including the difficulty in granting the relief sought by ClientEarth and the deference that must be awarded to directors in balancing the factors faced by a business as complex as Shell’s.

Considerations for Canadian Corporations and Directors

These decisions in ClientEarth v. Shell Plc, while not binding in Canada, are important illustrations of the deference that courts show to directors’ decisions that are taken in good faith, with an informed understanding of the relevant considerations and within a range of reasonable decisions available to the directors. While the environment more generally, and climate change in particular, are issues that directors may be required to consider to fulfil their fiduciary duties, such issues do not override the general duties that are owed to the corporation as a whole or necessarily outweigh other important corporate risks and objectives. The decisions are further examples of the limits of what courts are willing to do when addressing complex issues such as climate risks.

For further information concerning director duties in respect of environmental and climate change issues, please contact any member of our Dispute Resolution or Corporate/Commercial Groups.