How A U.K. Case Could Impact Corporate Directors And ESG

In February 2023, ClientEarth, an environmental law charity, filed a lawsuit against the board of directors of Shell plc for failure of the directors to take significant action to mitigate climate change. Specifically, ClientEarth wants Shell to move away from fossil fuels, in alignment with the Paris Accords’ goal to be net zero by 2050. Their rationale is based on a relatively new legal theory, that corporate directors have a duty to prevent climate change. The business sector needs to follow this case closely, because, if it is successful, it will redefine how businesses operate and open the door to litigation around the world.

The concept is relatively simple, while a bit of a leap. First, consider the traditional view of the fiduciary duty of a director. A director of a company has a duty to maximize profits for the shareholders. That is a gross generalization, but it serves the purpose. Second, accept that climate change is an imminent threat to humanity. Not a concern or an inconvenience, but a pressing threat that, without immediate action, will be catastrophic. Such a threat, that companies will be unable to make a profit because of the impacts of climate change.

Therefore, for a corporate director to maximize long-term profits for their company, they must sacrifice short-term profits in favor of mitigating climate change. This is all part of the broader Environmental, Social, and Governance (ESG) debate.

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While ESG in some form has existed for decades, this legal theory didn’t really exist until 2019. In 2015, two organizations under the United Nations, the UN Environment Programme Finance Initiative (UNEP FI) and the Principles of Responsible Investment (PRI), released a report titled “Fiduciary Duty in the 21st Century”. This document asserted that ESG could be a considered as a factor by directors and fund managers, but only in certain jurisdictions.

In 2019, the organizations released an updated report which changed their tune. They shifted from the idea that ESG could be considered, to one that ESG must be considered, following the logic laid out above. This proposal usurped any needed regulatory changes, simply fitting environmental concerns into the current definitions of fiduciary duty in saying climate change is a long-term threat to profits. This is the first case to test that theory.

Of course, this case is in the High Court of England and Wales, not a court in the United States, but legal development doesn’t operate on an island. If this case is successful, there will be more. We may even see a similar U.S. case while this one works through the English legal process. If this theory becomes mainstream, it will circumvent recent actions by the Securities and Exchange Commission, the Department of Labor’s ERISA rule, Congress’ response, and pending state actions.

Short of regulations clearly stating that climate change cannot be a factor in profit calculations, or studies refuting the threat to profits by climate change, there is not a lot that can be done to stop this theory if it takes hold. Business as usual will no longer be business as usual. If ClientEarth can convince a court that an oil company shouldn’t produce oil, all business models will have to change.