Wed, May 29 2024 29 May, 2024

Client Earth, Shell lawsuit to have ‘snowball’ effect

The world-first Client Earth Shell lawsuit will have a ‘snowball’ effect, prompting other shareholder activist groups to take similar actions, say commentators.

Courthouse facade with columns (Photo credit: Adobe Stock/Africa Studio)

Shareholder activist group Client Earth has filed a world-first lawsuit against the board of directors of energy major Shell for failing to align with the Paris agreement on climate change, with commentators now expecting a ‘snowball’ effect to result from the case.

The lawsuit was filed in February in the High Court of England and Wales and was backed by a group of institutional investors collectively holding more than 12 million shares in the company, and roughly £450 billion in total assets under management.

The group of investors includes, among others, UK pension funds Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS, Belgium’s Degroof Petercam Asset Management, Danske Bank Asset Management and pension funds Danica Pension and AP Pension in Denmark.

The legal claim alleges Shell’s 11 directors have breached their legal duties under the UK Companies Act by failing to adopt and implement an energy transition strategy that aligns with the Paris agreement, thus failing to manage “the material and foreseeable risks posed to the company by climate change.”

Specifically, Client Earth is seeking permission from the English Court to bring a so-called ‘derivative claim’ against Shell’s board of directors for failing to “promote the success of the company and to exercise reasonable care, skill and diligence by having failed to properly prepare the company for the net zero transition,” Will Hooker, a partner at Pallas Partners, the law firm representing Client Earth, told Gas Outlook.

This, according to Client Earth, “puts the long-term success and profitability of the company at risk,” he said.

“Client Earth is asking the Court to make directions to ensure that future conduct of the board aligns with their statutory duties,” he added.

“Shell’s board has acknowledged that the energy transition creates material risks to its business,” said Hooker. Meanwhile “Client Earth believes that the board is failing to meet its statutory duties to manage those risks.”

In particular, “the board has failed to set meaningful medium-term targets to reduce overall Scope 3 emissions, and it makes implausible claims to shareholders that its policies are aligned with the goals of the Paris agreement.”

“It has also failed to comply with the requirements of an order of the Dutch court that it must reduce Scope 3 emissions,” he said.

Shell’s net emissions are calculated to fall by just 5% by 2030, far below the net 45% reduction in group-wide emissions by the end of this decade ordered by a Dutch Court in May 2021.

The legal firm is representing ClientEarth on a pro-bono basis.

“This case marks a significant effort to give effect to the duties of directors to manage the energy transition for the long-term” Hooker said.

Moving forward, “company law will play an important role in shaping society’s response to the energy transition” he added.

New legal tool

If successful, the claim would establish a new legal tool for activist investors potentially resulting in more litigation.

Compared to other prominent legal cases such as ‘Milieudefensie’ against Shell or ‘Notre Affairs’ against Total “the new and groundbreaking element of this case is that it refers to the management of a company” as a whole, Matteo Fermeglia, assistant professor of International and European Environmental Law at Hasselt University in Belgium, told Gas Outlook.

Furthermore, for the first time shareholders of a company are leveraging company law to bring a legal case against an oil major.

While the board of directors’ negligence may be hard to prove a “snowball effect” is to be expected from this case, he argued.

Differences in legal systems may lead to varied outcomes for similar cases, however, the vast majority of systems stipulate a basic ‘duty of care’ of directors of companies towards their shareholders, which is the founding element of the legal claim, he added.

“The directors of major fossil fuel companies have both a fiduciary and moral duty to align capital expenditures with the 1.5 C target, and demonstrable failure to meet that objective opens company boards and executives to litigation risks,” Richard Heede, director at US-based Climate Accountability Institute, told Gas Outlook.

“Shell claims to be doing so, but its track record falls short,” he continued.

“It is high time for oil, gas, coal, and cement companies to step into the breach and commit to reducing absolute emissions in line with the 1.5 C pathway, with minimal overshoot and minimal offsets,” he said.

“This does not leave room for Shell or other companies to continue investing tens of billions predominantly into oil and gas exploration and production,” he added.

“This kind of action will pile-up and will get stronger and stronger,” Climate Action Network (CAN) Europe’s climate governance and human rights policy expert, Romain Didi, told Gas Outlook.

“Without the contribution of corporations, keeping global temperature increase to 1.5° is mission impossible,” he said.

“Directors of multinationals have to understand that we are not all equal in this crisis and that those with greater responsibility and leverage must contribute accordingly to keeping us safe from dangerous climate change,” he continued.

“Bringing individuals to courts and keeping them accountable for decisions that harm the many is a matter of survival and human rights…Not to mention that most of the carbon majors, Shell being one of them, pollute more than most countries, while having a greater control of their emissions and the agility to change than a government,” he added.