ClientEarth v Shell: Is the Climate Changing for Directors?
In March 2022, Environmental law charity, ClientEarth, took the first step in commencing legal action against Shell’s Board of Directors by issuing a letter before action criticising Shell’s Energy Transition Strategy.
According to ClientEarth, which has been a shareholder of Shell since 2016, “Energy is moving towards a cleaner future. But Shell’s climate plans remain stuck in a fossil fuel past” (1). More specifically, ClientEarth contends that the Board has failed to adopt and implement a climate strategy that aligns with the goal of the UN Paris Agreement (to limit the global temperature increase in this century to 1.5°C) and prepares the company for the inevitable transition to net-zero emissions. (2)
ClientEarth’s ultimate aim is to secure (i) a declaration that the Directors are in breach of their duties under the Companies Act 2006 to promote the success of the company (section 172) and to exercise reasonable care, skill, and diligence in carrying out their roles as directors (section 174); and (ii) an order that the Directors prepare and adopt an energy strategy that includes greenhouse gas reduction targets that are aligned to the goals of the Paris Agreement. (3)
But before ClientEarth can do that, it needs to obtain the High Court’s permission to bring a “derivative action” on behalf of the company, against the Directors. The Court will not allow the action if the Board can establish that (a) a director acting in accordance with the general duty to promote the success of the company would not seek to continue the claim; or (b) the proposed conduct that is the subject of the derivative action has been authorised by the company (4). The former is a high bar to meet. As for the latter, presumably Shell’s Energy Transition Strategy was signed off by the relevant authorities on behalf of the company.
It may well prove difficult for ClientEarth to obtain permission to bring the derivative action, but if permission is granted, this will be the first action in the UK seeking to hold directors personally liable for failing to prepare properly for the transition to net zero.
However, ClientEarth is no stranger to bringing shareholder actions against energy companies. In October 2018, it brought a claim against Polish energy company, Enea SA, successfully challenging its plan to build a €1.2bn coal-fired power plant and securing the annulment of the resolution to proceed with the project (5).
Nor will this be the first time that Shell’s climate strategy has been under judicial scrutiny. In May 2021, as a result of a class action brought by seven environmental groups, Shell was ordered by a Dutch court to reduce its group-wide CO2 emissions by 45%, compared to the 2019 levels, by the end of 2030 on the basis that its approach to did not meet the “unwritten standard of care” laid down in the Dutch Civil Code requiring it to reduce its carbon emissions so that Dutch citizens may enjoy their right to life and right to respect for private and family life (6).
The Supreme Court has also considered Shell’s duties in respect of alleged environmental damage caused by its subsidiaries overseas. In February 2021, as part of its consideration of whether the English Court had jurisdiction to try the claims against Shell, it held that there was at least an arguable case that Shell, as a parent company, owed a duty of care to Nigerian citizens allegedly affected by oil leaks from pipelines and infrastructure in the Niger Delta operated by its Nigerian subsidiary (7).
Comment
Regardless of whether the ClientEarth action is permitted, the media coverage of ClientEarth’s proposed action has certainly turned the public’s attention to Shell’s Energy Transition Strategy. (That alone may encourage Shell’s Board to bring the company’s strategy more in line with ClientEarth’s objectives).
It is also likely to turn the spotlight on other companies’ energy and climate strategies (and ESG strategies in general). Directors will be conscious not only of the risk of regulatory action and judicial scrutiny if they fail to adhere to ESG regulations (8) and deliver sufficient ESG strategies, but also of the prospect of such shareholder actions being brought on behalf of their companies against them in their personal capacities.
Directors and officers (“D&O”) insurers are alive to the risk of actions against both companies and directors. Not only are insurers subject to their own obligations to promote awareness and encourage action on ESG issues (9), but they are well aware of the public’s concerns regarding climate and energy having been targeted themselves by activist groups.
In September 2021, HS2 Rebellion protesters, who fear that the construction of HS2 will cause environmental damage, attempted to occupy the seven-storey Tower Place West building in the City of London that houses the offices of Marsh (which insures subcontractors for the HS2 project). Two of them scaled the building and two locked themselves onto the first and second storeys of the building (10).
On 2 April 2022, Extinction Rebellion activists held a demonstration outside the Lloyd’s of London building, with some of them scaling the building, in protest over the insurance of fossil fuel projects (11). A few days later, they were back at 7am, wearing rat masks and blocking the entrances to the building to prevent workers from entering (12). Then in June, the Mothers Rise Up climate action group also staged a Mary Poppins themed climate change flash mob at Lloyd’s of London, to protest the insurance industry’s role in underwriting fossil fuel projects (13). They sang “Let’s Make Insurance Bright” to the tune of “Let’s Go Fly a Kite”.
As companies become subject to increasing energy and climate regulation, D&O insurers will no doubt require more oversight of their strategies, and assurance of their compliance with both mandatory obligations (such as the Paris Agreement) and non-mandatory guidance (such as the recommended disclosures set out by the TCFD) (14), such that they should not attract the attention of environmental groups like ClientEarth.
If D&O insurers also start to pick up the legal bills of directors facing energy and climate related shareholder actions, they may well also start requiring more detailed information before accepting D&O risks on (i) the identity of a company’s shareholders, and specifically, whether there are any environmental groups such as ClientEarth amongst the shareholders; (ii) whether a company has been targeted by climate activists (through physical protests or social media campaigns; and (iii) whether a company’s ESG policies are aligned with the transition to net-zero or whether, instead, they are likely to attract the ire of climate activists.
Corporate climate policies are aimed at stopping temperatures rising, but if not to the liking of climate activists, their inadequacy (or perceived inadequacy) could also lead to D&O premiums rising.
Co-written by Partner John Curran and Associate Rachel Auld.
References:
- Redirecting Shell | ClientEarth
- ClientEarth starts legal action against Shell’s Board over mismanagement of climate risk | ClientEarth
- PowerPoint Presentation (clientearth.org)
- Section 263 of the Companies Act 2006
- ClientEarth v. Enea - Poland - Climate Change Laws of the World (climate-laws.org)
- ECLI:NL:RBDHA:2021:5339, Rechtbank Den Haag, C/09/571932 / HA ZA 19-379 (engelse versie) (rechtspraak.nl) Shell filed its Statement of Appeal with the Dutch Court of Appeal in The Hague on 22 March 2022 - Microsoft Word - Dutch District Legal Case FAQs 2021 - March 2022 Update.docx (shell.com)
- Okpabi and others (Appellants) v Royal Dutch Shell Plc and another (Respondents) [2021] UKSC 3
- For example, the mandatory obligations under the Climate Change Act 2008
- For example, the United Nations Environment Programme’s Principles for Sustainable Insurance Initiative, “Managing environmental, social and governance risks in non-life insurance business”
- HS2 Rebellion protesters scale seven-storey building in City of London | Evening Standard
- Extinction Rebellion: Lloyd's of London protest held by activists - BBC News
- Extinction Rebellion force Lloyd’s to shut office following protest | Evening Standard
- Lloyd’s of London targeted by Mary Poppins themed climate change protest | Latest News | Insurance Times
- Taskforce on Climate-Related Financial Disclosure