ClientEarth v Shell: Alleged breaches of board duties

On 15 March, the environmental law charity, ClientEarth, announced its pursuit of a derivative action against Shell’s Board of Directors, claiming breaches of the Board’s duties under ss.172 and 174 of the Companies Act 2006 (“the 2006 Act”), due to the Board’s alleged failure “to adopt and implement a climate strategy that truly aligns with the Paris Agreement goal to keep global temperature rises to below 1.5°C by 2050”. ClientEarth claims that the Board’s alleged failure threatens the long-term value of the company (given the vulnerability of Shell’s assets to the physical and economic impacts of climate change), increases its exposure to litigation and reputational harm, and will result in missed opportunities to invest in renewables.

S.172 of the 2006 Act requires directors to act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The 2006 Act requires directors to have particular regard (among other things) to the likely consequences of any decision in the long term, the impact of the company's operations on the community and the environment, and the desirability of the company maintaining a reputation for high standards of business conduct. S.174 requires directors to exercise reasonable care, skill and diligence.

The allegations follow last year’s decision of the Hague District Court in Milieudefensie v Shell, in which Shell was ordered to reduce its greenhouse gas emissions by 45% by 2030, including indirect value chain emissions, both upstream and downstream.

ClientEarth alleges that Shell has failed to comply with that order, despite announcing an accelerated strategy to achieve net-zero emissions by 2050. It argues that the company’s reliance on carbon intensity reduction targets means that its absolute emissions may even increase; that its target to reduce absolute emissions by 50% by 2030 does not include indirect value chain emissions, which make up over 90% of total emissions; and that its limited investments in renewable energy are overshadowed by planned growth of fossil fuel production.

While this action may appear novel, it is the latest in a developing line of global jurisprudence including: Notre Affaire à Tous and Others v France, in which the French government was found to have failed to discharge the international obligations that it had adopted in relation to climate change; the similar Dutch decision of Urgenda Foundation v State of the Netherlands; and claims against private organisations such as Deutsche Umwelthilfe v Mercedes-Benz AG in Germany and McVeigh v REST in Australia.

Pursuant to s.261 of the 2006 Act, ClientEarth will have to obtain the Court’s permission to proceed with the derivative claim, taking into account the factors set out in s.263 of the 2006 Act, as discussed in Saatchi v Gajjar [2019] 3472 EWHC Ch. Permission will be refused if the Court finds that a person (acting in accordance with the s.172 duty to promote the success of the company) would not seek to continue the claim, or where the relevant acts and/or omissions were authorised by the company before they occurred, or have been ratified by the company since they occurred.

Whether or not ClientEarth obtains permission in this matter, increasingly alarming environmental developments (such as the extreme temperatures recently recorded at the poles) suggests that the field of climate litigation will continue to expand and develop.

The directors of all companies that generate significant GHG emissions will, of course, be paying close attention to developments in this matter, but we expect the outcome to influence corporate behaviour far beyond the energy industry and other businesses with a major environmental footprint, given the breadth of s.172 of the 2006 Act. The scope for pursuit of directors in this context is also emphasised by the tightening of regulations concerning environmental disclosures, which we have discussed in previous articles greenwashing — commercial and regulatory considerations for directors and insurers and the importance of avoiding making misleading environmental claims. As we have noted before, directors would be well-advised to reduce their exposure by undertaking careful and proactive management of their ESG risks to keep pace with legal and regulatory developments and by ensuring that appropriate records are maintained. We would expect brokers and insurers to be keen to work with directors to assist in this regard. It also seems reasonable to expect that D&O insurers will require increasingly detailed information and analysis in support of proposals for cover.