On 15 March 2022 the law firm ClientEarth announced that it had taken the first steps to launch a legal challenge on climate against the Board and individual directors of Shell.
In 2021 Milieudefensie, [Friends of the Earth Netherlands] won a major case against Shell in the Netherlands. Mileudefensie won a judgement requiring Shell to reduce all of its emissions, including (critically) Scope 3 emissions from its customers, by 45% by the end of 2030. Shell is appealing against that judgement, as ClientEarth notes, arguing that it is unreasonable, and essentially incompatible with its business.
Shell has instead proposed its own alternative “Energy Transition Strategy”. ClientEarth claims that this is misleading and inadequate. They say it is misleading in claiming to be Paris-aligned when it is not, and it is inadequate in failing to deliver a credible plan for meeting the Milieudefensie judgement, and in failing to deliver adequate emissions reductions. They cite external evidence that Shell has only committed to reduce the “energy intensity” of its emissions, which would allow its actual emissions to rise as opposed to falling.
The case is of particular interest in that the claim alleges that 13 executive and non-executive directors are personally liable for failing to prepare properly for the energy transition. Whatever the outcome of the claim, this element of personal liability will certainly set off alarm bells in many boardrooms.
The case will have very important implications for future legal interpretation of directors’ “fiduciary duties” under the UK Companies Act 2006.
Section 172 of that Act places directors under a fiduciary duty to promote the success of the company for the benefit of its members as a whole. Directors must ‘have regard’ to some factors when deciding how to discharge their main duty. The factors to which they must ‘have regard’ include “the impacts of the company’s operations on the community and the environment” and “the likely consequences of any decision in the long term”. Then under section 174, directors must “exercise reasonable care, skill and diligence”.
Increasingly, academic and legal commentators have been raising questions about whether company directors meet these fiduciary duties if they fail to take sufficient account of the gathering evidence on climate change.
Arguments that directors’ legal duties now extend to climate change are given further force by government policies; by statutory expressions of the Net Zero target; by regulators’ explicit requirements on climate; by revisions to accounting standards; and by rapidly increasing statutory reinforcement of the principles of the Task Force on Climate-related Financial Disclosures (TCFD), which essentially aims to have climate risk factored in to every financial decision.
In the past, directors of a fossil fuel company might have argued that their fiduciary duties simply required them to produce as much fossil fuels as possible, and to maximise their returns to shareholders. This sort of litigation is challenging those assumptions, by asserting that they will only result in “stranded assets” or forced write-downs, and that directors have specific legal duties to propose credible transition plans which are consistent with the Paris Agreement on Climate Change.