Spring has sprung and with it we see a bunch of new developments in contentious ESG. In this edition, we report on some of the main stories in the disputes sector in the second quarter of 2023:

• the High Court's dismissal on the papers of ClientEarth's ground-breaking claim against Shell's Board;
• advancements in the European Union's proposed Corporate Sustainability Due Diligence Directive;
• Greenpeace's judicial review of the UK government's oil and gas licensing round in the North Sea;
• the FCA's Discussion Paper on sustainable change in the financial sector;
• a new greenwashing class action being faced by Delta Air Lines; and
• the clampdown on greenwashing advertisements in the energy sector by the Advertising Standards Authority.

Court dismisses ClientEarth's climate claim against Shell's directors

On 12 May 2023, ClientEarth's bid to sue Shell plc's board of directors was dismissed by the High Court on the papers. ClientEarth sought to bring a derivative action against Shell's directors for their alleged failure to effectively address the risks of climate change. The case was ground-breaking as the first-ever climate litigation to try to use a derivative action to establish the personal liability of a company's directors for allegedly failing to address the threat of climate change.

Acting in its capacity as minority shareholder of Shell, ClientEarth filed a claim under the "derivative claims" procedure set out in the Companies Act 2006 (CA 2006). ClientEarth argued that the directors of Shell had violated their duties under the CA 2006 (including the duty to promote the success of the company and to exercise reasonable care, skill and diligence) by failing to set emissions targets or to establish an acceptable basis for achieving Shell's strategy for managing climate risk.

The derivative claims procedure requires the permission of the court, which can be refused if the application does not establish a prima facie case or if the shareholder is not considered to be acting in good faith. The High Court accepted that ClientEarth had established a prima facie case that "Shell faces material and foreseeable risks as a result of climate change which have or could have a material effect on it". Nevertheless, the judge observed that Shell's directors did have a plan in place aimed at reaching net zero and found that, ultimately, it is for the directors to decide how to best promote the success of a company.

The judge also considered ClientEarth's motivations in bringing the claim, noting that, with only 27 shares in Shell, ClientEarth is a minority shareholder whose "real interest is not in how best to promote the success of Shell for the benefit of its members as a whole".

The court's decision was taken on the basis of written submissions and ClientEarth has requested an oral hearing for the ruling to be reconsidered.

EU Corporate Sustainability Due Diligence Directive

On 1 June 2023, the European Parliament adopted an amended version of the Corporate Sustainability Due Diligence Directive proposed by the European Commission (the Directive).

The European Commission first announced its landmark proposal for a corporate sustainability directive in February 2022 with the European Council setting out its position on the proposal in December 2022. Now that the European Parliament has adopted the legislative proposal, the European Council has to do the same. Once the institutions reach an agreement (or, failing that, a conciliation committee finds the legislation acceptable), the Directive should be published and adopted into law at the EU level.

Once effective, the Directive will establish a duty of corporate due diligence, obliging companies to identify and take action against negative environmental and human rights impacts of the company's activities. This will build upon legislation already in place in some member states establishing requirements for corporate due diligence in this area, such as France's Duty of Vigilance Law, and on existing duties under instruments such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.

As currently drafted (following the Parliament's amendments), the Directive would apply to EU companies with more than 500 employees and a worldwide turnover above €150 million (or more than 250 employees and a worldwide turnover above €40 million, for companies in high-impact sectors, such as textiles and mineral extraction). Importantly, the Directive would also apply to non-EU companies that have the same thresholds of turnover generated within the EU.

The Directive would create obligations for both member states and companies within its scope. It would introduce a number of measures, such as setting out new mandatory reporting obligations for companies and allowing companies to cease working with other entities in their value chain that do not meet the Directive's requirements. It would also require member states to appoint a supervisory authority with investigative and enforcement powers. Failure to comply with the Directive may result in significant sanctions, including fines of up to 5% of a company's worldwide net turnover. There are also likely to be indirect impacts for those involved in the value chains of companies to which the Directive applies, which may request information on suppliers' operations or impose contractual requirements that will allow them to comply with the Directive.

The European Parliament's proposal includes a number of changes to the Council's draft aimed at strengthening the Directive, including:

• widening the scope of application by amending the thresholds of the Directive to cover companies with a lower turnover and fewer employees than initially;
• inserting an obligation for companies to implement a transition plan to limit their emissions in line with the Paris climate agreement, to which (for companies with more than 1,000 employees) the directors' remuneration policy will be linked; and
• introducing provisions on risk mapping and prioritisation of adverse impacts – companies will have to prioritise adverse impacts based on their severity and likelihood of occurring.

The draft Directive had already seen a swathe of suggested changes from the Council of the European Union back in December. The European Parliament's announcement of its position will trigger a period of negotiation between the Council, Commission and Parliament with a view to agreeing a final text.

Once the final text of the Directive is agreed, adopted and published – which is not expected to happen before 2024 – the member states will have two years to transpose it into their domestic laws. Given the substantial nature of the obligations and the likelihood of litigation resulting from increased disclosures and/or failure to comply with the Directive's requirements (as seen, for instance, under the Duty of Vigilance Law in France), affected companies will want to take steps to ensure compliance well ahead of time.

Greenpeace Ltd v. (1) Secretary of State for Business, Energy and Industrial Strategy and (2) the Oil and Gas Authority; and Uplift v. (1) SSBEIS and (2) the OGA (North Sea oil and gas licensing)

On 21 June 2023, the government faced a hearing in a judicial review launched by environmental charities Greenpeace and Uplift in relation to an offshore oil and gas licensing round in the North Sea.

The licensing process was launched in October 2022 and ran until June 2023. It is expected to result in the grant of around 100 new licences for oil exploration in the North Sea.

Greenpeace and Uplift claim that the government's decision to grant new licences is unlawful. Notably, they claim that the environmental assessment of the project should have taken into account the volume of emissions that will be produced by end-users consuming the oil and gas extracted. This case raises the interesting question of whether end-use emissions should be considered direct effects for the purpose of environmental impact assessments, an issue that has proved controversial in other recent environmental judicial reviews. For example, in Finch v. Surrey County Council, the Court of Appeal held downstream emissions from future combustion of refined oil were not irrelevant for the purposes of the assessment, but a planning authority was not compelled to consider them when not effects of the proposed development itself.

In April, the two claims were granted permission to proceed and were heard on 21 June 2023.

DP23/1: Finance for positive sustainable change

The FCA has now concluded the period for responses to its Discussion Paper, "Finance for positive sustainable change". The Discussion Paper, which was published in February, forms part of the commitment the FCA made in its strategy for positive change to begin stakeholder engagement on ESG governance, remuneration, incentives and training in regulated firms.

The Discussion Paper aimed to encourage an industry-wide dialogue on firms' sustainability-related activities in order to help the financial industry drive positive sustainable change. The paper asked questions that sought to understand "how firms embed a clear purpose, how this relates to sustainability objectives, and the strength of the 'tone from the top' on sustainability-related matters".

As well as an overview of the topics for discussion, the paper also contained a collection of articles from industry practitioners, academics and other thought leaders, which were designed to encourage diversity of thought and wide-ranging debate. The articles covered diverse topics, such as preventing greenwashing and using pay to create accountability for ESG goals.

The FCA will use the feedback to increase its knowledge of "how they can better support the industry in this evolving field and whether there is a case for further regulatory measures in the area of firm governance, incentives and competencies".

The discussion period ended in May 2023, and the FCA will now consider the feedback from respondents before determining next steps.

Delta Air Lines faces greenwashing class action

A new class action lawsuit has been brought against Delta Air Lines in the District Court of California in the US, challenging Delta's approach to the widespread practice of carbon offsetting. The claim, brought in May on behalf of a "putative nationwide class, or alternatively a putative class of California residents", accuses the airline of misleading the public by its claims of carbon neutrality, specifically through its reliance on offsets.

Delta claims that it has been carbon neutral since March 2020. The lead plaintiff accepts that Delta has emphasised that its carbon neutrality is achieved in large part through the purchase of carbon offsets, but claims that it is not possible to be sufficiently certain of the value of offsets to make a claim of carbon neutrality. The plaintiffs allege this is due to issues with inaccurate accounting as a result of wrongly including data on: impermanent projects that are subject to disease, natural disasters and human intervention; projects that provide non-immediate speculative emissions reductions; and the crediting of offsets for projects that would have gone ahead with or without market investment.

Amongst other remedies, the plaintiff seeks an order from the court to prevent Delta from continuing to make the allegedly "deceptive" claims. If successful, we could see a rise of similar claims targeting the approach to carbon offsetting across a range of sectors.

ASA clamps down on greenwashing advertisements in the energy sector

On 7 June 2023, the Advertising Standards Authority (ASA) upheld three challenges to advertisements by Shell, Repsol and Petronas, which appeared in 2022 and early 2023, based on alleged greenwashing.

The advertisements focused on the companies' environmental practices. The Shell items emphasised the number of households in the UK using its renewable energy. The Repsol online advertisement showcased the company's development of biofuels and the Petronas television advertisement publicised efforts by the company to achieve net zero carbon emissions.

The ASA found that these claims were misleading as they omitted significant information about the companies' operations, which it noted include "substantial, ongoing and expanding fossil fuel production", misrepresenting the overall environmental impact of the companies' business.

These decisions are the latest example of the ASA cracking down on greenwashing – it has recently upheld similar challenges to advertisements by airlines Etihad and Lufthansa, as well HSBC and Tesco. The ASA is by no means the only regulator in the UK that is taking note of corporate greenwashing – for example, see our last ESG Disputes Bulletin for discussion of the Competition and Markets Authority's investigations into the fast-fashion and fast-moving consumer goods sectors.