Recent litigation brought in the UK against Shell directors has highlighted the increasing need for directors to consider the impacts of climate change when exercising director duties and making decisions for their companies.

If you are the director of a company in New Zealand, you are subject to a range of legal duties under companies law, including to:

  • act in good faith and in the best interests of the company and its shareholders, and
  • exercise due care, diligence and skill that a reasonable director would exercise in the same circumstances.

This article will explain the Shell litigation in detail, the broader global context, and the potential impact on New Zealand company directors. We discuss what you should be turning your mind to when exercising your directors duties.

What is the Shell Case About?

On February 9 2023, ClientEarth, a non-profit environmental law non-government organisation, brought a case against Shell. ClientEarth purchased a small shareholding in Shell which allowed it to bring a claim against company directors on behalf of the company for breach of their legal duties. Other institutional investors also supported this claim - together holding over 12 million shares in Shell - and brought a derivative action against Shell.

Derivative actions are a type of legal claim in New Zealand and can result in personal liability for directors.

ClientEarth claims that Shell's directors have breached their director duties under the UK's companies law by failing to properly prepare the company for an energy transition away from fossil fuels. They say this is a necessity as a result of climate change. Likewise, without this transition, the company's assets and value will be negatively impacted.

Additionally, they claim it is in the best interests of the company, its employees, and its shareholders (as well as the environment) for Shell to reduce its emissions more rapidly than it is currently planning. They are seeking an order from the UK High Court that Shell be required to strengthen its climate strategy.

Is there a Broader Context to This Case?

This is not the first time Shell has had a run-in with the law regarding the impact of its actions on the environment.

In 2021, a Dutch court ruled that Shell had a duty of care to reduce its carbon emissions, ordering that the company take proactive steps to cut its overall emissions by 45% by 2030. The case is under appeal, and Shell has yet to take the action directed by the existing court order (as pointed out in the new ClientEarth case).

Despite being under appeal, the case is significant as it was one of the first of its kind to find large corporate carbon emitters liable for their actions. The findings of the Dutch court and other decisions globally seem to demonstrate a shift in the willingness of courts to find links between corporate actions and the effects of climate change.

Other recent cases have found that governments in the relevant jurisdictions owe a public duty of care to their people and have imposed requirements to avoid harm caused by the future impacts of climate change.

What's Next?

Climate litigation is becoming increasingly common around the world, with potential litigants creatively exploring avenues for bringing claims to enact proactive climate action. In our view, it is only a matter of time before litigants start bringing cases of this nature in New Zealand. Consequently, directors must turn their minds to the issue of climate change as they make company decisions.

How Does the UK Case Impact NZ Directors?

The case of Smith v Fonterra Co-operative has been making its way through the New Zealand courts and is currently in front of the Supreme Court. In those proceedings, the Court of Appeal rejected the notion of a general duty of care regarding climate change, finding that there are strong policy reasons against imposing private law duties on carbon emitters, with the matter best dealt with at a legislative level.

It remains to be seen what the Supreme Court will decide. However, even if they take the same position as the Court of Appeal, the door will remain open for shareholder claims against directors in the climate context based on breaches of their statutory duties.

As argued in the Shell case, directors need to consider the realities of climate change and the impacts of their actions when making company decisions. In other words, suppose directors take a course of action they believe to be in the best interests of their company. However, the realities of climate change impacts can be shown to negate any of the perceived benefits for the company. As such, directors may be at risk of being in breach of their duties for not having appropriately considered and mitigated those impacts.

Even beyond the potential litigation risk is the associated reputational risk. Climate change is becoming an increasingly prominent issue in the public consciousness, with the public and investors alike putting more pressure on companies to be taking affirmative action with respect to the environment.

Key Takeaways

As a director of a New Zealand company, you should be turning your mind to the broader climate context when making company decisions. It is also critical to ensure compliance with your duties by identifying and managing climate-related risks in your industry.