Dispute resolution

What next for climate litigation in England after Court of Appeal rejects derivative claim?

Published on 16th Aug 2023

Claimants continue to seek ways to hold directors and companies to account for climate-related decisions

Energy storage fields, with solar panels and wind turbines

The Court of Appeal has recently rejected an application brought by members of a pension scheme to continue a derivative claim against the directors of the pension trustee company. One of the claims they wished to bring – which was referred to as "the fossil fuels claim" – was based on an alleged failure by the directors to form an adequate plan to deal with the financial risks involved in investing directly and indirectly in fossil fuels.

The claimants sought a declaration that this amounted to a breach of the directors' duties under sections 171 and 172 of the Companies Act 2006. Section 171 requires directors to act within their powers and section 172 requires them to promote the success of the company – and, in so doing, to have regard (among other matters) to "the impact of the company's operations on the community and the environment".

At first instance, permission to bring the claim was refused by Mr Justice Leech in August 2022 and the Court of Appeal has now dismissed the appeal from that decision.

Derivative action

Lady Justice Aplin delivered judgment of the Court of Appeal and noted that a derivative action can only be brought to benefit the company and to remedy a harm caused to the company: "A derivative action is not an opportunity for someone to pursue their own grievances or claims or to further their own particular interest in the name of the company".

Here, any loss would have had to have been caused to the trustee company and not the pension fund that the trustee company ran. The claimants, as members of the pension scheme, were not in a position analogous to shareholders (suffering loss which is reflective of loss suffered by the company) and the claim failed primarily because the claimants lacked standing to pursue it.

The investment decision

Commenting on the fossil fuels claim in particular, the Court of Appeal also noted that it had not been shown that the investment decision had resulted in a loss for the company, so that it could not even be properly characterised as a derivative claim. There was no suggestion that the directors had acted in bad faith or done anything other than acted in what they considered to be the best interests of the company and the scheme, having taken appropriate professional advice to enable them to do so.

Furthermore, the court agreed with the first instance judgment that the company had to exercise its powers of investment in a manner designed to ensure profitability, without excessive reliance on any particular type of investment, so as to avoid accumulations of risk in the portfolio as a whole.

The Court of Appeal did note, however, that the derivative claims advanced would have been well suited to be brought as beneficiary derivative actions or administration actions, albeit that would have led to different procedural hurdles for the claimants which they seem to have wanted to avoid.

It remains to be seen whether the claimants intend to bring a further appeal to the Supreme Court.

The wider picture in England

No successful climate-related case based on a breach of section 172 has been brought to date yet in England. Claimants face considerable difficulties in bringing these claims because the section 172 duty is largely a subjective one and good faith judgments cannot easily be challenged – although if no reasonable director would have acted in a certain way, it may be easier to question whether the director can show they genuinely believed they were acting in good faith.

A defendant director might argue that he or she decided other factors outweighed the impact of the company's operations on climate change; for example, the need to provide short-term shareholder returns or ongoing employment. Although, the obligation to act in the best interests of the company is generally interpreted as meaning to protect and increase its long-term (rather than short-term) value, strong evidence will be needed before the courts will be satisfied that this has not been done.

Climate litigation worldwide

Despite the lack of success so far, claimants across every industry are pushing the barriers on this issue. The recently released report on global trends in climate change litigation in 2023 published by the Grantham Research Institute and the London School of Economics and Political Science confirms the continuing trend to bring climate-related litigation against directors and companies continues worldwide.

The report concludes that climate-related litigation has remained steady worldwide (outside of the US). Strategic litigation against companies continues to develop, with cases targeting corporate actors from across a growing range of sectors. Those seeing the highest amount of cases include utilities, travel, personal and leisure, food and tobacco manufacturing and chemicals and plastic. A significant increase in "climate-washing cases" is fuelling this trend.

Separately, the British Institute of International and Comparative Law launched a project examining climate litigation tactics globally at the end of last year to analyse the peculiarities of cases involving companies and to help identify "possible arguments and legal tools to tackle climate change through litigation involving companies".

Osborne Clarke comment

For now, the English courts remain wary of litigants using the derivative claim process as a backdoor route to attack management and investment decisions and in furtherance of political aims. However, despite the success for the directors in the recent case referred to above, further cases against companies and their directors in England can be expected.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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