Businesses warned of D&O threat from climate case

As The AIRMIC conference began in Liverpool yesterday a leading lawyer has warned companies need to brace themselves for a “new age” of climate activism.

Speaking to Emerging Risks, Nicola Pangbourne, member of London FOIL (Forum of Insurance Lawyers) and partner at Kennedys warned that if a claim which has been lodged by an environmental law charity is successful it may see climate risks excluded from D&O covers leaving senior management exposed.

“It is broadly accepted that climate change will have a significant impact on businesses, regardless of sector, size or location,” Pangbourne explained. “The insurance industry is no exception.  Insurers have already started planning for the increase in property and casualty risks and the effect that climate issues have on the value of their investment portfolios.  However, it now seems that Insurers may also be facing claims from companies seeking to offload the risks of climate change related litigation onto them.”

She added: “The pre-action claim recently initiated by ClientEarth, an environmental law charity and shareholder of Shell, seeks to usher in a new age of climate activism.  ClientEarth have indicated their intention to commence a derivative claim against 13 of Shell’s directors, asserting that they are personally liable for Shell’s failure to implement an adequate energy plan that will allow it to meet its own and the government’s net zero targets.  ClientEarth say that this is in breach of the directors’ statutory duties under the Companies Act 2006 to: firstly promote the success of the company; and secondly exercise reasonable care, skill and diligence.”

Pangbourne said ClientEarth has already brought a successful shareholder action in Poland against energy company Enea, but this is the first such action in the UK.  If successful, it could prompt similar shareholder derivative litigation, resulting in costly claims against D&O policies.

“Shell does not appear to be the only company susceptible to claims that it has failed to manage its climate risk,” she added. “Net Zero Tracker, a group of scientific non-profit organisations, suggests that 622 out of 2000 of the largest publicly traded companies have “technically committed to a net-zero strategy”, but “the actual policies of many of these companies”, particularly those in the oil and gas industry, allegedly actively “undermine” sustainable goals.

“Whilst this novel claim has the potential to lead to further climate related exposure for insurers, ClientEarth first needs the court’s permission to bring a claim against Shell’s directors, and this is by no means guaranteed.

“ClientEarth will have to demonstrate that the conduct complained of amounts to a breach of duty.  This is a high bar because the court could consider that strategy and management issues are matters of business judgment, with which it will not interfere.  It will also have to show that it is the proper person to litigate in Shell’s name, which is a matter for the court’s discretion.”

Pangbourne warned that if the case of successful the ramifications for business leaders may be significant.

“Whether D&O insurers should be concerned about this claim remains to be seen,” she explained.  “If it is successful, insurers could seek to manage the exposure by excluding climate change related shareholder action from their wording altogether, or at the very least, apply a higher level of scrutiny to the climate change strategies of insured companies.  Alternatively, it could be viewed as an opportunity to underwrite a specific extension with an appropriate premium to match the potential exposure.”

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