Client Earth to Take Legal Action

ClientEarth Threatens Legal Action Against Shell's Directors in England and Wales

In Short

The Context: Environmental NGOs are exploring new judicial routes to push energy companies to increase their commitments in reducing their direct and indirect carbon emissions and also to reduce the amount of oil and gas they produce.

The Situation: ClientEarth, an environmental NGO and minority shareholder of Shell, has threatened legal proceedings against Shell's board of directors. The threatened claim is premised on an unprecedented application of directors' duties under the UK Companies Act 2006 and is amongst the first climate-related claims to be threatened against a company in the UK. 

Looking Ahead: Corporations and their directors could be exposed to potential claims being initiated against them by shareholders on the basis of perceived failings in their ESG and climate strategy.

On 15 March 2022, ClientEarth announced that it had written to Shell's board of directors informing them of its intent to bring a claim on behalf of the company for the board's failure to implement a Paris Agreement compliant strategy. The proposed proceeding follows Friends of the Earth Netherlands's successful claim against Shell in the Netherlands in 2021, in which the Dutch Court ruled that the company must reduce its overall global CO2 emissions by net 45% by the end of 2030 (relative to 2019 levels). See our 2021 Commentary about that case.

At present, ClientEarth has only sent a pre-action letter to Shell's board, to which it will have the opportunity to respond. If proceedings are issued against the directors, ClientEarth will require the permission of the English court to pursue them by way of derivative action on behalf of the company. 

There is limited information available on the exact details of the potential claim, but the key high level takeaways are:

  • The claim would be in the form of a derivative action against the directors in their personal capacities. A derivative action allows a shareholder (such as ClientEarth) to 'step into the shoes' of the company in order to bring a claim on its behalf against its directors—a step which requires the English court's prior consent, and which generally requires a claimant to demonstrate a prima facie case of wrongdoing by the directors which is not being pursued due to the directors' control of the company. ClientEarth has said it will be seeking a judgment to "compel Shell's board to strengthen its climate transition plans, in the best interests of the company in the long-term."  
  • The proposed claim follows the 2021 Shell annual general meeting in which approximately 30% of the company's shareholders voted against the board in support of a resolution calling for the company to set out Paris Agreement aligned emissions targets. While Shell has publicly maintained that its strategy is consistent with the Paris Agreement targets, ClientEarth says that independent analysis of the company's operating plans, budgets and 'Energy Transition Strategy' suggest that the company is actually on course for a 4.4% rise in net emissions by 2030. 
  • The threatened claim would be brought under Section 172 of the UK Companies Act 2006. This requires company directors to act in a manner that they consider would "promote the success of the company for the benefit of its members as a whole", having regard to factors including the impact of the company's operations on the community and the environment. ClientEarth has said that it will argue that the board is "fundamentally mismanaging [climate] risks, leaving the company ill-prepared for the net zero transition. That not only threatens global climate goals, it puts the company's long-term commercial viability—and therefore its investors' capital, including people's pension funds—at risk…" 
  • ClientEarth will argue that the board's current strategy does not adequately address the multifarious climate risks Shell is facing, including those arising from the physical impacts of the climate crisis, the effects of the net zero transition and the increased likelihood of litigation. ClientEarth further highlights the risk of climate change resulting in 'stranded assets', such as refineries, which require huge capital expenditure but may lead to massive write downs due to the regulatory, market, and societal shifts spurred by the energy transition. 

Amongst other reasons, the proposed action is interesting due to its grounding in the potential financial consequences to which Shell's shareholders may be exposed. It also highlights that the risk of climate-related litigation may extend to personal liability on the part of directors with responsibility for a corporate's strategy and actions. 

If pursued and if permitted by the courts, the proceedings will likely raise a lot of attention. However, it would not be the first such claim to be brought. In October 2021, members of the Universities Superannuation Scheme filed similar claims against the Scheme's current and former directors for breach of directors' duties, and sought the court's permission to pursue those claims by way of derivative action. Amongst other things, the members argue that the Scheme's failure to create a credible plan for the divestment from fossil fuel investments (despite an announced intention to be net zero for carbon by 2050) has prejudiced the financial success of the company.

The UK Companies Act 2006 codifies the obligation on directors to have regard to (among other things) the impact of a company's operations on the environment. This exposes directors to the risk of a breach of duty claim if that obligation is not fulfilled in relation to decision making or activities with the potential to impact the climate. Although there are procedural hurdles to bringing such a claim by way of shareholder derivative action, it remains a material risk to UK company directors. 

Three Key Takeaways

  1. Environmental groups are increasingly using judicial routes not just against States, but as a tool to push energy companies to increase their commitments in reducing their direct and indirect carbon emissions and also to reduce the amount of oil and gas they produce. 
  2. The obligation to have regard to the impact of a company's operations on, among other things, the environment is expressly set out in the codified duties of UK company directors. Although those duties are owed by directors to the company itself, shareholder derivative actions provide a route (albeit with procedural hurdles) for breach of duty claims to be brought by shareholders against directors. 
  3. This threatened claim underlines the fact that the risk of climate and ESG-related litigation potentially extends to executives with responsibility for a corporate's strategy and actions. 

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