Climate litigation – a growing risk for directors
A legal claim against the board of the oil giant Shell is the ‘tip of an iceberg’ that could require a nimble change of direction if company directors are to navigate their way through some potentially choppy waters.
It is the first case seeking to hold corporate directors personally liable for failing to properly prepare their company for the transition to net zero emissions.
Background
ClientEarth, the environmental legal activist group, which has a token shareholding in Shell, argues that the oil major’s 11 directors have failed to adopt and implement a climate strategy that truly aligns with the Paris Agreement goals.
Backed by a group of large pension funds and institutional investors, the activist claims the directors are breaching duties under sections 172 and 174 of the UK Companies Act, which legally requires them to act in a way that promotes the company’s success, and to exercise reasonable care, skill and diligence.
The burden of proof is high and requires ClientEarth to establish that directors were reckless and intended to deceive.
A panel of experts at a recent IoD Centre for Corporate Governance and Chapter Zero webinar – Climate litigation: an emerging risk for directors – agreed that the action faces significant challenges when it comes to the High Court in London.
Implications
Alex Cooper, lawyer at Commonwealth Climate and Law Initiative, with a focus on corporate/finance and climate change, believes the claim has a two-pronged approach.
The Milieudefensie case was brought against Shell by the Dutch branch of Friends of the Earth and a group of other NGO’s at the district court in The Hague.
In May 2021, the court ordered Shell to reduce its global carbon emissions from its 2019 levels by 45% by 2030, relating not only to the emissions from its operations, but also those from the products it sells.
While the risks of climate litigation to companies are clear, the volume of cases is also growing rapidly. Globally, the cumulative number of climate related litigation cases has more than doubled since 2015, bringing the total number to more than 2000. Around one quarter of these were filed between 2020 and 2022. See the London School of Economics and Political Science paper here.
SME risks
SMEs that think this battle between ‘green’ activists and multi-billion pound conglomerates has nothing to do with them should think again.
Large companies now routinely demand their supply chains, comprising mainly SMEs, explain in some detail what they are doing to decarbonise, in order to comply with far-reaching Scope 3 emissions rules.
Scope 1, 2 and 3 is a way of categorising the different kinds of carbon emissions a company creates in its own operations, and in its wider value chain.
They first appeared in the Green House Gas Protocol of 2001 and today, Scopes are the basis for mandatory GHG reporting in the UK and are also required under the UK listing rules for public companies.
Scope 1 covers the emissions that a company makes directly; Scope 2 are the emissions it makes indirectly, such as the energy it buys for heating and cooling buildings and is produced on its behalf; Scope 3 includes the emissions that the organisation is indirectly responsible for, up and down its value chain, including the products and services it buys from smaller suppliers.
Palmucci noted that Scope 3 emissions represent 97% of the total emissions of the consultancy Capgemini – the largest contributor being ‘purchased goods and services’, or suppliers.
In its 2022 annual report, Capgemini outlined a plan for tackling ‘supply chain emissions’ that other company directors might find instructive.
These measures include setting a 55% reduction target for 2030 (versus 2019 baseline), a letter to all suppliers from the chief executive explaining the net-zero agenda, organising supplier days, roundtables and workshops on collecting emissions information.
Palmucci said banks were also getting more involved by offering financial incentives to companies to tackle their Scope 3 responsibilities. For example, ING has launched its Sustainable Supply Chain Finance solution.
The product allows ING to offer better discount rates for supply chain finance to suppliers with better sustainability scores.
What if SMEs want to comply with the increasing focus on de-carbonisation but don’t know how to start?
Mitigation for directors
When it comes to addressing climate litigation threats, directors should adhere to best practice principles in order to mitigate any risks – consider what the risks are, make a plan for them and document it at the next strategy review.
Appointing a chief sustainability officer or establishing a sustainability committee could also help to defuse any ticking legal timebombs.
About the author
Dr. Roger Barker is Director of Policy and Governance at the Institute of Directors, and a member of the Management Board. Dr. Barker is the author of numerous books and articles on corporate governance and board effectiveness, including the recent volume: ‘The Law and Governance of Decentralised Business Models: Between Hierarchies and Markets’ (Routledge, 2020). He is a former member of the European Economic and Social Committee and the founder of a successful corporate governance advisory company. A former investment banker, Dr. Barker spent almost 15 years in a variety of equity research and senior management roles at UBS and Bank Vontobel, both in the UK and Switzerland. He has a doctorate from Oxford University and taught politics at Merton College, Oxford (2005-2008).
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