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04 Jul 2024

Identifying your greenwashing litigation risk: Fiduciary duties

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In this series of articles, we are exploring five potential causes of action which could give rise to claims in the courts of England & Wales. So far, we have looked at claims under the statutory framework provided by the Financial Services and Market Act 2000, and derivative claims by activist shareholders. We now consider the potential for causes of action arising from breaches of fiduciary duty.

The law: fiduciary duty

The primary obligation of a fiduciary is loyalty to its principal. The courts have resisted delineating the scope of this core obligation, on the basis that it may mean many different things depending on the relationship and circumstances. Leggatt LJ gave the following influential description in Al Nehayan v Kent [2018] EWHC 333 (Comm):

"Loyalty in this context means being guided solely by the interests of the principal and not by any consideration of the fiduciary's own interests. To promote such decision-making, fiduciaries are required to act openly and honestly and must not (without the informed consent of their principal) place themselves in a position where their own interests or their duty to another party may conflict with their duty to pursue the interests of their principal. They are also liable to account for any profit obtained for themselves as a result of their position."

Common fiduciary relationships include those between trustee and beneficiary, agent and principal, partner and co-partner, solicitor and client, and director and company. In circumstances where these settled categories of fiduciary duty are not present, it can be very difficult to establish on the facts that the necessary special relationship of trust and influence exists – the courts have made it clear that it is not a common circumstance (Kelly & Anor v Baker & Anor [2022] EWHC 1879 (Comm)).

What does this mean for greenwashing risk?

The Commonwealth Climate and Law Initiative and the Climate Governance Initiative published a study in 2021  discussing the relationship between climate governance and fiduciary duties. In the context of companies, directors owe a duty of loyalty to shareholders and a duty of care and diligence as to the governance of the company. Good governance, and with it, good risk management, is a constantly evolving practice in which directors must act according to their knowledge of foreseeable risks, regulations and market practice. It will be increasingly necessary for directors to integrate an appreciation of climate risks and opportunities into their decision-making, and failure to do so could amount to a breach of fiduciary duty.

The recent  Ramirez v Exxon Mobil Corp proceedings, brought in the Northern District of Texas, were based on such an approach.  The plaintiff relied in part on a statement made by Exxon Mobil in March 2014, that "Exxon Mobil would address climate change-related risks to its business, like increasing demand for renewable energy" by using a proxy cost of carbon in their investment and valuation procedures. A "proxy cost of carbon" is a figure representing the projected effects of various climate-related policies on the future global energy demand. The plaintiff argued that Exxon Mobil used a lower proxy cost or no proxy cost in its internal proved reserves and impairment calculations and in asset impairment evaluation.

This aspect of the plaintiff's claim failed at a class certification hearing in August 2023 (on the basis that Exxon had been able to rebut the presumption of reliance on the alleged misstatements). However, the case demonstrates the nature of claims which may be brought, should reliance be established by the courts.

At Stephenson Harwood, we have expertise in all aspects of greenwashing risk: regulatory compliance, civil fraud, commercial and corporate litigation, competition and consumer protection. We are well placed to advise in every major industry and sector, ranging from multinational corporations, financial institutions, large and medium sized companies, and professionals.

Our greenwashing risk team is international with specialists spread across our offices in Europe, Asia, and the Middle East, which means that we can support you wherever your business interests are based.

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