Directors’ Duties And Accounting For Climate Change Risks

It is for the board of directors to decide whether to take into account climate change risks when exercising their decision-making duties, not for the court to require it, a ruling has confirmed.  The award-winning corporate lawyers at ParrisWhittaker have years of experience advising companies and shareholders in Jamaica and the surrounding region.

Directors’ duties

Directors owe several duties under companies law, ranging from the requirement to act in the best interests of shareholders to exercising due skill, care and diligence.

Directors’ duties also include the duty to promote the success of the company. Where a director breaches their statutory duties, they could risk a legal claim.

What happened in this case?

ClientEarth is an international environmental law charity which brought a claim against the directors of giant oil and gas company Shell. The charity holds just 27 shares in Shell.

It brought a derivative action claiming Shell could not reach its goal of net zero carbon emissions by 2050 under its existing strategy; therefore the directors were in breach of their duties to the shareholders in failing to manage climate change risks.

The judge set out 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. This is an ongoing duty continuing throughout the period of time for which directors hold office.

However, ClientEarth effectively sought to impose absolute duties on the directors which cut across their general duty to have regard to the many competing considerations as to how best to promote the company’s success. The court said the impact of its operations on the community and the environment was for the directors to weigh up in that context.

Further, their responses to the business risks for Shell associated with climate change, whether that’s the adoption of a strategy or its implementation, are part of the decision-making process by which the directors manage the business.

Bad faith

Shell believed that ClientEarth’s application was an attempt to publicise and advance its own agenda – which would be a clear misuse of the derivative claim procedure and not in good faith.

The Supreme Court agreed. The judge who handed down the ruling concluded that where the primary purpose of bringing the claim was an ulterior motive (ie advancing ClientEarth’s own policy agenda); and if it were not for that purpose the claim would never have been brought, it would not have been brought in good faith.

ClientEarth was using an exceptional procedure in the form of a derivative action, for a purpose other than that for which the legislation has made it available. The court was not satisfied the charity was acting in good faith.

The outcome is that ClientEarth was unable to proceed with its action.

What does this mean?

When exercising their decision-making duties, company directors often have many competing matters to take into account – but that is a matter for them and not for the court (or anyone else). So long as they are acting in good faith and for the success of the company as a whole, directors should be reassured they are on safe ground.

Any third party seeking to take action against a board of directors should act in good faith before launching legal proceedings, or risk having their claim thrown out.

For strategic legal advice and representation, contact the experienced company and commercial lawyers at ParrisWhittaker on +1.242.352.6112 or info@parriswhittaker.com

¹ClientEarth v Shell Plc & Ors (Re Prima Facie Case) [2023] EWHC 1137