ClientEarth v Shell PLC: A new era for ESG and climate change litigation that’s turning up the heat for company directors

ClientEarth has now issued its threatened derivative action against Shell plc in the High Court of England and Wales. The claim, apparently bolstered by significant institutional investor support (making up 12 million shares in the company), shows that the growing trend in ESG and climate-related litigation is here to stay, and businesses must prepare for a green energy transition.

On 9 February, ClientEarth filed what the charity describes as the “world-first” derivative action as a shareholder against the Board of Directors of Shell plc in the High Court for ‘failing to manage the material and foreseeable risks posed to the company by climate change’. It is argued that Shell’s directors breached their legal duties under sections 172 and 174 of the Companies Act 2006 by failing to adopt and implement an energy transition strategy in line with the 2015 Paris Agreement – a legally binding international treaty on climate change, responsible for setting the overarching goal of limiting a rise in average world surface temperatures to below 2°C, while pursuing efforts for a 1.5°C increase above pre-industrial levels.

The UN’s Intergovernmental Panel on Climate Change has indicated that crossing the 1.5°C threshold substantially increases the risk of more severe climate change impacts, including flooding, droughts, cyclones and rising sea levels.

In March 2022, ClientEarth notified Shell of its claim against the company’s 13 executive and non-executive directors by issuing a letter before action criticising Shell’s “Energy Transition Strategy” to become a net-zero emissions energy business by 2050. Derivative actions by shareholders require the Court’s permission in order to continue a claim under section 261 of the Companies Act 2006. While there is no minimum number of shares that must be held in order to continue a derivative claim, the Court will look at the size of the shareholding when determining whether to permit the claim to continue. In February 2023 the charity filed its claim against Shell’s directors on behalf of the company. According to Paul Benson, ClientEarth lawyer, Shell is ‘seriously exposed to the physical and transitional risks of climate change, yet its climate plan is fundamentally flawed.’ This is against a backdrop of more than 30% of shareholders having voted against the Board in support of a resolution calling for Paris Agreement-aligned emissions targets at Shell’s 2021 AGM. ClientEarth has been a shareholder of Shell plc since 2016.

Investor support for ESG litigation

ClientEarth’s claim has received unprecedented support from institutional investors, including large pension funds and asset managers, holding more than 12 million shares in the company and more than £450 billion in total assets under management. One such institutional investor backing the derivative claim, Nest, is the UK’s largest workplace pension scheme representing 10 million members. The support of such heavyweight institutional investors for the claim is significant as it signals shareholder appetite for divesting from fossil fuels and a willingness to litigate in order to protect business assets and investments vulnerable to climate change impacts.

Institutional investor support for the derivative action by ClientEarth is set against a backdrop of Shell announcing record-breaking profits of $40 billion (£33 billion) in a chaotic global energy market for consumers and businesses alike. The recently announced record profits by Shell have led to arguments by the Claimant that the company is ‘underinvesting’ in its low-carbon transition strategy.

The importance of a viable transition strategy

ClientEarth’s action against Shell has demonstrated that climate change and ESG-related litigation is now firmly placed on the business agenda, with investors increasingly seeking to challenge the long-term economic viability of companies that fail to take immediate action against climate change in an anticipated, future low-carbon economy.

Divestment from fossil fuels, it is argued, is more than a mere fanciful prospect but an inevitable and foreseeable economic reality and necessity for businesses and must therefore be addressed by directors when considering their duties to the company under the Companies Act 2006.

Business directors can guard against potential litigation by shareholders in respect of their statutory duties by:

• Conducting risk assessments and evaluating financial exposure to climate change
• Developing viable strategies for a low-carbon/carbon-neutral economy
• Setting achievable targets and commitments
• Undertaking public engagement

Directors’ duties: Climate change as a financial risk

Business owners and directors can expect to be held to account as investors increasingly scrutinise the credibility of their proposed energy transition and emission reduction strategies, as well as plans to protect business assets and investments from the effects of climate change. If no meaningful and evidenced-based action, consistent with the Paris Agreement, is taken by directors, climate-related litigation including derivative claims by shareholders against company directors may ensue.

This “first-of-its-kind” claim filed in the UK by ClientEarth and the significant investor support received suggest that litigation focusing on the financial risks posed by inadequate policies on climate change may be employed as a means of forcing companies to make bolder moves on climate change. Directors may increasingly be held to account for failing to implement viable strategies in line with the Paris Agreement.

Whilst greater access to litigation funding teamed with growing public support currently make such claims more viable for climate activist organisations to pursue, it is likely that well-funded private investors and large claimant groups will eventually follow suit. Win or lose, this claim will undoubtedly influence how similar claims are brought in future.

Business owners and directors need to prepare for the real prospect of climate change litigation amidst greater public and investor support for a carbon-reduced economy and environmentally-sound business practices.

FURTHER INFORMATION

Should you have any questions about the issues covered in this blog, please contact Katie Allard in our Dispute Resolution team.

For further information on Environmental, Social and Governance issues, please visit our website here.

ABOUT THE AUTHORs

Katie Allard is an Associate in the Dispute Resolution Team. She has a wide-ranging commercial practice with particular interest and expertise in complex civil fraud and asset tracing investigations, boardroom and shareholder disputes, and breach of contract claims, acting for both claimants and defendants. 

Isabella McDonnell is a paralegal in the Dispute Resolution team and assists on a broad range of disputes, Including media, privacy, reputation management, commercial and contract, professional negligence and contentious trusts and probate claims.