Mon, Jun 17 2024 17 June, 2024

Client Earth asks UK court to revise Shell lawsuit dismissal

The environmental law charity is urging a UK court to reconsider its dismissal of the NGO’s landmark Shell lawsuit against the firm’s board of directors over alleged inaction against climate change.

Shell logo on top of glass building (Photo credit: Adobe Stock/Askar)

Environmental law charity Client Earth is hopeful that a UK court will reconsider its dismissal of the NGO’s landmark Shell lawsuit against the firm’s board of director over its inaction against climate change, amid a widening gap between oil majors strategies and climate goals.

Client Earth filed in February a lawsuit at the High Court of England and Wales, a world-first, against Shell’s board of directors for failing to align with Paris agreement objectives, which commentators said had the potential to lead to a ‘snowball’ effect if successful.

The case was brought as a so-called ‘derivative’ claim on behalf of Shell in Client Earth’s capacity as a minority shareholder of the company.

However, the High Court recently turned down the NGO’s request, noting that directors of large companies such as Shell had to take into account a number of competing considerations and questioning the appropriateness of determining companies strategy through court’s decisions.

In response to that, Client Earth is now asking the High Court to reconsider its decision through an oral hearing.

In its decision, the Court also noted that 80% of Shell’s shareholders were supportive of the company’s strategy in managing climate risks. Such support was reconfirmed at the company’s annual general meeting on Tuesday, which was marked by climate activists’ protests.

Shell, which posted record profits of $40 billion in 2022, is targeting net-zero scope 1 and 2 emissions by 2050, and to reduce scope 1 and 2 emissions by 50% by 2030 against 2016 levels. However, it did not set specific targets for scope 3 emissions, which are related to the combustion of the fossil fuels sold and which are estimated to account for the vast majority (90%) of an oil major’s carbon footprint.

Should Client Earth’s lawsuit be unsuccessful “the risks presented by climate change to Shell’s business won’t change. It’s likely to lose customers as society and the economy moves away from fossil fuels,” Client Earth’s senior lawyer Paul Benson told Gas Outlook.

The company is “likely to face significant write-downs, because there will be less need for oil production pipelines and platforms, certainly not new ones,” he argued.

“It’ll find it harder to get loans, because banks are increasingly cautious about lending to carbon-intensive industries, and it’s likely to face more and more regulation to tackle the huge problem of climate change, from carbon taxes and bans on fossil fuel extraction to mandatory transition rules.”

“Investors want to see action in line with the scale of these risks and by consistently sticking to its flawed strategy, the Board is currently failing to deliver on those expectations,” he added.

“Whether through further investor pressure, government intervention, or future regulation, Shell will have to reduce its emissions much harder and faster than it is currently planning,” he continued.

“It’s in the company’s best interests to do that sooner rather than later in order to protect its long-term commercial viability.”

While litigation is one of the tools “there are other avenues for influence, including capital allocation, investor engagement with corporate management, and shareholder voting powers,” he said.

“Government intervention will also play a role as countries look to hasten the shift to a low-carbon world.”

“Ultimately, the writing is on the wall for fossil fuels long term and the Board will have to change its approach.”

“The question is whether it does that now in order to future-proof the company’s commercial viability, or whether it continues to kick the can down the road until the only option left is to execute an abrupt ‘handbrake turn’ to maintain competitiveness.”

Client Earth’s lawsuit was backed by a number of institutional investors including Danish pension fund Akademiker Pension, which had said at the time that if ClientEarth’s claim was successful and Shell’s strategy was to become Paris-aligned “the company could become an attractive investment again.”

“We’re surprised and disappointed by the ruling from the High Court, the importance and potential implications of this case can hardly be understated, so we’re still hoping to see it go forward,” Akademiker Pension’s CIO Anders Schelde, told Gas Outlook.

“This ruling does not change our assessment of Shell as an investment.”

“We fully support ClientEarth’s claim against the Board of Directors of Shell for failing to adequately prepare the company for the energy transition,” he said.

The person fund previously held publicly traded shares in Shell but decided to exclude it from its investment portfolio in 2019 due to the lack of a credible plan to align the company’s business activities with the Paris agreement, he said.

“This was first and foremost done to shield our investments from long-term climate-related financial risks.”

“We are divested from Shell now, but we would be ready to reinvest if the company were to align its business activities with the goals of the Paris Agreement,” he added.