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Activist shareholder ClientEarth on 15 March that it intends to begin legal action against the individual board members of Shell plc (Shell) over the company’s climate transition plan. In what is believed to be the first legal case of its kind, ClientEarth alleges that London-listed Shell is breaching its legal duties under the CA 2006 by failing to adopt and implement a climate strategy in keeping with the . Shell has neglected to lower its absolute emissions to meet the 1.5-degree temperature increase limit on global warming, arguing that to do so the company would have to cut the amount of oil and gas it produces. The CA 2006 imposes a duty on a company’s directors to of the company, and to act with reasonable care, skill and diligence, and it is these duties that ClientEarth claims Shell’s directors are failing to fulfil by refusing to commit to lower absolute emissions.  

In a comment to Market Tracker, Paul Benson of ClientEarth stated:

‘This case will be the first ever to attempt to hold directors of any company accountable for failing to properly prepare for the net zero transition. Bringing the litigation will clarify the law on how climate risk management must be acted upon by directors under UK company law.’

While Shell publicly maintains that it will meet the 1.5-degree temperature goal set by the Paris Agreement, undertaken by the Australasian Centre for Corporate Responsibility on Shell’s climate transition strategy suggests otherwise. In its , the Australasian Centre for Corporate Responsibility argues that Shell will be unable to meet the 45% reduction in net emissions by 2030 compared with 2019 levels as required by the Hague District Court, and will instead see net emissions increase by 4.4%.

The Hague District Court’s requirement that Shell reduce its emissions stems from a landmark case brought against the company by Milieudefensie, the Dutch wing of environmental campaign group Friends of the Earth. Decided in May 2021, Shell failed to convince the Dutch court that its climate strategy at the time was concrete enough.  Shell has since appealed the verdict, and instead implemented its own . ClientEarth, which likely intends to build upon Milieudefensie’s success, does not believe the Energy Transition Strategy adequately addresses concerns around the impact that climate change will have on Shell’s business.

As such, ClientEarth said it was bringing the action as a shareholder in Shell to help protect the long-term viability of the company. In its , ClientEarth went as far as to imply that by presenting itself to be Paris-aligned when not, Shell may risk misleading investors and its competitors in the market. Moreover, further implications of a failure to adequately prepare for a transition from fossil fuels would leave Shell vulnerable to stranded asset risk, which in recent years has tended to stem from environmental factors such as climate change.  

The timing of ClientEarth’s announcement comes after a number of tough weeks for the oil and gas giant. Russia’s invasion of Ukraine on 24 February has galvanised the European Commission, with the publication of a to make Europe independent from Russian fossil fuels before 2030. The Commission reiterated its commitment to increase from all fossil fuels, not just those purchased from Russian suppliers. In addition, Shell was forced to bow to pressure by the UK government to exit its with Russian energy corporation Gazprom and cease involvement in the Nord Stream 2 pipeline project, in which it owns a 10% stake.

ClientEarth is encouraging institutional investors to join or support its claim ahead of Shell’s 2022 annual meeting, which is due to be held on 24 May 2022.

The planned action illustrates the growing prospect of ESG (environmental, social and governance) related litigation Climate actions are a subset of ESG actions – in that they focus on one aspect of the ‘E’ – climate change. Our  on climate change litigation also looks at Milieudefensie, among others and considers the various ways in which climate actions are being brought (a subscription to Lexis®PSL Environment is required).

There is currently insufficient active UK litigation to speculate as to how this proposed action will develop and much will depend on how this and similar disputes are instigated. Market Tracker will continue to monitor how this matter develops.