ClientEarth takes Shell’s Board of Directors to Court

We have previously commented on ClientEarth announcing that it had submitted a Letter Before Action against Shell’s 13 Directors for failing to implement a suitable strategy in accordance with the Paris Agreement which seeks to reduce the World’s reliance on fossil fuels.

On 9 February 2023, ClientEarth issued proceedings against the now 11 Directors of Shell in the English High Court for allegedly failing to ensure that Shell was protected against climate change related risks.  The derivative action is pending and has gained support from a number of Shell’s investors including UK pension funds Nest and London CIV.  This is the first action of its kind in Europe, although similar suits have been filed in the US and targets individual Board members in relation to climate-related matters.

General background

In 2019, Shell was the Defendant in a claim brought by a Dutch Company, Milieudefensie, which was also brought by 17,379 Dutch citizens.

In 2021 the Dutch Court ordered that Shell should reduce its carbon and greenhouse gas emissions by 45% by no later than 2030.  The ruling of the Dutch Court was such that in relation to Shell’s scope 1 and scope 2 emissions, the obligation was strict and in relation to scope 3 emissions (i.e. those of upstream and downstream vendors over which Shell has no direct control) the Court ruled that Shell should make “significant best efforts” to achieve the 45% reduction.

The Court also held that Shell’s parent company and the Board are ultimately responsible for driving the company’s climate strategies and have an important role to play in avoiding climate disaster.

The decision has been appealed by Shell and whilst it is unlikely that the appeal will be determined any time soon, if the UK derivative action continues (because it will first require the Court to determine whether ClientEarth has a claim on the face of it) the UK Court might be influenced by the Dutch decision.

UK Derivative Claim

The claim has been brought pursuant to Section 260 Companies Act 2006 which allows a shareholder to bring a claim where it considers a Director(s) might have breached their duties to the company.

The claim has three main allegations:

1. That Shell and its directors have failed to ensure that Shell will comply with the order of the Dutch Court and the requirement to achieve a 45% reduction in emissions is in peril;
2. That the directors have failed to implement a climate strategy which is in line with the Paris Agreement and therefore have failed to protect Shell and its shareholders; and
3. That there has been over-arching failure to properly manage risks that Shell faces which have brought about by climate change.

ClientEarth seeks a declaration that the Directors have acted in breach of their duties and that the Court rules that Directors implement a strategy that greenhouse gas emissions are reduced in line with the requirements of the Paris Agreement and the Dutch Judgment.

The claim is framed as a breach of Section 172 of The Companies Act 2006 which provides that a Director has a duty to promote the success of the company for the benefit of its shareholders.  There are also allegations in relation to Section 174 of The Companies Act 2006, which requires directors to exercise reasonable skill and care in carrying out their duties.

There has, and continues to be, an increased focus on individual responsibility of Directors in the UK including, but not limited to, in relation to climate change.

Commentary

As mentioned above, the Court is yet to decide whether the case will meet the criteria required to continue, which effectively means that ClientEarth must prove that it has a claim on the face of things, but if it does, this could be a ground-breaking moment which might usher in a wave of derivative claims in the UK Courts relating to the requirement of companies to address their climate change strategies.

It is clear that environmental, social and governance (ESG) should no longer be regarded by companies as merely an afterthought and this claim has demonstrated why compliance with ESG is now more important than ever.  It is now becoming increasingly important for companies to consider whether their internal policies are sufficient and in line with the UK’s net zero ambitions to avoid the possibility of climate change litigation being brought against them in the future.