Published 29 March 2022

50 predictions: Construction & Engineering

ClientEarth has issued a letter of claim against 13 of Shell’s executive and non-executive directors alleging that a failure to properly prepare for net-zero puts them in breach of their legal duties.

ClientEarth has issued a letter of claim against 13 of Shell’s executive and non-executive directors alleging that a failure to properly prepare for net-zero puts them in breach of their legal duties.Directors have statutory duties under the Companies Act 2006 (the “Act”) to act in a way that they consider will promote the success of the company for the benefit of its members as a whole (s.172 of the Act). There is an express obligation under s.172 on directors to have regard to specific factors including the impact of the company’s operations on the community and environment. Directors have a separate duty to exercise reasonable care, skill and diligence in discharge of their duties (s.174 of the Act).We have already written (see here) on why directors are at risk of breaching these duties if they fail to understand and act upon the risks posed by climate change to their businesses. It is well established that climate change presents physical, transition and liability risks to businesses and the financial system as a whole, and failing to properly consider these risks puts the long term success of a company in jeopardy.While under English law it is generally only the company (acting via its board of directors) that can bring a claim for breach of directors’ duties, ClientEarth, as a shareholder in Shell, is using an exception to that rule, a derivative claim. A derivative claim is a tool available to shareholders in circumstances where the majority wrongfully prevent a company bringing or proceeding with a claim against a director for breach of duty, negligence or breach of trust.According to ClientEarth, Shell faces significant climate risks, including;Shell’s physical assets being heavily exposed to extreme weather events and the wider economic impacts of climate breakdown (physical risks);The net-zero transition, bringing regulatory, market and societal shifts, means Shell will face massive limitations on its operations, while its assets are at threat of becoming stranded (transition risks); andClimate inaction is increasing Shell’s exposure to the risk of legal action and reputational damage (liability risks).ClientEarth alleges that while Shell has announced an “accelerated” net-zero strategy and its board objective to be a net-zero emissions energy business by 2050, its strategy is flawed. It highlights, amongst other things, that its 50% reduction target by 2030 only relates to scope 1 emissions (direct emissions) and scope 2 emissions (indirect emissions), which make up only around 5% of the company’s emissions. Scope 3 emissions, those emitted along Shell’s value chain (i.e. including by customers), are excluded from its target. ClientEarth also alleges that Shell has only limited investment in renewable energy, and that despite its net-zero target the board intends to grow the company’s fossil fuel business.This, it says, fails to adequately prepare the company for the transition risks posed by climate change, and fails to exploit the competitive advantage Shell could gain by investing in renewables and green technologies. It also ignores the 2021 judgment by the Dutch Courts (see below) which ordered Shell to reduce its group wide scope 1 to 3 emissions by 45% by the end of 2030. These failures, ClientEarth alleges, put the directors in breach of their statutory duties.Is this new?The last couple of years have seen some great successes for activist climate litigation in Europe – Dutch, German, French and Irish governments have all been at the receiving end of activist litigation and subsequent court judgments ordering them to make changes to climate policies.We are seeing a trend emerging where cases against governments have been successful, activists turn to corporations to try and effect corporate change. Milieudefense et al v Royal Dutch Shell (2021) was the first case against a corporation which was decided in favour of the claimants, and Shell was ordered to reduce its worldwide CO2 emissions by 45% by 2030 compared with 2019 levels. While Shell is appealing that decision, a number of other claims have subsequently been issued against corporations across Europe.We have not however seen the same successes in activist litigation in the courts of England & Wales. Activists have tried to challenge the government on numerous occasions by way of judicial review, with limited success, albeit more applications have recently been issued by ClientEarth, Friends of the Earth and the Good Law Project against the government’s Net Zero Strategy and Heat and Buildings Strategy.ClientEarth’s threatened claim against Shell is the first time we have seen activists in the UK target a corporation rather than the government. If ClientEarth decides to issue its claim, they will need to overcome a number of hurdles that have to be tackled when bringing a derivative action, including persuading the court to use its discretion to consent to the claim. It will be interesting to see how the court deals with this, especially in light of the indisputable evidence of the risks that climate change brings to businesses.A sign of more to come?It’s important to be clear that these sorts of derivative actions are not limited to activists. A claim filed in October last year (Ewan McGaughey et al v Universities Superannuation Scheme Limited), brought by two members of the Universities Superannuation pension scheme against the directors of the company that manage the scheme, made similar allegations. Among a series of contentions against the directors, the claimants allege that the schemes’ continued investment in fossil fuels without any adequate plan for divestment prejudices the long term success of the company and constitutes a breach of the directors’ statutory duties under the Act.Climate change poses real risks to companies and, as these cases show, directors. If they are not already, directors should see these cases as a wakeup call to properly consider and act on climate change risks, to protect their company’s success and their own risk of liability. Others, such as pension trustees and investment managers, need to be alive to the issue too.The latest IPCC Report published in February this year, made it very clear that the window of opportunity to ensure global warming is limited to 1.5 degrees (deemed necessary to avoid the most severe consequences of climate change) is closing rapidly, and what needs to be done to meet that target is immense. In that context, the physical, transition and liability risks businesses are facing with respect to climate change have the potential to evolve rapidly – identifying and mitigating these risks should be at the top of board agendas.