Press release: 15 November 2023
Court fails to engage with key climate risk arguments in Shell directors case dismissal
'Misguided' dismissal of groundbreaking lawsuit a missed opportunity to clarify English company law during climate crisis
LONDON – The Court of Appeal has refused to hear ClientEarth’s historic lawsuit against Shell’s Board of Directors – the first derivative action worldwide to seek to hold directors personally liable for climate risk mismanagement.
ClientEarth’s case argued that the Board had breached its legal obligations under company law by failing to properly manage climate risk facing Shell, jeopardising the company’s long-term viability. The High Court of England and Wales dismissed the lawsuit without considering the merits earlier this year, which ClientEarth appealed.
Responding to the decision, Paul Benson, ClientEarth senior lawyer, said: “We are deeply disappointed by this decision, which we think is wrong and misguided. The Courts have missed a critical opportunity to grapple with the enormity of the climate crisis, and clarify directors’ legal duties in light of the significant risks it presents to companies and shareholder value.
“It is astonishing that the Court has refused to engage with detailed evidence as to the Board’s failings, and dismissed out of hand the support from major institutional investors with more than 12 million shares in the company.
“No doubt Shell will say that this decision vindicates its Board’s direction, but the reality is that by failing to grapple with the issues, or even hear our appeal, the Court has given Shell a ‘free pass’.
“Even so, directors should not be breathing a sigh of relief. The High Court confirmed that corporate directors have a duty to manage climate risk, which is significant in itself. While this claim did not pass procedural hurdles, the legal risk facing boards is still very real. So too is the rapidly escalating threat that climate change and the energy transition presents to all fossil fuel majors.”
“Given the scale of climate risk facing companies, and the Court's acknowledgement of the materiality of climate change to oil companies, it is inevitable that directors will be found liable as that risk is mismanaged. If not today, then in the future.”
ClientEarth brought the lawsuit in its capacity as a shareholder and was represented by London litigation firm Pallas Partners. The claim alleged Shell’s 11 directors had breached their legal duties under the Companies Act by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement, contrary to their stated objectives.
Benson added: “We are undeterred by this decision, and will keep fighting for accountability from people in the driving seat of companies steering further into climate catastrophe. It is companies like Shell that are most exposed to climate risk and which have the most to lose from their directors chasing short-term wins over long-term prosperity.”
Procedural objections raised by the Court included the notion that, as an environmental legal organisation, ClientEarth could not be acting in the best interests of the company. ClientEarth believes this to be a missed opportunity on the part of the judiciary to interpret the law in a way that takes the severity and urgency of climate risk into account. In this case, the interests of the company and its shareholders were aligned with those of the planet.
Benson said: “One of the oft-touted advantages of our legal system is its agility and flexibility in response to the critical issues of our time. Courts cannot avoid the important questions that climate change poses to traditional legal conventions. It is imperative that judges of all expertise get to grips with climate science and what the realities mean for companies, the economy and society at large.
“It was always clear that directors have wide discretion, and rightly so. But this discretion has limits, and the law must allow for directors to be held to account when their actions fly in the face of seismic risk.
“Neither Court decision addressed the crucial question of the Board’s climate risk management. Shell has therefore evaded legal scrutiny of its strategy.”
Flawed transition strategy
ClientEarth’s lawsuit received the support of institutional investors with more than 12 million shares in the company, and more than half a trillion US dollars (£450 billion) in total assets under management. All of these investors said the lawsuit was in their best interests as shareholders.
Shell’s Board maintains that its ‘Energy Transition Strategy’, including its plan to be a net zero emissions business by 2050, is consistent with the 1.5°C temperature goal of the Paris Agreement. But leading third-party assessments have found that Shell’s strategy is not Paris-aligned. In particular, the strategy excludes short to medium-term targets to cut the emissions from the products it sells – known as scope 3 emissions – despite these accounting for more than 90% of the company’s overall emissions.
The group’s net emissions had been forecast to fall by just 5% by 2030, which is a far cry from the net 45% reduction in group-wide emissions by the end of this decade ordered by a Dutch Court in May 2021. ClientEarth alleged that the Board’s failure to fully comply with the Dutch Court’s judgment is also a breach of its legal duties. Shell has appealed that judgment.
UK pension fund London CIV was one of the institutional investors supporting the case. Its Chief Sustainability Officer Jacqueline Amy Jackson said: “This isn't just a problem for Shell. While climate risks are rising for oil and gas investments, this issue extends across many more companies across a myriad of sectors. One thing is crystal clear – failing to meet climate goals and increasing emissions has a widespread impact on global biodiversity and GDP. This raises doubts about the long-term viability of companies often considered ‘safe’ (and therefore viable) investments across all sectors.”
Since ClientEarth filed the lawsuit, Shell’s Board has further weakened its transition strategy, abandoning oil production reduction targets and slashing investment in renewables – a move which has sparked criticism from its own employees and investors alike, and caused major shareholders such as the Church of England Pensions Board to divest.
Benson added: “We stand by the substance of our case: Shell is not aligning its business plans with a net zero future.”
Notes to editors:
ClientEarth’s derivative action argued that Shell’s Board had breached Section 172 of the UK Companies Act, which requires company directors to act in a way that they consider will best promote the success of the company for the benefit of its members as a whole. It also argued a breach of section 174 of the Act, requiring directors to exercise reasonable care, skill and diligence in the discharge of their duties.
The lawsuit claimed that the Board’s failure to adopt a transition strategy that truly aligns with the Paris Agreement amounted to a breach of these duties, given the material financial risk climate change presents to Shell.
Recent analysis from Fitch Ratings warned that oil and gas companies may be facing an era of credit downgrades due to the sectors’ “elevated” climate vulnerability over the next decade.
The Court of Appeal refused permission to appeal based on largely procedural grounds (including that ClientEarth is only a very small shareholder), and because the Court is generally unwilling to 'interfere' in the decision-making of directors. The Court did not engage with the merits of ClientEarth’s evidence or its central argument that the directors are mismanaging the climate risks facing the company.
London-headquartered boutique litigation firm Pallas Partners acted pro bono for ClientEarth on the claim. The firm specialises in high stakes litigation, international arbitration and investigations. The firm litigates cutting edge and complex cases, including securities litigation in the UK and Europe. Pallas launched in February 2022.
ClientEarth is a non-profit organisation that uses the law to create systemic change that protects the Earth for – and with – its inhabitants. We are tackling climate change, protecting nature and stopping pollution, with partners and citizens around the globe. We hold industry and governments to account, and defend everyone’s right to a healthy world. From our offices in Europe, Asia and the USA we shape, implement and enforce the law, to build a future for our planet in which people and nature can thrive together.