CLIENTEARTH HAS STARTED legal action against the Board of Directors of Shell, arguing that their failure to properly prepare the company for net zero puts them in breach of their legal duties.

On 15 March, the environmental law organisation notified Shell, in its capacity as a shareholder, of its claim against the company’s 13 executive and non-executive directors – in the first ever case seeking to hold company directors personally liable for failing to properly prepare for the energy transition.

ClientEarth argues that the Board’s failure to adopt and implement a climate strategy that truly aligns with the Paris Agreement is a breach of their duties under the UK Companies Act. Under that Act, Shell’s Board is legally required to act in a way that promotes the company’s success, and to exercise reasonable care, skill and diligence.

Paul Benson, ClientEarth lawyer, said: “We believe that there are sufficient grounds to assert that Shell’s Board is mismanaging the material and foreseeable climate risk facing the company.

“Shell is seriously exposed to the physical and transitional risks of climate change, yet its climate plan is fundamentally flawed. If, as we claim, the company’s plan is being held up to be Paris-aligned when it is not, then there is a risk of misleading investors and the market at large.

“Despite Shell’s current profits, failing to properly prepare the company for the inevitable net zero transition only increases the company’s vulnerability to stranded asset risk, and to massive write-downs of its fossil fuel assets.”

ClientEarth says it is acting in Shell’s best interests by pursuing shareholder litigation, to ensure that near-term profit does not come at the expense of enduring commercial viability for all of the company’s stakeholders, including its shareholders and employees.

“The business world is littered with examples of companies that failed to adapt. Shell risks going the way of Kodak and Blockbuster. Unless the Board changes course, long-term value will be eroded, and eventually destroyed”, Benson added.

The challenge comes as Russia’s invasion of Ukraine has triggered the biggest shock to energy markets in decades. Analysts expect war in Ukraine could likely hasten the trend away from Shell’s oil and gas products over time, with the EU declaring last week that it would set out a plan to wean the bloc off fossil fuels.

Many of Shell’s largest institutional shareholders have expressed concern about the company’s climate strategy. More than 30 per cent of shareholders voted against the Board in support of a resolution calling for Paris-aligned emissions targets at Shell’s 2021 AGM. The Climate Action 100+ Initiative, supported by the world’s biggest investors, is calling on all companies to align their business plans with the goals of the Paris Agreement.

Flawed climate strategy

In May 2021, Shell was ordered by a Dutch court to reduce its group-wide emissions – including those from the fossil fuel products it sells – by net 45 per cent by the end of 2030. However, its directors have since rebuffed parts of the verdict, calling it “unreasonable” and – in respect of the obligation to reduce Scope 3 emissions – indicating that it is essentially incompatible with its business. Shell has since appealed the Dutch ruling.

Instead, the Board has implemented its “Energy Transition Strategy” and subsequent Scopes 1 and 2 absolute reduction targets. Shell publicly maintains that its 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, in step with society.

But, ClientEarth lawyers say, the strategy simply does not square with the emissions reductions pathways scientists say are needed to meet that goal and avoid catastrophic climate change, nor does it square with the company’s own net zero ambition.

ClientEarth lawyers also highlighted that the intention to only transition “in step with society” places yet a further caveat on the commitment to net zero. Analyst research* last year suggested that, far from a 45 per cent reduction, Shell’s strategy would in fact result in a four per cent rise in net emissions by 2030.

Benson added: “The longer the Board delays, the more likely it is that the company will have to execute an abrupt ‘handbrake turn’ to retain commercial competitiveness and meet the challenges of inevitable regulatory developments.

“Shell’s shareholders need certainty that the company is using their capital effectively in its navigation of the global energy transition and is genuinely pursuing the climate goals that it says it is.”

During its full year earnings call in February, Shell’s Board announced an increase to the company’s dividends and plans to buy back more shares after reporting profits of $19 billion. The announcement came as households were facing crippling energy bills, which have continued to soar as the war in Ukraine has thrown the fossil fuel energy market into further chaos.

“Boosting dividends and buybacks might placate investors temporarily, but that approach is short-sighted, if – as the Board maintains – the money is critically needed to prepare the company for a net zero landscape.

“The proportion of investment currently going to Shell’s transition is, relatively speaking, miniscule. There needs to be greater focus on the long term and greater investment in renewables to break free from fossil fuels and their inherent volatility.”

ClientEarth is encouraging institutional investors to join or support the claim, and – in line with their own fiduciary duties – to use their position to compel the Board to adopt a strengthened climate strategy which sufficiently protects against financial losses resulting from climate risk.

* More information on Redirecting Shell, the claim from ClientEarth, here.

* Source: ClientEarth