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September 8, 2023

In Brief: ClientEarth ordered to pay Shell legal costs; UK considering exiting Energy Charter Treaty

The latest news in ESG policy and regulation

The English High Court has ordered ClientEarth to foot the bill for its opponent’s legal costs after the non-profit unsuccessfully tried to establish that Shell’s board directors held a personal responsibility for the oil major’s disappointing climate policy. ClientEarth had sought to bring a derivative claim alleging that Shell’s directors were in breach of their fiduciary duties for failing to set Paris-aligned emission reduction targets and hence protect the company against climate change risks. In a note, law firm Cleary Gottlieb said that this novel claim structure “may no longer be a viable means of seeking to challenge organisations on their ESG policies, because the risk of an adverse costs order is a significant disincentive for NGOs and other parties who seek to bring these types of claims”.

The UK government has said it will consider withdrawing from the Energy Charter Treaty, unless a “vital modernisation” is agreed. In a statement, the government urged the adoption of the updated treaty, which would see a stronger focus on promoting cleaner energy sources. The treaty allows fossil fuel companies to sue countries if they think their investments are compromised by policy changes. In recent months, several EU member states have announced they want to withdraw from the treaty, which, according to the UK government, has caused any reforms to remain in limbo.

The British government has also appointed Claire Coutinho as secretary of state in charge of the Department for Energy Security and Net Zero. She will take over duties from Grant Shapps, who has become defence secretary, following a ministerial reshuffle by prime minister Rishi Sunak.

The Network for Greening the Financial System has published two reports on climate-related litigation risks. One report looks at trends and developments potentially affecting financial institutions, while the other takes a deep dive into microprudential supervision. The NGFS suggested that supervisors should identify the risk drivers that can lead to direct costs (such as damages, fines and fees) and indirect costs (for instance, insurance payouts or credit losses) for financial institutions. However, it also warned that due to ongoing developments in diverse jurisdictions, it will be a challenge for supervisors to provide reliable estimates for climate litigation risks.

At the European Central Bank legal conference this week, ECB supervisory board vice-chair Frank Elderson warned about the rising risk of climate litigation against banks. Separately, at the same event, ECB executive board member Isabel Schnabel said in a speech that climate-related and environmental risks warrant “special supervisory attention” from an economic perspective, due to their size, global dimension, non-linearity and potential for irreversible damage. 

The European Financial Reporting Advisory Group and the Global Reporting Initiative have issued a joint statement saying that duplicate reporting by companies will be avoided due to a “high level of interoperability” between the EU and GRI standards. Companies that currently report under the GRI will be well prepared to report under the European Sustainability Reporting Standards (legislated as part of the EU Corporate Sustainability Reporting Directive), whereas companies using the ESRS are considered as reporting “with reference” to the GRI standards.

Efrag also held a webinar on Tuesday to discuss proposals as to how best to disclose ESG data across value chains under the ESRS. While participants questioned some of the proposals, not least certain suggestions about how to distinguish between actors in the value chain, the overall conclusion was that the document was on the right track and there were few, if any, red flags contained in its 30 or so pages. The general consensus was that the final document should make it clear the guidance was for larger companies and that help for small and medium-sized businesses could come at a later date.

This week, the Africa Climate Summit in Nairobi, Kenya, and the Finance in Common Summit in Cartagena, Colombia, took place in the run-up to COP28 in Dubai later this year. The summits featured several proposals to reform international climate finance, as well as announcements on deeper cross-border collaboration. Examples included the launch of a green hydrogen strategy between the EU and Kenya, and the development of a blue finance roadmap among development banks to better finance blue economy projects.

A group of 36 investors from the Institutional Investors Group on Climate Change have sent a letter to proxy adviser Institutional Shareholder Services urging it to integrate further climate issues into its proxy voting recommendations. The investors argue that climate matters are material to investors’ stewardship and voting practices to mitigate financial risk for their portfolios. They therefore want the ISS to provide a “specialty net zero policy” for the 2024 proxy season.


A service from the Financial Times