Introduction: ClientEarth V Board Of Directors Of Shell 
On 9th February 2023, a lawsuit (“the said Suit”) was filed by the Shell’s Shareholders against Shell PLC (“the Company”) and its Board of Directors (“the Directors”) at the London High Court.
News of the said Suit had stunned the Climate Change community and overall the Business industry, especially the Big Oil industry, as this is the first time in the United Kingdom that a company’s Board of Directors are being personally sued for its failure to properly prepare the Company for the energy transition.
The said Suit is brought by an environmental law firm, named “ClientEarth”, they claimed that the Company and the Directors are legally required to manage the risks to the Company, which includes successfully mitigating the foreseeable climate change.
It was alleged that by failing to approve an energy transition strategy that aligns with the Paris Agreement 2015 to slow down global warming, the 11 Directors of the Company had breached their legal duties under ss 172 and 174 of the Companies Act 2006.
At the same time, it was alleged that the Company had failed to deliver the climate goal within reach, as they have continued to use fossil fuels for production, despite claiming that the Company is strategising to stay in competition within the energy market for cleaner and cheaper resources.
The Said Suit Follows the Decision of a Landmark Case
To trace back, we need to take a look at the landmark case of Milieudefensie et al. v Royal Dutch Shell plc. (“RDS”) , where an environmental group, named “Milieudefensie/Friends of the Earth Netherlands” along with Non-Profit Organisations and more than 17,000 citizens (“the Plaintiffs”) filed a suit against RDS at the Hague District Court in the Netherlands. They argued that RDS has an unwritten duty of care under the Dutch law and RDS’s inadequate actions on climate change had unlawfully endangered the life of the Dutch citizens.
In May 2021, the Dutch Court ruled in favour of the Plaintiffs and ordered RDS to reduce its carbon dioxide (“CO2”) emissions through its corporate policy (“the Court Order”). This is indeed a turning point as it was the first time that a private company was successfully sued under private law, and it shows how the target for Climate-related litigations has now slowly shifted from governments to private companies as well.
However, it was later found that no real action was actually taken to comply with the Court Order. A letter was subsequently issued by the Plaintiffs, urging RDS to implement the verdict and warning the risks of personal liability risks as a result of failure to act. As of now, RDS has filed for an appeal but it is still required to comply with the Court Order to reduce its CO2 emission level.
Directors’ Duties vs Climate Change: How Does It Work?
As of now, there are mainly three ways to encourage the Directors to take Climate Change into consideration when they are making financial decisions for their companies.
Regulators create regulations and guidelines to impose obligations on the Directors to make climate-related disclosures such as reporting on financially-material climate risks, risks management and/or strategies on environmental sustainability. There are countries which have begun to push for the incorporation of mandatory climate-related disclosures that are aligned with the recommendations by the Taskforce on Climate-related Financial Disclosures (“TCFD”) into their regulatory system.
Our neighbouring country, Singapore, has followed the TCFD recommendations and made it mandatory for certain listed financial and non-financial firms to provide climate-related disclosures on a “comply or explain basis”, as provided under the Listing Rules 711A & 711B and Sustainability Reporting Guide.
Laws and regulations that offer green tax, tax allowance subsidies, tax exemptions, incentives and/or impose fines on acts of pollution to encourage the company to incorporate environmentalism into their corporate policy and further push investments that mitigate environmental impacts. This will then directly trigger the Directors’ duties to assess the effect of Climate Change as the finances of the company and the interests of the shareholders may be impacted.
In the United States, President Joe Biden has introduced the Inflation Reduction Act 2022, which is known to be the largest climate bill passed in American history that aims to achieve a net-zero carbon emission economy by the year 2050. The act imposes tax on emission of any greenhouse gas and, at the same time, provides corporations with billion dollars-worth tax credits and incentives to tackle climate change and drive investments in renewable industries.
A Director of a company owes a duty under the law to ensure the wellbeing and success of the company. This is called fiduciary duty. This way, the Directors will then be mandated to take into account environmental risks and matters when exercising their managerial powers in promoting the success of the company. However, it should be stressed that not all of the jurisdictions have laws which expressly provide that the Director has a duty to consider the environmental risks and impact from the company’s operation. Even if the Directors do consider the environmental matters while exercising their power, it is possible that this can go both ways, as Directors also have the duty to consider other factors that affect the company.
- 1st Outcome: In the situation where a company’s financial interests will be severely affected from Climate Change, the Directors will have the fiduciary duty to take initiatives to incorporate environmentalism into their policy to prevent future losses.
- 2nd Outcome: Considering that the Directors also have the duty to consider other factors, such as profit maximisation. Hence, it is very much possible that Directors may decide that the impacts of other factors are far more crucial than environmental matters.
Directors’ Duties vs Climate Change in Malaysia
Malaysia, as a common law jurisdiction, operates under the common law legal system. Thus, the Directors’ duties are articulated in:
(1) the statutes, where the statutory duties and principles of directors are properly set; and
(2) the case laws, where duties are pronounced in cases decided by the court in Malaysia.
In general, Directors Duties can be found under Section 213 of the Companies Act 2016 (“the CA 2016”), where:
- Director of a company shall, at all times, exercise his powers for a proper purpose and in good faith in the best interest of the company; and
- Director of a company has a duty to exercise reasonable care, skill and diligence with, (a) knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and (b) any additional knowledge, skill and experience which the director in fact has.
From the above, it is apparent that, unlike the United Kingdom’s Companies Act 2006, the Directors’ duties to take into account impact of company’s operation on the environment are not expressly provided under the CA 2016. At the same time, to date, there is also no specific law in Malaysia mandating the reduction of greenhouse gas emissions or Climate Change.
Be that as it may, with the growing and strong evidence showing the link between Climate Crisis and the foreseeable financial risks posed to the companies, the scope and content of the Directors’ Duties in Malaysia are expected to evolve to a higher standard through rapid developments in common law and regulations from the local authorities.
As of now, the said suit is still pending the High Court’s leave (or permission) whether the claim may proceed to be heard. If the High Court allows the suit to move forward, this may expand the duty of care of the Directors to cover considerations on climate-related risks and sustainability strategies. Directors will be obligated to take Climate Change into consideration, as failure on such duty, will unfold its liability under the law.
At the same time, should the claim be brought in by the High Court, it may be accepted in Malaysia, as decisions from other common law jurisdictions are persuasive authority and can be and followed through the legal principle of stare decisis.
In summary, the said suit shows how the investors and stakeholders are becoming increasingly concerned and vocal on climate-related issues, as most of them are now aware of how Climate Change may pose genuine threats and risks towards their investments.
Regardless of the outcome of the said suit, the said suit is challenging and testing the relevance of climate risks to the Directors’ fiduciary duty in the Climate litigation sphere and, it had undoubtedly opened up a gateway for Climate-concerned investors and stakeholders to press the matter of Climate Change and the potential personal liability against the Company’s Board of Directors.
One wonders with the advent of Environmental Social & Governance (ESG) and Sustainable Development Growth (SDG), whether the claim by ClientEarth will eventually turn both ESG and SDG into a yardstick that ought to be legally considered by a director in every step of its decision making.