The first quarter of 2023 has already seen a frenzy of activity in the ESG and climate risk environment, with the pace of evolution looking set to continue. In this edition, we highlight just a few headline developments in the contentious space, including:

• ClientEarth's groundbreaking suit in the English High Court against the Board of Directors of Shell;
• a recent Court of Appeal decision concerning the legality of UK Export Finance's decision to fund an LNG project in Mozambique;
• a judicial review of the FCA over its approval of the prospectus of Ithaca Energy;
• a lawsuit against Danone for breach of its Duty of Vigilance under French law; and
• the UK Competition and Markets Authority's new agenda to clamp down on greenwashing in the fast-moving consumer goods sector.

ClientEarth v. Board of Directors of Shell

In February 2023, ClientEarth formally launched its High Court claim against the directors of Shell, alleging their failure to adopt an energy transition strategy that complies with the Paris Agreement breaches their Companies Act duties to promote the success of the company and to act with reasonable care, skill and diligence. The claim is a derivative action brought in ClientEarth's capacity as a shareholder of Shell, and it is the first claim in the UK brought by a shareholder against a company based on a failure to adopt an adequate plan to move away from fossil fuels.

ClientEarth claims in particular that Shell's interim emissions targets do not align with its aim to become net zero by 2050 and that the targets fall short of the ruling by a Dutch court in the Milieudefensie case, which ordered that Shell must reduce its overall emissions by 45% by 2030, a decision which is currently being appealed (see our coverage of this decision here).

ClientEarth's central argument is novel. Rather than focusing on environmental or social responsibility, the thrust of its claim is Shell's directors' responsibilities to execute their legal duties properly in the interests of the company's long-term "commercial viability". In its latest press release, ClientEarth argues: 

"[e]nsuring the company stays competitive in the energy markets of the future, as countries and customers worldwide choose cheaper, cleaner energy, means Shell needs to move away from fossil fuels towards an alternative business model … The future consequences of Shell's flawed climate plans could cause the company's value to plummet, costing jobs and running the risk of shareholders and investors losing significant amounts of money, including people's pension funds".

The case has unprecedented backing from Shell's institutional investors (pension funds and asset management companies) holding more than 12 million shares in the company. This breaks the mould of litigation traditionally being pursued solely by environmental charities against large multinational corporates. This institutional support suggests that investors too have become acutely concerned about the implications that Shell's current climate plans have for its long-term profitability.

Court of Appeal dismisses judicial review of UK Export Finance's decision to invest in an LNG project in Mozambique

Back in March 2022, the High Court dismissed NGO Friends of the Earth (FoE)'s judicial review of UK Export Finance's decision to provide more than US$1 billion of public funds to help finance an LNG project in Mozambique. FoE argued that the UK government had erred in law by concluding that the project and financing were compatible with its and Mozambique's obligations under the Paris Agreement. Although the High Court dismissed the claim, it was notable that it was split on its findings. This ruling was then appealed and, in February 2023, the Court of Appeal ultimately rejected the challenge.

FoE and its lawyers are reviewing the judgment "before deciding on next steps, including the possibility of an appeal".

This decision is significant in clarifying the UK government's legal responsibility to comply with the Paris Agreement when making decisions as to investments in energy projects. The Court of Appeal held that the appropriate standard to be adopted by the courts in reviewing such decisions is the "tenability" rather than the "correctness" of the decision i.e. "whether the decision-makers adopted a tenable view" that "funding the project was aligned with the UK's obligations under the Paris Agreement". This was principally because the Paris Agreement, as "an unincorporated treaty", did not create a "domestic law requirement for [the government] to be certain that the decision complied with [its obligations under the Paris Agreement]". The court noted: "It would be unworkable and impracticable if the government could only make such a decision if it were able to demonstrate that its view of the factual and legal position was correct. In fact, the decision-makers knew that there were possible legal challenges whatever it decided".

As for the rationality of the decision to fund the project, the Court of Appeal highlighted huge complexity around determining whether the project would contribute to the transition away from fossil fuels, due to uncertainties with the project's offtaking arrangements. Ultimately, as the government was being advised by its consultants that "the project could, in some scenarios, align with the UK's obligations under the Paris Agreement", this was deemed to be "at least a tenable view".

Notwithstanding the high threshold for successful judicial review actions as demonstrated in these proceedings, governments will increasingly be called upon to make difficult decisions regarding funding, permits and subsidies for projects, including in an effort to meet decarbonisation and biodiversity targets and stimulate investment in decarbonising industries. We therefore do not expect the challenges to government in this field to abate.

ClientEarth launches judicial review of Financial Conduct Authority (FCA)'s approval of Ithaca Energy prospectus

Also in February 2023, ClientEarth launched a challenge to the FCA over its approval of the prospectus of Ithaca Energy. The case has been filed as a judicial review and marks the first time that ClientEarth, which has a record of successful claims, has targeted the UK regulator.

Ithaca Energy holds significant interests in North Sea oil and gas fields. Although its prospectus issued in November 2022 acknowledges that there are climate risks faced by the oil and gas industry in general, ClientEarth argues that the prospectus does not adequately describe the climate risks that are faced by Ithaca's business specifically, nor the significance of these risks. The claim highlights the conflict between Ithaca's intention to develop new fossil fuel infrastructure and its incompatibility with goals set out in the Paris Agreement.

By the failure of the prospectus to provide investors with sufficient information on these risks, ClientEarth argues that investors are deprived of the opportunity to make an informed assessment of Ithaca Energy's financial position, breaching the FCA's legal requirements for prospectuses.

The High Court has yet to confirm whether it will grant permission for the claim to be brought.

Danone sued for breach of France's Duty of Vigilance law

Three NGOs have sued Danone for non-compliance with France's Duty of Vigilance law by failing to reduce the amount of its plastic waste. This trailblazing legislation requires corporates of a certain size to establish and implement concrete plans to mitigate the impact of their activities on human rights and the environment across their supply chains. Danone is yet to respond to the claim.

The Duty of Vigilance law provides another ready route for NGOs to pursue strategic litigation to spur corporates to reform their sustainability strategy. The legislation has already given rise to a number of claims and threatened legal actions in France covering a range of sectors including oil and gas, financial services, and food manufacturing and retail. In September last year, the three NGOs had also put (in addition to Danone) eight other "'Big Food' corporations", including Nestlé France, McDonald's France and several major French supermarkets and retailer groups, on legal notice to revisit their "threadbare plastics approach". This included a warning that failure by the companies to respond within three months of the notice could result in the NGOs formally commencing legal action.

We can also expect more plastics-related litigation globally, as a study carried out by Minderoo Foundation estimates that corporate liabilities arising from plastics litigation initiated in the period between 2022 and 2030 might exceed "US$20 billion in the United States alone".

The CMA clamps down on the fast-moving consumer goods (FMCG) sector

The UK Competition and Markets Authority (CMA) has announced that it will start probing claims made by companies in the FMCG sector, as it broadens the scope of its greenwashing investigations beyond the fast fashion sector (see the CMA's investigations into ASOS, Boohoo and Asda). Analogous to fast fashion items, FMCG products can broadly be described as everyday goods that see continuous high demand from consumers and are sold at relatively low cost. This new regulatory agenda has been spurred by the growing number of household products (such as food and drink, shampoo, laundry detergent, toothpaste and cleaning products) being marketed as "green" or "eco-friendly". The CMA has observed that the UK public spends more than £130 billion annually on such household essentials, and is concerned that consumers are "being misled and potentially even paying a premium for products that aren't what they seem, especially at a time when the cost of living continues to rise".

Companies operating in the FMCG sector should carefully assess their past and future statements relating to the sustainability of their products that may now be caught within the CMA's widened regulatory focus. The government has already released several guidance notes to elaborate on the CMA's Green Claims Code, giving numerous examples to demonstrate what the CMA may consider to constitute greenwashing.