As understanding of the impact that Environmental Social Governance (ESG) risk can have on organisations has accelerated, the topic has steadily risen up the agenda of companies operating across a range of industries.
It’s a risk being fuelled by regulatory changes and litigation alike with Grantham Institute’s ‘2021 Global Trends in Climate Change Litigation Policy’ report revealing that the number of climate change-related cases had more than doubled since 2015. Where between 1986 and 2014, just over 800 cases were filed, a further 1,000 have since been brought before the courts.
In the wake of this advanced activity, and particularly since news broke of the pre-claim action initiated by the environmental law charity ClientEarth and shareholders of Shell, London lawyers have warned of an increasing number of investors suing their companies for failing to minimise the financial impact of climate-related risks.
Exploring what this surge in climate activism means for the London market and whether the number of investors seeking legal advice/action from companies is likely to increase going forward, Alexandra Nurse (pictured), a member of London FOIL and partner at Kennedys, shared her insights into what’s happening across the industry. The pre-action claim against Shell’s board follows a decision handed down in the Netherlands, she said, where the District Court of the Hague found that Shell must reduce its carbon dioxide emissions by 45% by 2030.
“This claim was brought by seven environmental associations and NGOs acting as co-claimants (Millieudefensire v Royal Dutch Shell (2021)),” she said. “ClientEarth has already brought a successful shareholder action in Poland against energy company Enea, but this is the first such action in the UK.”
However, Nurse highlighted that another derivative action brought in the UK which paved the way for the ClientEarth v Shell case was McGaughey & Anor v Universities Superannuation Scheme Ltd & Anor [2022] (the “McGaughey v USS”). Lecturers and members of the Universities Superannuation Scheme filed a legal action against the directors of the Universities Superannuation Scheme (“USS”) for breaches of their directors’ duties, she said, and sought the court’s permission to pursue those claims by way of derivative action.
The directors were accused of multiple failings relating to a controversial 2020 valuation, she said, and of inaction around climate change commitments including an alleged failure to create a credible plan for the divestment from fossil fuel investments, which the claimants alleged to have prejudiced the financial success of the company.
“At an inter-parties hearing,” Nurse said, “the presiding judge commented that the claimants needed to prove the USS suffered a loss mirroring that suffered by the members of the USS. Further, that this was because of a deliberate or dishonest breach of duty, or otherwise as a result of USS directors’ improperly benefiting themselves at the scheme’s expense.
“The judge found no evidence the USS had suffered such a loss. Importantly, the judge agreed that beneficiaries of a pension fund corporation do have the right to sue directors for breach of duty. However, in this case, there was insufficient evidence to support the claimants’ claims.”
Nurse stated that while McGaughey v USS opened the door, in principle, to derivative actions on the basis of perceived breaches of directors’ duties pertaining to policies put in place to reduce risk exposure to climate change (or the lack thereof), a shareholder or investor is yet to succeed in meeting the evidentiary threshold required to demonstrate that directors have, in fact, breached their duties. Nevertheless, she said, these cases demonstrate that the attention given to ESG issues and the appetite for related litigation is increasing.
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In terms of what this surge in climate activism means for the London insurance market, she noted that the ClientEarth v Shell case illustrates the escalating risk that actions may be brought against insureds around their climate change commitments and plans. While this is a novel suit, she said, activist shareholder claims are becoming increasingly common and will not be limited to Shell.
“While such litigation is likely to be primarily focussed on energy companies,” she added, “any company that emits greenhouse gases could be the subject of a claim by activist investors – such as transportation companies, agricultural businesses or businesses that manufacture products that emit greenhouse gases. Even financial institutions are coming under pressure. For example, Barclays came under shareholder pressure to reduce its investments in fossil fuel companies.”
In addition to the potential exposure to claims against policies for defence costs/potential court judgements, Nurse said, the insurance market should be alive to potential public pressure around the insurance of certain entities that are perceived to be neglecting their climate change commitments. Such pressure may be alleviated if insurers can demonstrate that they are applying a higher level of scrutiny to the climate change strategies of insured companies.
There are steps that insurers can take to protect themselves against climate activism-related claims at the underwriting stage, she said. For example, when approached to underwrite a new risk, insurers could ask specific questions about the policies/initiatives that an insured may have put in place to address climate change risks.
As to whether the success of such climate activism-related claims could have implications for investors considering actions across other non-climate-related aspects of ESG, Nurse emphasised that all aspects of ESG are receiving a high level of attention, and this is not expected to decrease.
“Insureds are subject to significant regulatory scrutiny in respect of not only how they are complying with their climate change responsibilities,” she said, “but how they are working to comply with diversity obligations, and how they are running their businesses with reference to protection of consumers and staff.”
