Shell says derivative action attempt against its board over climate risk has ‘no merit’

After ClientEarth, an environmental law charity, announced plans to take the board of directors of the UK’s oil and gas giant Shell to court over what it describes as “failing to move away from fossil fuels fast enough,” the oil major has denied the allegations made against its board, vowing to oppose the derivative claim application.

ClientEarth disclosed its intention of going to court against Shell’s board of directors on Thursday, 9 February 2023, stating that the UK giant’s board is in breach of its legal duties under the UK Companies Act to manage risks to the company that could harm its future success, as it is“failing to move away from fossil fuels fast enough.” The organisation claims that this is the first-ever case of its kind, seeking to hold corporate directors personally liable, and the first time a company’s board has been challenged on its “failure to properly prepare for the energy transition.”

In a bid to support global climate goals, Shell first announced its aim to become a net-zero emissions energy business by 2050 or sooner back in April 2020, which included all the emissions from the manufacture of all its products (Scope 1 and 2). However, ClientEarth is arguing that the targets and strategy the board currently has for reducing its emissions “simply do not add up,” as “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 organisation further states that the board’s strategy fails to deliver the emission cuts needed to keep global climate goals within reach and instead, it continues with fossil fuel production for decades to come, tying the company to investments that are “likely to become unprofitable as countries and customers worldwide choose cheaper, cleaner energy.”

ClientEarth claims that this puts Shell’s long-term commercial viability at risk while also threatening efforts to protect the planet, further increasing the risk to the company, thus, the future consequences of the UK firm’s “flawed climate plans” could cause its value to “plummet, costing jobs and running the risk of shareholders and investors losing significant amounts of money, including people’s pension funds.”

Moreover, the organisation believes that this puts Shell’s board in breach of its legal duties under the UK Companies Act to manage the climate risk facing the company. Therefore, ClientEarth says it is taking Shell’s board to court through a derivative action, bringing the legal claim as a shareholder in Shell, and “asking the court to order the board to strengthen the company’s climate plans.” 

Paul Benson, Senior lawyer, ClientEarth, remarked:“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 its long-term value in jeopardy.”

Furthermore, ClientEarth highlights that this case has already received support from institutional investors who together hold over 10 million shares in the company, including, among others, UK Government-backed pension scheme Nest, UK local government pension scheme London CIV, the Swedish government pension fund AP3, Danske Bank Asset Management & Danica Pension in Denmark, and AP Pension in Sweden, who are “concerned that the board’s strategy does not reduce the company’s emissions fast enough.”

In line with this, the organisation underlines that putting sufficient emissions reduction targets in place in the short and medium term will secure the company’s long-term value, as well as protect investors’ capital.

Mark Fawcett, CIO of Nest (Shell investor), commented:“Investors want to see action in line with the risk climate change presents and will challenge those who aren’t doing enough to transition their business. We hope the whole energy industry sits up and take notice. 2023 is a crucial year if we are to keep net-zero by 2050 on track and this case can be a springboard for Shell introducing key changes.”

Regarding shareholder litigation, ClientEarth explains that a derivative action is a claim brought by a shareholder of a company – ultimately on behalf of the company – in this case to argue alleged breaches of duty by the board, which means the shareholder bringing the claim is effectively seeking to step into the company’s shoes, to pursue the board for wrongs allegedly committed against the company.

“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,” added Benson.

The potential legal action that Shell is facing now is not the first brush with the law for the company when it comes to 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.

The case was filed in 2019 by the Dutch environmental organisation, Milieudefensie, other NGOs, and a group of private individuals. The court ordered Shell to reduce its carbon emissions by 45 per cent by 2030 compared with 2019 levels and found Shell responsible for emissions from customers (scope 3) and suppliers.

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 company 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.

However, ClientEarth claims that the board’s plans fall short of the Dutch court judgment handed to Shell in 2021, adding that the company’s board has since “rebuffed parts of the verdict, indicating that it is unreasonable and essentially incompatible with Shell’s business.”

The organisation further underscores that delay will only increase the risks the company faces, “kicking its inevitable transition down the road. 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 harder and faster than it is currently planning.”

Offshore Energy has reached out to Shell regarding the derivative claim application, seeking more information from the oil major. In response, a Shell spokesperson said: “We do not accept ClientEarth’s allegations. Our directors have complied with their legal duties and have, at all times, acted in the best interests of the company. We believe our climate targets are aligned with the more ambitious goal of the Paris Agreement: to limit the increase in the global average temperature to 1.5°C above pre-industrial levels.

“Our shareholders strongly support the progress we are making on our energy transition strategy, with 80 per cent voting in favour of this strategy at our last AGM. ClientEarth’s attempt, by means of a derivative claim, to overturn the board’s policy as approved by our shareholders has no merit. We will oppose their application to obtain the court’s permission to pursue this claim.”

Shell further clarifies that the group of institutional investors collectively holding more than 12 million shares, referenced in ClientEarth’s press release, represent less than 0.2 per cent of the firm’s total shareholder base. In addition, the oil major emphasises that the financial investment it is making in the energy transition is “significant and more than the $3.5 billion investment that is often reported.”

The UK player elaborates that this figure is the cash capital expenditure in its Renewables and Energy Solutions (R&ES) business, which doesn’t take into account the energy-transition spending in areas that sit elsewhere in its business, like EV charging or biofuels, or investments in renewable natural gas, or in building a sustainable aviation fuel and renewable diesel plant in the Netherlands.

The company expects that around 35-40 per cent of its combined opex and capex will go to lower carbon energy and non-energy products in 2023 while 35-40 per cent of its cash capex is expected to be spent on its growth businesses beyond 2025.

Contrary to what ClientEarth says, Shell claims it is not ignoring the Dutch court ruling and any suggestion otherwise is “misleading,” as the firm is taking active steps to comply while it waits for the outcome of the appeal. This is illustrated by investments in low-carbon fuels, renewable power, and hydrogen along with the changes the company is making to its upstream and refinery portfolios.

The UK-headquartered energy giant points out that it was 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. The company estimates that it has reduced Scope 1 and 2 carbon emissions under operational control by 16 per cent compared with 2021, and 31 per cent compared with 2016.

“Today, there is no standard methodology to determine how to align companies’ plans and targets with the goal of the Paris Agreement. We studied a subset of IPCC scenarios that achieve that goal and were focused on earlier action and placed less reliance on the use of carbon sinks. From this subset, we calculated the range of carbon intensities over time and set targets consistent with these,” outlined Shell in its statement.

Additionally, Shell adds that it is “pleased to see strong support from shareholders” on its energy transition strategy, with 80 per cent of shareholders voting in favour of the progress Shell has made over the last year.

While ClientEarth has filed the claim against Shell’s board, the UK giant will defend its position robustly, thus, it is now up to the High Court to decide whether to grant ClientEarth permission to bring the claim.

Regarding Shell’s recent activities, it is worth noting that the energy giant recorded its highest-ever profit on a year-on-year basis last year, reaching nearly $40 billion.

The record-high profit from 2022 is more than double the firm’s full-year 2021 profit of $19.29 billion.