In what it calls the “world’s first” of its type, the environmental advocacy group ClientEarth has filed a shareholder derivative action against the board of Shell plc, claiming that the company’s directors have failed to take sufficient steps to protect the company from the future impacts of climate change. The action seeks to compel the board to “strengthen its climate transition plans, in the best interests of the company in the long term.” A copy of ClientEarth’s February 9, 2023 press release about the new lawsuit can be found here. The group’s statement of FAQ’s can be found here.
ClientEarth is a global advocacy group that seeks to use legal actions to advance environmental objectives. ClientEarth holds a small number of Shell shares. According to its press release, the group has filed a shareholder derivative action in the High Court of England and Wales against the board of directors of Shell. The group claims to have the support of a group of institutional investors that “collectively hold more than 12 million shares” of Shell. The investors include, among others UK pension fund Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS, Degroof Petercam Asset Management (DPAM) in Belgium, as well as Danske Bank Asset Management and pension funds Danica Pension and AP Pension in Denmark.
In its statement of FAQs, the group claims that its new lawsuit is “the first attempt to hold a company’s Board of Directors personally liable for failing to properly prepare for the energy transition.” The group also claims that its new lawsuit is “a milestone in climate litigation: company directors can – and will – be challenged to uphold their legal duties to manage climate risk, by preparing their companies for that transition.”
I have not yet been able to obtain a copy of the group’s complaint and would be very grateful to anyone who could supply me with a copy. From the advocacy group’s statements, it appears that the group’s allegations against Shell’s board are made in reliance on the UK Companies Act, and in particular upon the Section 172 of the Act, which requires the company directors to act in a way they consider will best promote the success of the company for the benefit of its members as a whole. Under the Act, the group alleges, Shell’s board is also legally required to exercise reasonable care, skill, and diligence in the discharge of its duties.
The gist of the group’s allegations against the Shell board is that, as one of the world’s largest oil and gas companies, the company is “exceptionally vulnerable” to the physical and transitional impacts of climate change, including foreseeable risks that are material to its business. The company’s assets, the advocacy group asserts, are heavily exposed to the likely future effects of climate change, and the company is also exposed, the group alleges to “to the transition risk resulting from regulatory, market, and societal shifts,” such that the company’s assets are “at serious risk of becoming stranded in the future.”
Yet Shell’s Board, the advocacy group alleges, is “fundamentally mismanaging those risks, leaving the company ill-prepared for the low-carbon transition.” The company’s “Energy Transition Strategy,” which the company released in 2021, which purports to target the company’s reduction of Scope 1 and Scope 2 emissions by 50% by 2030 has, according to the group, “serious shortcomings.” The group alleges that among other things, the zero emissions target is not reflected in the company’s operating plans and budgets; contains strikingly low short and medium-term reduction targets; and, according to analyst research the group cites, would result in just a 5% reduction in net emissions by 2030.
Moreover, the group alleges, Shell continues to invest in the development of new oil and gas fields while investing only a small percentage of its capital in renewable energy. In addition, the group asserts, the company’s Board has “failed to put forward a meaningful strategy to fully comply with a recent judgment of a Dutch Court, which has ordered the company to reduce its net emissions … by 45% by 2030 compared to 2019 levels.”
According to the company’s statements, the lawsuit seeks to “compel Shell’s Board to strengthen its climate transition plans, in the best interests of the company in the long-term.”
This new lawsuit represents the very sort of climate change-related D&O litigation that observers and commentators have long anticipated, which is noteworthy in and of itself. ClimateEarth claims the lawsuit is the “world’s first” seeking to hold company directors “personally liable for failing to properly prepare for the energy transition.”
Yet while the group claims that its suit seeks to hold directors “personally liable,” the relief or remedy the group claims to be seeking appears to be a judicial order compelling the board to require the company to take action, rather than monetary damages.
Moreover, quantifying the directors supposed present liability could be particularly challenging, given that the harms the group alleges are all in the future. Indeed, demonstrating shareholder harm of any but the most theoretical type at the present moment would seem to be particularly elusive given that the company posted record profits last year (according to the Wall Street Journal (here), the company reported $41.6 billion in profits measured on a net of current cost-of-supplies basis).
The company’s recent record profits underscore the dilemma companies face in confronting climate change issues; as the recent Journal article put it, oil and gas companies like Shell are “wedged between some large investors and governments calling for accelerated shifts away from its fossil fuels and others continuing to demand the profits that those assets can generate.”
As far as the new lawsuit’s implications, it seems noteworthy that the action has been brought against a company in the oil and gas sector. In that respect, the lawsuit arguably is unsurprising, as it is not news that the companies in that sector have the attention of activists, regulators, and others when it comes to climate change issues. Indeed, this is not even the first lawsuit brought against Shell itself when it comes to climate change concerns. ClientEarth itself expressly refers to the prior lawsuit against Shell in which a Netherlands court has ordered the company to reduce its emissions by 2030 (as discussed in detail here).
It also is noteworthy that ClientEarth brought its action in an English court, under UK law. Shell is of course now based in the UK, which would explain the choice of forum and law. However, as I noted in a recent post (here), claimants seeking to assert climate change related claims have been particularly active in Europe, more so than has been the case in the U.S, and this new lawsuit seems to reinforce that point. This may be the rare instance where legal developments may advance more quickly in courts outside the U.S.
While it remains to be seen how this lawsuit will fare and what it might accomplish, it seems probable that this will not be the last lawsuit of this type. Indeed, it seems probable that advocacy groups, regulators, and others will continue to seek to use litigation to try to compel companies either to take climate change action or to increase their climate change-related disclosures. In that respect, from the point of view of the prospective claimants for these kinds of claims, it may be relatively unimportant that these kinds of lawsuits succeed on the merits – the claimants asserting these kinds of claims may be more interested in drawing attention to the issues and putting pressure on companies to make changes than on prevailing from a litigation standpoint.
What will be interesting to see is whether claimants will seek to expand their aim beyond just the oil and gas sector to include companies in other industries, and whether the claimants will seek to assert these kinds of claims in U.S. courts.
In the meantime, those concerned about the prospective liabilities of corporate directors and the kinds of claims that can be asserted against them will have to try to assess risk of further claims of this type. Those who have long been concerned about the possibilities for lawsuits of this type now have a concrete example to cite when seeking to describe the potential risks.
One final thought about what this case means as far as ESG litigation trends. Regular readers know that so far, most of the ESG litigation that has been filed has not been against ESG laggards, but rather against companies that were proactive on ESG issues but who executed poorly on the ESG goals or who failed to live up to their commitments. This case shows that ESG laggards may also attract litigation. Clearly ESG litigation can take many forms.