Here's Why Directors Need to Start Taking Climate Risk Seriously

The inevitable has happened. Shell now faces another environmental legal battle where its company directors are now being sued by shareholders for failing to properly manage Shell's climate risk. 

The case against Shell's company directors is being brought by ClientEarth, who is an environmental organisation and also a shareholder of Shell. ClientEarth is arguing that Shell's Board of Directors has failed to adopt and implement a climate strategy that aligns with commitments under the Paris Agreement to keep anthropogenic warming under 1.5°C by 2050. The group will argue that this is in breach of the Board's directors' duties under the UK Companies Act to act in a way to promote the company's success and to exercise reasonable care, skill and diligence. 

ClientEarth will make several arguments to support its position. Already, Shell is under a legal obligation to reduce its 2019 levels of carbon emissions by 45% by 2030. Rather than actioning the obligation, Shell has decided to appeal the decision. The result from the appeal is still uncertain. 

Nonetheless, ClientEarth maintains that according to science, the world's greenhouse gas emissions need to be halved by 2030 in order to avoid the worst of climate change. While Shell has publicly maintained that its emissions reduction strategy is consistent with Paris commitments in that they have set a target to become a net zero emitter by 2050, ClientEarth is arguing that Shell's interim targets are insufficient to meet this goal and would result in a 4% rise in Shell's net emissions by 2030; a result that is far from the 45% emissions reduction obligation they now face. Even more concerningly, the company is unlikely to meet its own emissions targets. 

From this, ClientEarth will then argue that the Board has failed to act in the best long-term interests of the company. In a decarbonising economy, where there is mounting pressure against heavy emitters to reduce their emissions to mitigate the effects of climate change, the Board's current climate strategy and insufficient targets could risk the company's enduring commercial viability. As ClientEarth lawyer, Paul Benson, states:

"Shell is seriously exposed to the risks of climate change, yet its climate plan is fundamentally flawed. In failing to properly prepare the company for the net-zero transition, Shell’s Board is increasing the company’s vulnerability to climate risk, putting the long-term value of the company in jeopardy."

ClientEarth's legal action against Shell's company directors is a significant push forward in the world of climate litigation. This is the first time that directors have been sued for failing to properly manage climate risk and prepare for a transition to net zero emissions. Although the outcome of the legal action is yet to be seen, company directors should be put on notice that they face waves of incoming litigation for not taking climate mitigation seriously. 

The legal action could also place energy providers and mining companies in precarious positions. Fundamentally, energy providers and mining companies make their money from extracting fossil fuels. If these companies want to maintain their commercial viability in a new green economy, they will need to take drastic steps to decarbonise and to create a business model that is consistent with a greener planet. 

However, the legal action is not without its challenges. The avenue of litigation being pursued is new and it remains to be seen whether the courts will accept ClientEarth's arguments. Moreover, Shell has not welcomed ClientEarth's decision to sue, claiming their emissions reduction targets are in line with the Paris Agreement. The company has also questioned the use of litigation to compel climate action, arguing that government-led policies are needed to successfully decarbonise the energy system. 

Regardless of Shell's objections, what does remain clear is that courts are being used as avenues through which civil society can keep companies accountable for climate action. As already mentioned, Shell was ordered to cut their emissions by 45% by 2030. Suing company directors was perhaps the next right move to directly influence company climate policy and therefore compel more effective climate action. 

In sum, company directors around the world should be on notice. Perhaps directors outside of Shell are lucky in the sense that they have had a glimpse into the future of climate litigation without being sued (yet). In any event, they should be scrambling back to the Board room and rethinking whether their climate policy will do what they have said it will do. 

References

[1] ClientEarth, 'We're Taking Legal Action Against Shell's Board for Mismanaging Climate Risk' (online, 15th March 2022) <https://www.clientearth.org/latest/latest-updates/news/we-re-taking-legal-action-against-shell-s-board-for-mismanaging-climate-risk/>. 
[2] Damien Gayle, 'Shell Directors Sued for 'Failing to Prepare Company for Net Zero'', The Guardian (online, 15th March 2022) <https://www.theguardian.com/business/2022/mar/15/shell-directors-sued-net-zero-clientearth>.