Why Shell needs a new direction

ClientEarth has started legal action against Shell’s Board of Directors over its failure to properly prepare for the net zero transition.

Energy is moving towards a cleaner future. But Shell’s climate plans remain stuck in a fossil fuel past.

We believe Shell’s Board of Directors is mismanaging the climate risks facing the company, posing serious questions for long-term value.

Capitalising on the opportunities of the energy transition, while protecting investor capital and the climate, demands a new direction.

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About the claim

ClientEarth, in its capacity as shareholder, is taking derivative action to compel Shell’s Board of Directors to act in the best long-term interests of the company by strengthening its climate plans. We seek to ensure that the Board’s strategy of prioritising near-term profit does not come at the expense of enduring commercial viability for all of the company’s stakeholders, including its shareholders and employees.

What does the claim argue?

  • The derivative action will argue that Shell’s Board of Directors has failed to properly prepare the company for the net-zero transition, putting the long-term value of the company at serious risk.
  • It asserts that Shell’s Board is mismanaging the material and foreseeable climate risk facing the company, in breach of its legal duties.

What climate risks is Shell facing?

  • As acknowledged by Shell’s Board, climate change and the net-zero transition pose a significant threat to companies in the energy sector, and system-level risk to the economy as a whole.
  • Shell’s physical assets are heavily exposed to extreme weather events and the wider economic impacts of climate breakdown.
  • As the net-zero transition progresses, bringing regulatory, market and societal shifts, Shell is facing potentially massive limitations on its operations, while its assets are at serious threat of becoming stranded in future.
  • Meanwhile, climate inaction is increasing Shell’s exposure to the risk of legal action and reputational damage.

What is wrong with Shell's Energy Transition Plan?

  • Shell has announced an “accelerated” net-zero strategy and Energy Transition Strategy, which Shell’s CEO says “are fully consistent with the more ambitious goal of the Paris Agreement: to limit the increase in the average global temperature to 1.5°C above pre-industrial levels". The Board’s stated objective is to “be a net-zero emissions energy business by 2050, in step with society”.
  • However, the corresponding emission reduction targets do not add up. In fact, the company’s reliance on ‘carbon intensity’ reduction targets mean that its absolute emissions into the atmosphere could even increase.
  • And although the company has now set a 50% absolute emissions reduction target by 2030, this only relates to its Scopes 1 and 2 emissions – i.e. around 5% of the company’s emissions.
  • Meanwhile, investments in renewable energy are limited, and the Board intends to grow the company’s fossil fuel business which is incompatible with the 1.5C compliant pathway produced by the International Energy Agency.

Why is this a problem?

  • Shell’s delayed transition plan fails to adequately prepare for the energy transition-related risks posed by stranded assets, write downs, and costly additional legal, regulatory and compliance measures and operational restrictions that the company will face.
  • It overlooks the opportunities presented by the energy transition and the competitive advantage Shell could gain by increasing investment in renewable energy projects and new green technologies, or the possible route of shrinking the company and returning capital to shareholders.
  • The longer Shell takes to implement a credible strategy, the more likely it is that the company will have to execute a costly ‘handbrake turn’ that could erode significant value.
  • In May 2021, Shell was ordered by a Dutch Court to reduce its group-wide Scope 1-3 emissions – i.e. including those from the fossil fuel products it sells – by net 45% by the end of 2030. To date, the Board has failed to put forward a meaningful strategy to comply with the Scope 3 part of that judgment – increasing the risk that the company will be forced to make rapid adjustments to its strategy.
  • There’s also a glaring disconnect between the Board’s climate commitments and Shell’s business plans. In the disclaimer presented in the 2021 Annual Report the Board states: “Shell’s operating plans cannot reflect our 2050 net-zero emissions target and 2035 NCF target, as these targets are currently outside our planning period.”
  • The Board has decided not to align its accounts and operating plans with its net-zero ambition, which should raise questions for investors about what the company’s real strategy is.

Why does ClientEarth say that Shell’s Board is acting unlawfully?

Under English law, company directors have a duty to assess, disclose and manage material risks to the company. ClientEarth’s claim is that the Board’s mismanagement of climate risk puts it in breach of their duties under the UK Companies Act.

Section 172 of that Act 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. In doing so, they are required to have regard to a range of factors that includes the likely consequences of any decision in the long term, the interests of the company’s employees, and the impact on the environment. Under section 174 of the Act, Shell’s directors are also legally required to exercise reasonable care, skill and diligence in the discharge of their duties.

We say that the Board has breached these duties.

How can investors support the claim?

ClientEarth is encouraging institutional investors of Shell to support the claim, and – in line with their own fiduciary duties – to use their position to compel the Board to adopt a strengthened climate strategy which sufficiently protects against financial losses resulting from climate risk.

Please email redirectingshell@clientearth.org for further details or to arrange a confidential discussion.

The wrong direction

20%

Shell's carbon intensity target by 2030, while scientific consensus and Dutch Court Order is that a 45% reduction in absolute emissions needed.

4.4%

the amount Shell’s net emissions are calculated to rise by by 2030.

14

new oil & gas projects are in the development pipeline, contrary to the recommendation of the IEA.

<10%

of Shell's total emissions are covered by its 2030 absolute emissions target.

Lawyer profiles

Paul Benson

Prior to joining ClientEarth, Paul Benson spent more than ten years in private practice, primarily at ‘magic circle’ law firm Freshfields Bruckhaus Deringer LLP. There, he specialised in commercial litigation and contentious environmental matters, acting for multinational companies on some of the most complex and high-profile disputes of the last decade.

Sophie Marjanac

Before joining ClientEarth, Sophie Marjanac was a senior lawyer in the environment and planning law practice of top-tier Australian law firm, Clayton Utz. There, she advised many of Australia’s largest corporates, including in the energy and resources sector, on a range of contentious and regulatory issues.

April Williamson

Prior to joining ClientEarth, April Williamson worked in highly-regarded practices at the law firms DLA Piper and White & Case. While in private practice, her work primarily concerned environmental regulation, major infrastructure and energy issues, working with major corporations, financial organisations and government departments.

Miriam Boxberg

Miriam Boxberg leads our investor and stakeholder engagement on the case. She is qualified as a barrister and brings prior experience advising companies in the oil and gas sector, including three years in the renowned international arbitration group at WilmerHale LLP. She also has a strong background in international law and human rights, and has worked as a Judicial Assistant at the International Court of Justice in The Hague.

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