ESG Shareholder Activism: Watch This Space

Article by Niki Saberi Oskoui

A recent trend is shareholder activism influencing corporate agendas as shareholders have begun to give increased corporate attention to ESG (environmental, social and governance) criteria: with proven links to business resilience, competitive strength and financial performance. ESG also has the potential to resolve society’s most pressing problem: climate change. With COP27 having recently taken place in Sharm el-Sheikh, businesses’ approach to climate change will now be under increased scrutiny. 

What is shareholder activism? 

It can be understood as a spectrum of activities that a publicly traded company’s shareholders can undertake to promote change within the company policies and practices. The driving force behind shareholder activism is often increasing the value of, or extracting value from, the company, which, in the UK, aligns with the directors’ duties to promote the company’s success. 

What are recent shareholder trends? 

There have been various activist proceedings instituted to catalyse change in corporate policy. In light of this, Roger Cox, the lawyer who defeated Shell, predicts an ‘avalanche of climate cases’ and expects banks and financial regulators to be targeted next. It is, therefore, essential for law firms and their clients to be aware of the precedential cases in this sphere. 

Royal Dutch Shell 

In this historical case, a judge in the Hague ordered Royal Dutch Shell to cut its carbon emissions by 45 per cent by 2030 compared to 2019 levels – a much faster rate than the company had planned. The court also found that Shell owed an unwritten duty of care under the Dutch Civil Code to Dutch residents to take adequate action to mitigate its contributions to climate change. It held the duty of care to flow from international treaties such as the 2016 Paris Climate Agreement. Although the judgement is now on appeal, this case was a historic turning point for a potential wave of climate change litigation. Multinationals with high carbon footprints will now be forced to bring their policies in line with the Paris Agreement. 

Client Earth v Shell 

In March 2022, Client Earth issued a pre-action letter of claim against the board of directors at Shell for their failure to properly prepare the company for net zero, which is in breach of their duties to the company. Client Earth has reported that it is seeking a judgement to compel ‘Shell’s board to strengthen its climate transition plans in the best interests of the company’. 

Follow This v Big Oil 

In December 2022, activist group Big Oil filed shareholder resolutions calling on four energy companies (BP, Shell, ExxonMobil and Chevron) to set clear targets to reduce their Scope 3 emissions by 2030 to be consistent with the goals of the Paris Climate Accords to limit global warming. 

What is the law involved? 

Claims brought by shareholders are premised on an unprecedented application of the provisions to directors’ duties in the UK Companies Act 2006, specifically Section 172. This provision requires company directors to act in a manner that they would consider to ‘promote the success of the company for the benefit of its members as a whole’, having regard to factors including the impact of the company’s operations on the community and the environment. Matters include the likely consequences of any decision in the long term; employee’s interests, the company’s business relationships with its suppliers, customers and others, the impact of the company’s operations on the community and the environment and its reputation. 

Directors also have a separate duty to exercise reasonable care, skill and diligence in the discharge of their duties under Section 174 of the Companies Act. When a claim is brought for a breach of a director’s duty, the board of directors or a liquidator (on behalf of the company) will issue the claim. For example, in the case of Client Earth v Shell, Client Earth, a shareholder in Shell, will have to pursue a derivative action against the directors in their personal capacities. 

A derivative action is an exception to the rule. This allows a shareholder to bring a claim, on behalf of the company, against its directors. This requires the court to provide prior consent, and the court will not give permission if the board can show that a director acting in accordance with the duty to promote the success of the company would not seek to continue the claim (or if Shell’s climate strategy has been authorised or ratified by the company). 

What are the implications for law firms and their clients?

The rise in shareholder activism demonstrates the attention given to ESG issues and the appetite for related litigation, which is increasing in the UK, following a more active litigation landscape in the US and Europe. Following this, corporations and their directors in the UK are more exposed to claims being initiated against them by shareholders on the basis of perceived failings in their ESG strategy or on the basis of allegedly misleading “ESG statements” brought on the basis of either the Companies Act, or section 90 of the Financial Services Markets Act 2000. Law firms will have to help clients navigate a changing global environment and to provide solutions, insights and advisory services on the best practices in ESG integration across corporate strategy, disclosures and investor engagement. It is important for firms to advise companies to adapt to the ESG challenge and inform them of its significant benefits. Law firms will also be critical in helping businesses identify and manage their ESG risk. Aside from ensuring compliance with legal obligations, commercial pressures and reputational risk, changes to corporate behaviour may be needed for companies to be truly ESG compliant. Finally, as litigation of ESG issues increases, it will be interesting to see if the UK judiciary is willing to act as a watchdog on ESG issues. 

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