Last month, environmental law organisation ClientEarth announced that it was taking Shell to court. This may not sound out of the ordinary. But what makes this case different is that there are real people at the centre of it. This time it’s not a corporation that’s liable, it’s their Board of Directors.
ClientEarth says that the 11 members of the board have breached their legal duties by failing to adopt a transition strategy that aligns with the Paris Agreement.
Essentially, Shell’s Board isn’t doing enough to manage the risks the company faces because of climate change.
“What we’re asking the court for is an order which requires the board to adopt and implement a strategy to manage climate risk in line with its duties under the (UK) Companies Act, in line with its duties under English law,” explains ClientEarth senior lawyer Paul Benson.
The other extraordinary thing is that the law organisation isn’t acting alone: they are backed by investors who hold 12 million shares in the fossil fuel giant. ClientEarth, crucially, is one of these investors. They became a Shell shareholder in 2016.
“The shift away from fossil fuels towards low carbon alternatives, they call that essentially an existential crisis for the oil and gas industry,” says ClientEarth senior lawyer Paul Benson.
“Shell’s board has identified some of that risk. The problem is that it’s not managing it in a proportionate and adequate way, and that leaves the company seriously exposed.”
What exactly is ClientEarth asking for?
“It’s the first time where a board of directors is on the hook for failing to properly prepare the company for the energy transition,” Benson says.
Bringing this case was no small decision. Benson asserts that his team has spent months pouring over the documents and has significant expertise in the area. From that work, came this landmark lawsuit.
It’s something of a test case for the English courts. There’s still hope that media coverage and pressure from investors could force the board to act. But Benson says that’s now a “forlorn hope”.
He is confident that the High Court will grant permission for ClientEarth to proceed with the first-of-its-kind lawsuit.
How did it get to ClientEarth suing Shell’s Board of Directors?
Benson explains that it is a “coming together of a number of really serious concerns and frustration”. ClientEarth has been a shareholder in Shell since 2016 and is part of a network of investors.
But they aren’t the only ones worried about the future. Benson says their position as shareholders means they have been privy to this concern and frustration about the direction of travel.
He adds that investors have been uneasy about the direction the Board is taking and complaints have been voiced to them several times over the years. Not only that, but these investments include peoples’ pension funds.
Shell denies there is any unrest, claiming that shareholders “strongly support” the progress it is making on its energy transition strategy with 80 per cent voting in favour of it at the last annual general meeting.
What are Shell shareholders concerned about?
One of the key issues for ClientEarth is a 2021 Dutch court order which requires Shell to cut its emissions by 45 per cent by the end of 2030 – a judgement the company has appealed.
Friends of the Earth and more than 17,000 co-plaintiffs successfully argued that the company knew about the risks of carbon emissions for decades and that its climate targets didn’t go far enough.
“That judgement, the court said very explicitly, is what we call not stayed pending appeal. So that means they have to do it now. They can’t just appeal and say ‘oh maybe we’ll win the appeal’,” Benson explains.
“They have to do it now and start complying with the judgement now.”
But he claims the response to the court order set alarm bells ringing.
The Board has said they will cut scope one (direct greenhouse gas emissions from sources owned by the company) and scope two emissions (indirect emissions from energy purchased and used) by 50 per cent by 2030.
Scope three emissions, or emissions from the products they sell which are responsible for 90 per cent of the company’s total, won’t be cut.
Independent assessments have estimated that Shell’s net emissions are set to drop by just 5 per cent by 2030 – a far cry from what the court has ordered.
According to Benson, the board doesn’t believe this target is compatible with the business and so they aren’t going to do it.
“It’s just not a reasonable or sustainable management model for a huge multinational company to just say: ‘Well, I don’t like part of that court order, so we’re not going to do it.’”
Shell: Handbrake turns and stranded assets
Last year, ClientEarth sent a lengthy letter to the Board setting out its concerns.
It believes that the longer Shell leaves it to adapt to potential changes in regulation, the economy, consumer trends and even societal developments, the less likely it is that it can respond properly. It increases the chance of a harsh “handbrake turn” to rectify the problem.
They didn’t receive a satisfactory response and at that point, Benson says, they felt they had no option except for a lawsuit.
“It’s a recipe for stranded assets if you continue to plough money into major new oil and gas projects when every single energy transition scenario from the International Energy Agency says there is going to be a decline in demand.”
Stranded assets are those that are likely to be worth less than expected. In terms of oil and gas, that means those that are devalued or become liabilities because of the energy transition.
For example, he explains that there are some assets which the company has or projects under exploration and development which won’t start producing oil and gas until 2030 or 2040. According to Benson, the world will look a lot different by that point.
“You’re putting all this money, people’s shareholder capital, people’s pensions fund money, into these huge new projects. And those projects are most likely going to end up as stranded assets.”
Shell has said it doesn’t accept ClientEarth’s allegations and insists its directors have complied with their legal duties, acting in the best interests of the company. It also claims that its climate targets are aligned with the 1.5C goal of the Paris Agreement. The Board has said it will defend its position.
Now it is up to the High Court to decide whether to grant ClientEarth permission to bring the claim.
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