Legal action against Shell urges businesses to make haste in move to Net Zero

A year on from Shell losing its landmark climate case in the Dutch courts (which we have previously discussed here), Shell is once again facing climate change related legal action, this time in the English courts. ClientEarth has taken legal action against Shell’s 13 directors, holding them liable for failing to implement a sufficient strategy in accordance with the Paris Agreement, which seeks to reduce the world’s reliance on fossil fuels by cutting their use in order to keep global temperature rises below 1.5°C by 2050.

ClientEarth, in its capacity as a shareholder of Shell, alleges that the directors of Shell have failed to promote the success of the company for the benefit of its members, as required by s.172 Companies Act 2006 (CA 2006) by not exercising reasonable skill and care in creating and committing to a climate strategy which adequately addresses the climate-related risks to its business.

Section 172 of the CA 2006 provides that a director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In so doing, the director must have regard, amongst other things, to the impact of the company’s operations on the community and the environment[1]. It is the first time that shareholders have sought to hold a board of directors accountable for failing properly to prepare for the net zero transition, however, ClientEarth has said it intends, subject to Shell’s response, to apply to the High Court for permission to pursue a derivative claim against Shell, in its capacity as a shareholder of Shell.

One of the grounds for ClientEarth’s claim is the failure of Shell’s board adequately to respond to the ruling in Milieudefensie v. Shell[2], whereby the Hague District Court in the Netherlands ordered Shell to reduce its group-wide CO2 emissions by 45 percent (net) compared with 2019 levels, by the end of 2030. Shell is in the process of appealing the decision and maintain that its climate strategy is consistent with the 1.5°C temperature goal of the Paris Agreement and has set a target to become a net zero emission energy business by 2050.

ClientEarth rebuts Shell’s statement alleging that Shell’s interim targets to reach net zero simply do not add up and, in fact, Shell’s strategy would result in a 4% rise in net emissions by 2030. As a result, it is ClientEarth’s belief that the company is unlikely to meet even its own 2050 targets.

The success of ClientEarth’s claim will firstly depend on whether the Court grants permission to bring a derivative claim on behalf of the company against the directors personally. Permission will be refused if the directors can show that Shell’s strategy for net zero transition has been ratified by the company or that a person acting in accordance with the duty to promote the success of the company would not seek to proceed with the claim. Whilst the hurdle may be high for ClientEarth, pressure has been mounting to place more emphasis on the impact of businesses’ operations on the community and the environment under s172 CA 2006, and as part of a wider Environmental, Social and Governance (ESG) strategy.

If ClientEarth’s legal action is successful at trial, the Court could force Shell’s board to align its climate strategy with the goals of the Paris Agreement by way of a mandatory injunction and it could also declare that Shell’s board has acted in breach of its statutory duties pursuant to CA 2006.

Comment

Notwithstanding whether permission is granted for the action or ultimately successful at trial, it is clear that climate change litigation is here to stay and specifically more climate-related litigation will be brought directly against companies and their boards. The legal action has relevance for all companies, not just in the energy sector, as all businesses will shortly be required to make disclosures relating to how they are fulfilling their environmental obligations. It is likely that by the end of 2023, mandatory climate-related disclosures will apply to the majority of UK-registered companies (as reported in HM Treasury’s “a Roadmap towards, mandatory climate-related disclosures”). As a result there is a need for businesses to focus on operating in a more sustainable way in order to show commitment to cutting emissions to avoid legal action.

It is increasingly important that businesses adequately consider the environmental consequences of their operations especially at a time where the consequences are having a tangible effect on financial performance and strategy. Areas of risk mitigation may include:

• undertaking a risk assessment to identify ESG related practices within the organisation that may be at greater risk of potential claims;
• ensuring board minutes contain a range of climate change considerations which prompt directors to consider their business net zero targets / climate change risks as a part of overall decision-making; and
• ensuring there is evidence of robust consideration of material climate impacts and risks arising from significant contracts and transactions.

It is important for directors to understand that if there is an inconsistency between the company’s public position in relation to ESG issues and its internal policies and actions, the company could be liable for making misleading disclosures, which might give rise to regulatory investigations and related derivative actions by shareholders.

This is particularly important for businesses bidding on central government procurement contracts as the tender process now requires key ESG related themes to be evaluated and a minimum weighting of 10% must be given to ESG objectives in each procurement[3].

[1] (section 172(1)(d), Companies Act 2006).

[2] Vereniging Milieudefensie et al. v. Royal Dutch Shell PLC, Hague District Court, Decision of May 26, 2021

[3] Procurement Policy Note (“PPN”) 06/20