Fiduciary duty claims against board members may be tested in court soon

Fiduciary duty and securities claims that have been brought to date clearly show the risks to companies, and their directors and officers, from failing to incorporate climate change into strategy, oversight, risk management and disclosure. It is important to note that the physical and transition risks that catalyse as legal risks transcend geographic boundaries, with the possibility to give rise to multiple legal actions across different jurisdictions.

A claim raising the fiduciary duty implications of climate risks on an asset level has already been brought. In 2018, a successful claim was brought against Polish power generation company Enea SA seeking the annulment of a board resolution consenting to the construction of the €1.2bn 1GW Ostrołęka C coal-fired power plant, on the basis that construction would harm the economic interests of the company by failing to consider the transition risks posed by climate change.³

The relevance of climate risk to fiduciary duty on a strategy-wide level is being tested. In February 2023, the environmental NGO ClientEarth, in its capacity as a shareholder of the company, brought a claim against the board of Shell plc. ClientEarth alleged that Shell's directors had breached their duties to promote the success of the company and to exercise reasonable care, skill and diligence in doing so, due to a failure to implement an adequate climate risk management strategy. ClientEarth elucidated a number of specific incidents of these duties when considering climate risk, including:

1. a duty to make judgments regarding climate risk that are based upon a reasonable consensus of scientific opinion;
2. a duty to accord appropriate weight to climate risk;
3. a duty to implement reasonable measures to mitigate the risks to the long-term financial profitability and resilience of Shell in the transition to a global energy system and economy aligned with the global temperature objective of 1.5°C under the Paris Agreement on Climate Change 2015;
4. a duty to adopt strategies which are reasonably likely to meet Shell’s targets to mitigate climate risk;
5. a duty to ensure that the strategies adopted to manage climate risk are reasonably in the control of both existing and future directors; and
6. a duty to ensure that Shell takes reasonable steps to comply with applicable legal obligations.

The High Court initially refused permission for this claim to be continued (although ClientEarth has since been granted leave to make its permission arguments again). In its judgment, the High Court held that the law does not contain more specific obligations on directors than the general duties set out in statute (i.e. the duties to act in the best interests of the company, and with due care, skill and diligence). In the Court’s view, the board was best placed to consider how to balance multiple competing risks and issues facing the company, and the courts should be slow to intervene. 

ClientEarth has been granted an oral hearing for its permission arguments to be heard by the court. Investors, corporate lawyers, the boards of high-emitting and financial companies, and other strategic litigants are watching developments closely.

Investors are also facing fiduciary claims

Investor fiduciaries have also faced challenges regarding their fiduciary duties. In Australia, the corporate trustee of A$50 billion AUM pension fund Retail Employees Superannuation Trust (REST) was sued for breach of its duty of care for failing to integrate climate change considerations into its investment strategy.⁴ The case was settled in November 2020 on favourable terms to the plaintiff. REST issued a press release recognizing climate change as a material financial risk, and undertook to be net-zero by 2050 and to ensure that its investment managers “take active steps to consider, measure, and manage financial risks posed by climate change and other relevant ESG risks.”⁵ 

A case with possible implications for both company and investor fiduciary duties was brought in October 2021. Beneficiaries of the U.K. University Superannuation Scheme (USS) pension fund filed a claim against the directors of the fund management company, claiming that by continuing to invest in fossil fuels, while acknowledging that climate change is a material financial risk to the returns of assets is a breach of fiduciary duties.⁶ This case was dismissed on procedural grounds.

There have also been movements against fiduciary duty incorporating climate risks for political reasons. In the U.S., an NGO and a number of individual members have brought a claim against the New York City Employees’ Retirement System and two other pension funds, alleging that the funds have breached their fiduciary duties by divesting from fossil fuel assets allegedly for political motivations.⁷ This follows a number of Republican Attorneys General writing to asset managers warning of possible litigation.⁸

Greenwashing claims are developing

Claims around greenwashing, which can lead to personal liability for directors, are also on the rise. In August 2021, shareholder activist group, the Australasian Centre for Corporate Responsibility (ACCR) sued Santos alleging misrepresentations under consumer protection and corporation laws. Claims by Santos include that their natural gas is “clean fuel” that provides “clean energy” and that it has a “credible and clear plan” towards achieving “net-zero” emissions by 2040.⁹ The case is ongoing. 

A claim has been brought against the Dutch airline KLM alleging that it will breach consumer law if it continues to advertise ‘sustainable’ aspects of its business, including the development of lower-emission aviation fuel and carbon offsetting, in light of its wider business strategy of increasing aviation travel.¹⁰

In the U.S., Shell plc may face regulatory action following a greenwashing complaint lodged by a US NGO Global Witness to the US SEC. The NGO alleges that by including gas as part of its “renewable and energy solutions”, Shell is misleading its investors as to the extent to which its expenditure is aligned with the net-zero transition.¹¹

Also in the U.S., a class action lawsuit has been filed against Delta Airlines. The complaint alleges that the airline’s advertisements that it is the “world’s first carbon neutral airline” are misleading.¹²

Greenwashing risks can increase the risks of a fiduciary claim. In the U.S., ExxonMobil and its officers have been sued for breach of fiduciary duty and securities fraud. The earliest of these claims, Ramirez v ExxonMobil, passed a key hurdle in 2018 when the case regarding the company’s liability and that of individual officers and directors was permitted to go forward.¹³ The court held that the plaintiffs’ allegations supported a strong inference that the defendants had actual awareness or knowledge that ExxonMobil had materially misrepresented the value of its assets (which the plaintiffs alleged the company and its individual officers Tillerson, Swiger, and Rosenthal knew would need to be written down as oil prices started to collapse in 2014, and as oil sands investments looked increasingly likely to become “stranded assets.”)¹⁴In addition, there is an ongoing claim from 2019 against Exxon Mobil’s directors alleging that they have breached their fiduciary duties by allowing misleading disclosures about stranded assets.¹⁵

Litigation against companies and governments can have significant impacts on business models

Litigation has also been brought which may significantly affect company’s business models. In May 2021, the District Court in The Hague ordered Royal Dutch Shell to cut its CO₂ emissions by 45% by the end of 2030, compared to 2019 levels.¹⁶ That decision is being appealed.¹⁷ In coming to this decision, the court considered the impacts of Shell’s actions on the ECHR rights of the claimants, based on a successful claim against the Dutch government in 2020.¹⁸ The claimant, Milieudefensie, has now informed 30 other multinational companies that it is willing to take them to court, using the same type of claim as used against Shell, if they do not produce transition plans.¹⁹

Companies may also face liability for climate damages litigation, whereby claimants seek damages as a result of the effects of climate change. 

The case of Luciano Lliuya v RWE AG²⁰was brought in November 2015 by a Peruvian farmer against Germany’s largest electricity producer and greenhouse gas emitter for harms arising from climate change, and how RWE’s actions, despite being in a different jurisdiction, contributed to the risk and threat of flooding from melting mountain glaciers near his town of Huraz. The case is ongoing. A similar claim has recently been brought by four Indonesian fisherman against Swiss cement company Holcim, seeking proportional damages for the cost of flood protection measures and a reduction in CO₂ emissions.²¹

With climate litigation increasing and the first claims being brought against directors an officers, governance mechanisms to mitigate the risks of liability ought therefore to be prioritized by forward-thinking boards.²² This Primer is being published in order to help guide thinking about those governance mechanisms.