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UK company directors may be liable for climate impacts, say lawyers

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Friday, March 15, 2024

Company directors in the UK could be held personally liable for failing to properly account for nature and climate-related risks, according to a group of lawyers.A legal opinion published this week found that board directors had duties to consider how their business affected and depended on nature. These included climate-related risks as well as wider risks to biodiversity, soils and water.The analysis said directors of UK firms faced serious personal consequences for breaching these duties, potentially including claims for damages or compensation by their shareholders. Even in cases where it was difficult to work out exactly how much money the company had lost, directors could lose their jobs or have their remuneration or exit packages cut.Few lawsuits have so far been brought personally against company directors on environmental challenges, and none have yet succeeded.Legal experts commissioned by the climate advisory firm Pollination Group and the Commonwealth Climate and Law Initiative said failure to assess financial risks from a company’s unaddressed nature-related impacts and dependencies could expose directors to increased shareholder scrutiny under the Companies Act.Legal opinions commissioned for other jurisdictions, including Australia, New Zealand and the Philippines, have come to similar conclusions.Nature-related risks are clear for some industries. The food production sector, for example, is heavily dependent on healthy soil and pollinators to produce crops and livestock.However, most companies depend on and affect nature in some physical way. Banks that hold mortgages in homes at risk of coastal flooding, for example, risk losing a key asset.Companies also face transition risks, such as shifting consumer preferences and new legal requirements seeking to reduce nature loss. The 2021 Environment Act established a ban on the use of commodities produced on illegally deforested land abroad, although this has not yet come into force. And the EU’s deforestation regulations require UK companies selling specific products into the bloc to ensure they are deforestation-free.The latest legal opinion, authored by a group specialising in corporate, financial and environmental law, concluded that directors who had properly identified and considered such risks would be better protected from potential claims.Martijn Wilder, the chief executive of Pollination Law, said the document “reiterates the need for boards to put relevant nature-related risks on their agendas and be able to demonstrate that they have given those risks proper weight and consideration in decision-making”.The first case seeking to hold company directors personally liable for failing to properly prepare for the energy transition was brought by ClientEarth against the board of Shell last year. The environmental law charity argued as a minority shareholder that Shell’s directors had breached their legal duties under the UK Companies Act.The case was dismissed and ClientEarth was subsequently ordered to pay all Shell’s legal costs. In February, the retired supreme court judge Lord Carnwath, who is now a visiting professor in practice at the London School of Economics, commented that this was a “missed opportunity” to examine directors’ legal duties.“I find it surprising that the judge held that ClientEarth had failed to disclose even a prima facie case, and unfortunate that the application for permission to appeal was dismissed by a single lord justice without any form of hearing,” he said.ClientEarth is appealing against the decision.A similar case brought by trustees of the Universities Superannuation Scheme arguing that their pension fund breached their duties by continuing to invest in fossil fuels was dismissed by a UK court last year.While legal action against directors is expected to continue, support for them is also growing. Last year, the Law Society published guidance for solicitors on advising company boards about climate risk. A framework has also been developed to help businesses assess their impacts on nature loss. A growing number of companies are adopting recommendations from the Taskforce on Nature-related Financial Disclosures for greater transparency on their nature-related risks.

Legal experts say directors could face personal claims for failing to consider how businesses affect natureCompany directors in the UK could be held personally liable for failing to properly account for nature and climate-related risks, according to a group of lawyers.A legal opinion published this week found that board directors had duties to consider how their business affected and depended on nature. These included climate-related risks as well as wider risks to biodiversity, soils and water. Continue reading...

Company directors in the UK could be held personally liable for failing to properly account for nature and climate-related risks, according to a group of lawyers.

A legal opinion published this week found that board directors had duties to consider how their business affected and depended on nature. These included climate-related risks as well as wider risks to biodiversity, soils and water.

The analysis said directors of UK firms faced serious personal consequences for breaching these duties, potentially including claims for damages or compensation by their shareholders. Even in cases where it was difficult to work out exactly how much money the company had lost, directors could lose their jobs or have their remuneration or exit packages cut.

Few lawsuits have so far been brought personally against company directors on environmental challenges, and none have yet succeeded.

Legal experts commissioned by the climate advisory firm Pollination Group and the Commonwealth Climate and Law Initiative said failure to assess financial risks from a company’s unaddressed nature-related impacts and dependencies could expose directors to increased shareholder scrutiny under the Companies Act.

Legal opinions commissioned for other jurisdictions, including Australia, New Zealand and the Philippines, have come to similar conclusions.

Nature-related risks are clear for some industries. The food production sector, for example, is heavily dependent on healthy soil and pollinators to produce crops and livestock.

However, most companies depend on and affect nature in some physical way. Banks that hold mortgages in homes at risk of coastal flooding, for example, risk losing a key asset.

Companies also face transition risks, such as shifting consumer preferences and new legal requirements seeking to reduce nature loss. The 2021 Environment Act established a ban on the use of commodities produced on illegally deforested land abroad, although this has not yet come into force. And the EU’s deforestation regulations require UK companies selling specific products into the bloc to ensure they are deforestation-free.

The latest legal opinion, authored by a group specialising in corporate, financial and environmental law, concluded that directors who had properly identified and considered such risks would be better protected from potential claims.

Martijn Wilder, the chief executive of Pollination Law, said the document “reiterates the need for boards to put relevant nature-related risks on their agendas and be able to demonstrate that they have given those risks proper weight and consideration in decision-making”.

The first case seeking to hold company directors personally liable for failing to properly prepare for the energy transition was brought by ClientEarth against the board of Shell last year. The environmental law charity argued as a minority shareholder that Shell’s directors had breached their legal duties under the UK Companies Act.

The case was dismissed and ClientEarth was subsequently ordered to pay all Shell’s legal costs. In February, the retired supreme court judge Lord Carnwath, who is now a visiting professor in practice at the London School of Economics, commented that this was a “missed opportunity” to examine directors’ legal duties.

“I find it surprising that the judge held that ClientEarth had failed to disclose even a prima facie case, and unfortunate that the application for permission to appeal was dismissed by a single lord justice without any form of hearing,” he said.

ClientEarth is appealing against the decision.

A similar case brought by trustees of the Universities Superannuation Scheme arguing that their pension fund breached their duties by continuing to invest in fossil fuels was dismissed by a UK court last year.

While legal action against directors is expected to continue, support for them is also growing. Last year, the Law Society published guidance for solicitors on advising company boards about climate risk. A framework has also been developed to help businesses assess their impacts on nature loss. A growing number of companies are adopting recommendations from the Taskforce on Nature-related Financial Disclosures for greater transparency on their nature-related risks.

Read the full story here.

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UK company directors may be liable for climate impacts, say lawyers

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UK company directors may be liable for climate impacts, say lawyers

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Join us to forge
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