A shareholder of Shell is pursuing Shell's board of directors in the UK for failing to implement a strategy aligned with the Paris Agreement and preparing the company for a low carbon economy, in another example of the way stakeholders concerned by climate change and ESG are employing new tactics.
ClientEarth sues Shell's Board of Directors
ClientEarth, a shareholder of Shell plc (Shell) and an environmental law organisation, is seeking to pursue a derivative action against Shell’s board of directors in the UK for failing to implement a strategy aligned with the Paris Agreement and to prepare the company for a low carbon economy in breach of directors’ duties under the UK Companies Act.
The proposed action follows Friends of the Earth’s successful claim against Shell in the Netherlands in 2021. In that case, the District Court of the Hague ordered Shell to reduce its CO2 emissions, including its scope 3 emissions, by net 45% by the end of 2030.
While Shell has since moved its business operations to the UK, and are appealing the decision claiming it is neither feasible nor reasonable, Shell’s response to the ruling is at the centre of ClientEarth’s allegations. Specifically, ClientEarth alleges that Shell’s emissions targets (which were purportedly accelerated following the Dutch Court’s decision) are not reflected in Shell’s operational plans or budget. According to September 2021 research relied on by ClientEarth, the board’s corporate strategy would instead lead to a 4.4% increase in net emissions by 2030.
The matter is still in its pre-action infancy and ClientEarth will first need permission from the High Court of England and Wales to pursue litigation in the company’s name, which some commentators have opined is unlikely to be given.
While ClientEarth holds this is a first of its kind, a similar derivative action brought against the trustee directors of the Universities Superannuation Scheme has recently been struck out by the UK High Court of Justice, having failed to substantiate a prima facie case. The move to make directors personally liable for corporate strategy has long been theorized as a potential pathway for strategic climate litigation and, as Noel Hutley SC and Sebastian Hartford-Davis’s recent third opinion on directors’ duties with respect to climate change makes clear, directors should now proactively protect a company against climate-related risks to avoid liability. Merely contemplating these risks will be inadequate. Regardless of the outcome in the current matter, ClientEarth’s move will likely prove influential for similar future actions.
The alleged failures of Shell’s Board of Directors
Under section 172 of the UK Companies Act, company directors have a duty to promote the success of the company and company directors must act in a way that promotes the company’s success for the benefit of its members as a whole.
ClientEarth argues that the board’s failure to implement a strategy compatible with the net zero transition puts the company’s long-term commercial viability, including investor capital, at risk given Shell’s material exposure to climate-relate risks, including Shell’s physical infrastructure, market transitions and shifting societal attitudes. Through a derivative action, ClientEarth is seeking to compel Shell’s board to materially strengthen its corporate climate strategy.
The future of climate change litigation against directors
Shell’s board of directors will have an opportunity to respond to ClientEarth’s pre-action notice before ClientEarth will seek the UK Court’s permission to bring the claim – however a timeframe is not yet known. For the Court to permit such an action, ClientEarth will need to overcome certain legal hurdles which may prove difficult to sustain.
Interested parties and stakeholders alike will be closely following ClientEarth’s move to hold Shell's directors personally liable and will likely influence further strategic litigation to force corporate executives into climate action. Indeed, litigants are increasingly opting for novel approaches to force both corporate and government decisionmakers to account. In O’Donnell v Commonwealth  FCA 1223, the applicant claimed, inter alia, that certain Commonwealth officials owed a duty to disclose to investors information material to climate change. The Federal Court of Australia ultimately struck out this argument on the basis that the applicant lacked standing. Although the applicant failed on this point, it is likely that litigants will continue to pursue this line of argument in order to pressure energy companies to take more action to reduce their carbon emissions.