Another crack at lawsuit against Shell board on the cards over ‘failing to move away from fossil fuels fast enough’

After the lawsuit against the board of directors of the UK’s energy giant Shell was thrown out of court recently, ClientEarth, an environmental law charity, hopes to turn things around at a hearing it sees as another chance to pursue derivative action over – what it describes as – the failure of Shell’s board to “properly prepare for energy transition.” 

Back in February 2023, ClientEarth revealed plans of pursuing derivative action against Shell’s board of directors over what it deemed as a breach of the board’s legal duties under the UK Companies Act to manage risks to the company that could harm its future success, as it was“failing to move away from fossil fuels fast enough.” The organisation described the case as the first-ever of its kind, seeking to hold corporate directors personally liable, since it was the first time a company’s board was being challenged on its “failure to properly prepare for the energy transition.”

After Offshore Energy reached out to Shell regarding the derivative claim application, a Shell spokesperson denied the allegations made against the oil major’s board, vowing to oppose ClientEarth’s application to obtain the court’s permission to pursue the derivative action. According to Shell, the financial investment being made in the energy transition is “significant and more than the $3.5 billion investment that is often reported.”

In addition, the spokesperson explained that the group of institutional investors collectively holding more than 12 million shares, referenced in ClientEarth’s statement, represent less than 0.2 per cent of the firm’s total shareholder base.

As the court refused permission for the case against Shell’s board to proceed in a decision given on Friday, 12 May 2023, ClientEarth intends to ask the judge to reconsider this decision at an oral hearing. This comes after the environmental law charity was granted a hearing at the High Court, which it will use to request a reconsideration of the dismissal of – what it sees as – a landmark lawsuit against Shell’s board of directors over climate risk mismanagement.

Furthermore, the organisation claims that its case is about Shell’s board adopting a strategy that is fit to manage the serious and significant climate risks facing the company in line with its legal duties.

Paul Benson, Senior lawyer, ClientEarth, remarked: “Shell’s board says it supports global climate goals and has set a target for the company to be a net-zero business by 2050. But the targets and strategy the board currently has for reducing its emissions simply do not add up. Analyst research suggests that Shell’s plan would in fact result in a reduction of just 5 per cent in net emissions by the end of the decade. 

“The board’s strategy fails to deliver the emissions cuts needed to keep global climate goals within reach. Instead, it continues with fossil fuel production for decades to come. And it ties the company to investments that are likely to become unprofitable as countries and customers worldwide choose cheaper, cleaner energy.” 

On the other hand, Shell underscores that it is taking active steps to achieve its net-zero goals, as shown by investments in low-carbon fuels, renewable power, and hydrogen along with the changes the company is making to its upstream and refinery portfolios. According to the UK-headquartered player, it was already more than halfway towards achieving its target reduction of 50 per cent by 2030 for Scope 1 and 2 emissions by the end of 2022.

“Shell’s shareholders need certainty that the company is using their capital effectively in its navigation of the global energy transition and is genuinely pursuing the climate goals that it says it is. It is in the best interests of the company, its employees and its shareholders – as well as the planet – for Shell to reduce its emissions faster than it is currently planning,” added Benson.

The potential legal action that Shell is facing now is not the first brush with the law for the oil major regarding carbon emissions policies, since a Dutch court ordered Shell in May 2021 to deepen its carbon emissions cuts in a ruling described as the first of its kind.

While less than a month after the ruling, Shell pledged to take some ‘bold but measured’ steps to accelerate the reduction of carbon emissions from its operations, the firm confirmed in July 2021 it would appeal the court’s decision. Come October 2021, the oil major set a new target to halve its Scope 1 and 2 emissions compared to 2016 levels by 2030, regardless of the outcome of the appeal.

Meanwhile, the plot thickens further as an activist investor, Follow This, recently reported that its shareholder resolution, submitted for a vote at Shell’s upcoming annual meeting (AGM) on 23 May 2023 to call on Shell to align its 2030 Scope 3 emissions reduction target with the Paris Agreement, had won the backing of key investors from the Climate Action 100+ initiative.

This shareholder meeting is expected to gauge the appetite for more ambitious climate targets after the distancing from such resolutions last year as the pursuit of energy security took precedence in the aftermath of the Ukraine crisis.

“The current energy crisis and the climate crisis can be addressed simultaneously by investing the windfall profits from high oil and gas prices in other energy sources. Diversification of the energy supply would foster energy security by reducing dependency on oil and gas fields tied up in geo-political conflict and reduce emissions to address the climate crisis simultaneously. Shell has the engineering prowess, financial muscle, and global market-making capabilities to rapidly scale the transition to renewables,” outlined Follow This.

In a bid to get its point across, the activist investor refers to a recent report by Accela Research, which indicates that Shell currently plans less than 10 per cent of its energy mix to be low-carbon by 2030 while more than 90 per cent will remain in oil and gas. 

Shell is not the only company facing a vote for medium-term Scope 3 targets, as three other oil majors –TotalEnergies, ExxonMobil and Chevron – are in the same boat. This comes after increased investor support last month for Paris-aligned emissions at BP signalled growing recognition by investors that mitigating the climate risk posed by high-emitting companies is in the best interest of their portfolio.

“In May, investors once again have the opportunity to urge oil majors to align their 2030 emissions reduction targets with the Paris Accord; we hope that the investors who voted against Paris alignment at BP last month, will view the AGMs this month as retakes to correct this oversight,” emphasised Follow This.