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Shell’s shareholder, ClientEarth, has announced that it intends to sue Shell’s directors for failing to manage climate risk or properly prepare the company for the transition to net zero in line with the Paris Agreement. Matt Caples, Francesca Berry, and Elaina Bailes consider this novel application of corporate law to the expanding realm of climate change litigation.
The attention given to environmental, social and governance (“ESG”) issues and the appetite for related litigation is undoubtedly increasing. Shareholders and climate activists, together with their lawyers, are considering how claims can be asserted against companies whose climate protection strategy is falling short.
Shareholder lawsuits against PLCs are usually brought with the aim of seeking damages for the depreciation of shares. So far, such claims have largely focused on misleading financial reports. However, with increased investor awareness of ESG issues and increasing corporate environmental reporting requirements, it is only a matter of time before shareholder lawsuits are filed based on a company’s misleading ESG reports. Alternatively, as in the case of ClientEarth, shareholders may disagree with a company’s actions or proposed actions. They can then use litigation to pressure the board to change its ESG policies on the basis that they are likely to inflict losses on the company, and therefore its shareholders.
basis of claim
In a first of its kind, ClientEarth, a non-governmental organization (“NGO”) and shareholder of Royal Dutch Shell PLC, has announced a prospective derivative action against Shell board members alleging derelictions of duty by their directors. ClientEarth alleges Shell’s board members failed to act in a manner conducive to the company’s success and failed to exercise reasonable care, skill and diligence as required by Sections 172 and 174 of the Companies Act 2006 is required.
Section 172 of the Act imposes a general duty on a director “…to act in such a manner as he believes in good faith to be best suited to further the success of the corporation for the benefit of its members as a whole.”
And Section 172(1)(d) requires that a director, in the performance of his duties, give special consideration to “…the impact of the corporation’s operations on the community and the environment.”
ClientEarth alleges that Shell’s directors have failed to do so, as the company’s policies are said to be inconsistent with the Paris Agreement’s 1.5°C temperature target and fail to meet Shell’s own net-zero emissions targets. Such omissions jeopardize the long-term value of the company. Specifically, ClientEarth claims:
“Shell’s physical assets are highly exposed to extreme weather events and the broader economic impacts of climate change.
“As the net-zero transition progresses and brings with it regulatory, market and societal changes, Shell faces potentially severe disruptions to its operations and write-downs, while its assets are at serious risk of being stranded in the future.”
ClientEarth says by pursuing shareholder lawsuits it is acting in Shell’s best interests to ensure short-term profit is not at the expense of long-term profitability for its stakeholders, including its shareholders and employees.
Precedent in other jurisdictions
This lawsuit is not the first climate change lawsuit that has been threatened or brought against Shell. In May 2021, in Milieudefensie et al v. Royal Dutch Shell Plc, the District Court of The Hague ordered the company to reduce group-wide emissions (including those from suppliers and end users) by 45% by the end of 2030.
One of the reasons for ClientEarth’s potential lawsuit is the alleged failure of Shell’s board of directors to adequately respond to the Dutch court’s ruling. Shell has subsequently appealed the ruling, claiming its goal to reach net-zero by 2050 is in line with the company’s progress towards the Paris Agreement target.
ClientEarth’s lawsuit against Shell is currently in the preparatory phase. As this is a derivative action on behalf of the company against the directors personally under Section 260 of the Companies Act 2006, the Court must authorize the action to be brought. Assuming that this first hurdle can be overcome and the lawsuit is successful, Shell will be one of the first companies to have its ESG certification assessed in English courts.
Greater importance of the case
The case is also the first example in England and Wales of an activist shareholder applying established general principles of company law to the ESG arena. If the case continues, it could spark a trend for similar actions. If the lawsuit is successful, the court could force Shell to revise its net-zero transition strategy and potentially find that its directors failed in their statutory duties. Such a finding could in turn trigger potential “greenwashing” claims by Shell shareholders under Section 90 or 90A of the Financial Services and Markets Act 2000. Such claims would relate to the loss in value of the shares suffered as a result of misleading statements regarding the company’s climate protection strategy.
Each judgment will be highly relevant to other companies both within the energy sector and beyond. This is particularly true given the increase in environmental reporting requirements, with climate-related disclosures set to apply to most UK registered companies by the end of 2023. Company leaders need to be aware that any inconsistency between a company’s public position on ESG issues and its internal policies could result in liability for misleading disclosures.
This could result in regulatory investigations, related shareholder derivative lawsuits and investor protection claims. Companies also need to think carefully about how they defend such claims, as they want to be diligent in defending their ESG strategies without being viewed as hostility to climate-conscious investors. Regardless of the outcome of ClientEarth’s lawsuit, litigation related to climate change will continue to grow. The trend of asserting such claims directly against companies and their managing directors is only just beginning.
