ClientEarth are taking ground breaking steps by pursing shareholder litigation against Shell.
ClientEarth accuse Shell of failing to adopt and implement a climate strategy that aligns with the goals of the Paris Agreement, leading to a breach of directors duties under sections 172 and 174 of the Companies Act 2006. This is the first time shareholders have brought a claim relating to ESG (Environmental, Social and Governance) matters in the UK.
Shareholders are permitted to bring claims, known as derivative actions, for alleged breach of directors' duties. They are commonly brought for perceived financial reporting breaches, but this claim highlights a new direction for shareholder action. The s172 duty requires a director to "…act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole" and of particular relevance to this case directors must have regard to "the impact of the company's operations on the community and the environment". S174 requires directors to exercise reasonable care, skill and diligence.
ClientEarth claim that the Shell board's failure to properly manage climate risk, and in particular its failure to adopt and implement a climate strategy that truly aligns with the Paris Agreement goal to keep global temperature rises to below 1.5°C, means that it is breaching these duties.
As part of its explanation ClientEarth refer to the proceedings in 2021 following which Shell was ordered by a Dutch Court to reduce its overall omissions by net 45% by the end of 2030. Climate Earth claim that the Shell board "has since rebuffed parts of the verdict, indicating that it is unreasonable and essentially incompatible with its business" and that Shell's current strategy would result in a 4% rise in net emissions by 2030, meaning that the company would be unable to meet even its own targets. ClientEarth argue that the Shell board has failed to properly prepare the company for the net-zero transition, putting the long-term value of the company at serious risk.
Further details of the claim can be found via 'ClientEarth: We're taking legal action against Shell's board for mismanaging climate risk'.
ESG awareness has increased significantly recently, as has shareholder activism, so it was only a matter of time before such a claim was brought. Although this is still a pre-action claim, if permission is given by the court to bring the action the case will create a great deal of interest and may well impact on ESG strategies going forward.
If you would like to discuss your company's ESG strategy please contact Sharon Ayres or your usual Gowling WLG contact.