Examining the Impact of Climate Change on Director’s Duties

We have seen some examples of legislation calling for a higher level of responsibility in relation to actions affecting climate change, such as The Paris Agreement, which was signed during the United Nations Framework Convention on Climate Change on 12 December 2015. It is an international treaty that seeks to keep global temperature rise well below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C. The predecessor to the Paris Agreement was The Kyoto Protocol, which was adopted in 1997 and defined emission targets, however, it did not halt global warming and greenhouse emissions continued to rise. Unlike The Kyoto Protocol, the Paris Agreement is legally binding for all signatories. Each country that has signed it needs to plan and report the efforts and contributions they are making to lessen global warming.

According to the Paris Agreement, Ireland is to reduce greenhouse gas emissions by 40% minimum by 2030, when compared with levels in 1990; reduce emissions by 20% minimum by 2020 (when compared to 2005 levels); ensure that 16% of the energy used across all sectors came from renewable resources; and that 10% of the energy used in transport is renewable. If Ireland fails to meet these targets, it will suffer financial repercussions. To achieve this, it is likely that legislation will be enacted in Ireland to impose obligations on industries and, in turn, on companies and their directors.

In other parts of the world, in an attempt to reach the set-out targets, environmentalist groups have brought cases against companies and have sought to hold directors personally liable for their lack of co-operation with the agreement. For a director to be held personally liable there must first be a duty or obligation on them to do/ not to do something and they must then breach that obligation.

In the English case, ClientEarth v Board of Shell, ClientEarth, who are a minority shareholder of Shell, claimed that due to improper management of material and foreseeable risks posed to the company by climate change, the directors ought to be held personally liable. The court refused to grant permission to continue the claim and dismissed it on two occasions with the Court stating that the directors themselves are to determine how best to promote the success of a company. Whilst ClientEarth was successful in establishing a prima facie case that Shell faces material and foreseeable risks as a result of climate change, which have or could have material effect on it, it did not make out a prima facie case that Shell’s board was mismanaging that risk. The main reasoning for this was due to the fact that management of a business the size of Shell requires directors to take into account a range of competing considerations with which the court is ill-equipped to interfere. Another key point highlighted in the judgment notes that there is no universally accepted methodology as to how Shell might be able to achieve the targeted emission reduction in its energy transition strategy.

It was alleged in the case that there was a breach of the duty to promote the success of the company as set out in Section 172 Companies Act 2006 (UK). In Ireland, there is no direct equivalent to S.172 under the Companies Act 2014, however under EU proposal for a corporate sustainability due diligence directive, directors would be required to consider human rights, climate change and the environment in their decision making.

Currently the most relevant legislation regarding this matter is S.228(1) of the Companies Act 2014 which states that a director of a company shall act in good faith in what the director considers to be the interests of the company, which might not be in the best interest of the climate. With its broad meaning and a lack of precedent, it would be difficult to establish a prima facie case that due to the actions or omissions of a company’s directors, the climate change targets have not been taken into consideration and therefore showing that the director was not acting in good faith.

Whilst there has been no Irish case-law holding directors liable for failing to consider climate matters, climate litigation has been successfully brought against the Irish government over failure to comply with climate legislation. It is inevitable that the government will impose obligations on industries, and companies working within those industries, to reduce emissions. The only questions are when and what those obligations will require and what penalties can be imposed for failure to comply.

For further information please contact Gavin Simons (Partner) or your usual AMOSS contact.