As BP faces a shareholder revolt and threats of legal action, growing polarisation of investors and issuers is expected to lead to increased litigation.
Courts could increasingly be asked to intervene in disputes between shareholders and company boards on how to best navigate climate-related risks, raising further questions about the future of investment stewardship, experts tell Sustainable Investor.
“Courts are increasingly being resorted to as a legitimate extension of the stewardship tools available to shareholders,” according to Alexander Rhodes, Partner at law firm Mishcon de Reya.
Institutional investors have typically used a mix of behind-the-scenes engagement and publicly registering their concerns via resolutions at AGMs to influence decisions and behaviour at investee firms. Both sides are showing increasing signs of frustration, and reaching for alternatives.
“It does appear as though disagreements between shareholders and companies on climate action and other sustainability issues are being addressed through litigation more often,” notes Lindsey Stewart, Director of Institutional Investor Content at fund data and analytics provider Morningstar.
Disputes on company strategy related to climate change have been most visible in the energy sector, with several cases reaching the courts.
In 2023, Shell saw part of its shareholder base, including UK pension funds Nest and London CIV, support a UK lawsuit against the oil giant’s board of directors over unfit climate plans. In 2024, ExxonMobil sued green investors Follow This and Arjuna Capital for filing a climate resolution. Both cases were eventually dismissed by both UK and US courts.
Fast forward to today, BP is being threatened with legal action over its dismissal of a shareholder resolution which asked the company to disclose a strategy for creating shareholder value under scenarios of declining oil and gas demand. The resolution was filed by Follow This, which has a track record of filing climate resolutions at big oil companies, and several institutional investors, including Edmond de Rothschild Asset Management, Ostrum Asset Management and the West Yorkshire Pension Fund.
Shell, on the other hand, has decided to include an almost identical resolution at its upcoming AGM.
These cases highlight that “some energy companies appear to have hardened their stance on engaging with climate-conscious investors,” says Morningstar’s Stewart.
According to Mark van Baal, Founder of Follow This, BP’s decision to block the resolution sets a “dangerous precedent” and demonstrates that “companies are using every tool in order to not change course”.
In response to BP’s resolution blocking, Follow This and 12 institutional investors, including Legal & General, have announced they will vote against a resolution proposed by the British oil giant to scrap existing climate disclosures by the company. Proxy advisors ISS and Glass Lewis have also recommended shareholders vote against the BP resolution. To pass, it needs more than 75% support.
Follow This is also set to vote against the re-appointment of the chair and against a resolution suggesting allowing virtual-only meetings, out of governance concerns. The group will support another shareholder resolution – co-filed by Australasian Centre for Corporate Responsibility and UK pension funds – which asks BP to justify its upstream oil and gas spending.
Meanwhile, Follow This is also considering further legal action, alleging BP directors have committed an offence by not allowing the shareholder resolution on the company’s AGM agenda.
“Now that the matter will not be resolved before the AGM on 23 April, BP could be required to convene an extraordinary general meeting at its own expense,” Follow This said in a statement seen by Sustainable Investor.
Mishcon’s Rhodes, who is advising Follow This on the matter, says the threat of legal action from shareholders represents a more “confrontational approach” arising from dissatisfaction with the AGM process, where “boards assert that their discretion enables them to refuse to table resolutions, or to decline to act on advisory resolutions if they are passed”.
He adds: “This leaves shareholders with nowhere else to go, and the courts are increasingly willing to consider climate risks as material financial risks, and not mere activism.”
Reset in relations
With the material risks of climate change to corporate value being contested or neglected, board and shareholders perspectives have been shown to be at odds.
“There’s an increasingly prevalent perception on the shareholder side that their rights are being eroded away, while companies are pushing back on what they perceive as micromanaging by shareholders focused on sustainability and governance issues,” says Morningstar’s Stewart.
He adds that particularly in the US, where the Securities and Exchange Commission has recently changed guidance regarding investor outreach, proxy-voting intentions and the shareholder proposal process, this has had the effect of raising the barriers to shareholder engagement outside the courts.
Rhodes notes ExxonMobil’s decision to sue Follow This and Arjuna Capital even after they withdrew their climate resolution reflects the limitations of the AGM process. “Corporate litigation of this kind, where boards are prepared to spend company money suing activist shareholders, will inevitably have a chilling effect on relations between the two parties,” he says.
While there has always been a tension between shareholder rights and management discretion, if perceptions of climate change risk to financial value continue to develop in different directions, litigation between shareholders and boards is likely to continue, he adds.
Another corporate lawyer, speaking on condition of anonymity, echoes this view, saying that some shareholders baulk at attempts to reduce shareholders’ rights, and are also getting increasingly concerned about the physical, transition, liability and system-level risks associated with climate change, nature loss, and energy insecurity.
“Given climate change and nature loss are system-level or market-wide factors that affect all sectors of the economy, all regions, and all financial instruments, they cannot be mitigated by asset diversification. They too increase shareholders’ incentives to engage and litigate,” the lawyer claims.
However, courts have been reticent to interfere with corporate policy, the lawyer cautions, adding that a “polarisation” between boards – who in some cases attempt to limit shareholder influence and oversight – and shareholders – who worry about long-term climate-related risks and loss of shareholder rights – is likely to continue unless resolved by the courts.
Morningstar’s Stewart argues “a reset” is needed in relations between companies and investors. “Whatever can be done to […] find mutually agreeable solutions outside the courts can only be of benefit to the health of public capital markets,” he adds.
High costs, high stakes
While launching lawsuits is notoriously expensive, climate litigation as a field has been growing for some time.
The latest statistics from the Grantham Research Institute on Climate Change and the Environment show that, to date, nearly 3,000 climate lawsuits have been filed globally. Researchers calculated that, in 2024, around 20% of climate cases filed targeted companies, or their directors and officers.
Specific corporate lawsuits, such as Milieudefensie v. Shell and Lliuya v. RWE have also affirmed that, in principle, companies can be held liable for climate-related harm even if these lawsuits faced legal evidentiary hurdles.
Meanwhile, an upcoming US Supreme Court decision in the case Suncor Energy v. Boulder County is set to clarify whether US federal law bars local governments from seeking relief for climate damages in state courts. Dozens of US local governments have sued fossil fuel companies for damages caused by their emissions and alleged deception campaigns about the dangers of climate change.
“If the US Supreme Court rules against Suncor Energy, the materiality of climate litigation risk to fossil fuel companies will become significantly greater. Consequently, climate risk, and the way boards choose to address it will become increasingly important in the minds of investor stewardship teams,” says Rhodes.
Relatively few of these climate-related cases involve institutional investors, but the instances are increasing.
In 2022, UK and European pension funds including the Church of England Pensions Board and Denmark’s AkademikerPension initiated legal action against Volkswagen after the German automotive giant refused to provide requested information about its climate-related lobbying activities.
“Although litigation can often prove costly for both investors and companies, it appears that a rising number of disagreements have ended up in the courts that might not have done in prior years,” adds Morningstar’s Stewart.
Follow This’ van Baal says shareholders need to balance the loss of impact and influence through divestment versus the costs to initiate litigation against their investee companies.
The corporate lawyers agree. “Where investors wish to maintain their shareholding, and press their rights, litigation is the next available step if board engagement fails. It also has the benefit of binding decisions, but at the cost of time, money and the shareholder/board relationship,” Rhodes says.
Divestment is seen as a measure of last resort, only in instances where “engagement failed, litigation is not a realistic option or is unlikely to succeed, and there is little chance the board will change”, the other lawyer adds.
“The disadvantage is that it leads to loss of influence, and may lead to lock-in of financial loss. But it may be required to prevent further losses from, for instance, future liability and stranding of assets,” he concludes.
