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The Environment and Boardroom Accountability in the Age of ESG: Shell’s Directors Sued In The UK

Author: John Davies
3 min read
03 May 2023

Key Takeaways

  • It is possible for litigation to be brought in Australia on behalf of a company by its shareholders where a company’s environmental strategy is not consistent with the best interests of that company.
  • Where shareholders are unwilling to bring a derivative action claim or unable to obtain leave of the court, then ASIC is able to bring a claim against the company instead.
  • Companies should consider obtaining legal advice on their environmental strategies, policies, and claims to ensure that they fully understand any legal consequences.
  • If you own or manage a small business, particularly one which may have significant privacy risks, you should be on notice that you may be required to comply with the Privacy Act sooner than expected.

Earlier this year Client Earth announced that it had commenced a derivative action claim against Shell’s directors in the UK. This claim alleges that Shell should set a more ambitious emissions reduction strategy in line with the targets of the Paris Agreement and consistent with the decision handed down in a 2021 case (Milieudefensie v Royal Dutch Shell (Hague Decision) which required Shell to reduce its global net carbon emissions by 45% by 2030. Shell has said it will appeal that decision.

The argument set out by Client Earth is that Shell’s directors have breached their obligation under section 172 of the Companies Act 2006 (UK) to act in a way that they consider (in good faith) to be the most likely way to promote the success of the company. This section specifically requires directors to have regard to the long term consequences of any decisions.

The orders being sought would force Shell to adopt a stronger climate strategy more consistent with the Paris Agreement and Hague Decision, which Client Earth claims to be in Shell’s best interests.

Client Earth requires the permission of the courts prior to this claim proceeding further.

Can similar claims be brought in Australia?

The Australian equivalents to the UK Legislation are sections 180 and 181 of the Corporations Act 2001 (Cth), which requires directors of companies to:

  1. Exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of that company (s 180); and
  2. Exercise their duties in good faith and for a proper purpose (s 181).

Likewise to the UK, any Australian derivative action claims would require leave of the court.

Unlike the UK, Australian directors do not have a specific legislative obligation to consider the long term consequences to the company of their decisions. However, long term consequences may be considered and former High Court Justice Kenneth Hayne in the final report of the Banking Royal Commission said:

“The longer the period of reference, the more likely it is that the interests of shareholders, customers, employees and all associated with any corporation will be seen as converging on the corporation’s continued longterm financial advantage”

If shareholders are unwilling or unable to bring a derivative action claim, ASIC is capable of bringing these actions without first obtaining court approval.

What does this mean for the future?

With derivative action claims potentially looming on the horizon, ASIC commencing proceedings in the Federal Court over alleged greenwashing by Superfund Mercer, and the ACCC naming green washing as one of their compliance and enforcement priorities for the current financial year, it has never been more important for companies to consider how their environmental policies, strategies, and advertising campaigns can create legal risks.

Companies should ensure that they appropriately engage their legal advisors while establishing and updating environmental policies, strategies and advertising campaigns which are rooted in environmental claims to ensure that the risks are understood and manageable.

For advice regarding corporate and commercial legal questions, please contact John by email or 07 3220 1144.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.

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