Shell board of directors sued by investors over climate strategy

Shell‘s directors are being personally sued for allegedly failing to adequately manage the risks associated with the climate emergency in a first-of-its-kind lawsuit that could have widespread implications for how other companies plan to cut emissions.

Environmental law firm ClientEarth, in its capacity as a shareholder, filed the lawsuit against the British oil major’s board at the high court of England and Wales on Thursday.

It alleges 11 members of Shell’s board are mismanaging climate risk, breaching company law by failing to implement an energy transition strategy that aligns with the landmark 2015 Paris Agreement.

The claim, which has the backing of institutional investors with over 12 million shares in the company, is said to be the first case in the world seeking to hold a board of directors liable for failure to properly prepare for the energy transition.

“Shell may be making record profits now due to the turmoil of the global energy market, but the writing is on the wall for fossil fuels long term,” Paul Benson, senior lawyer at ClientEarth, said in a statement.

“The shift to a low-carbon economy is not just inevitable, it’s already happening. Yet the Board is persisting with a transition strategy that is fundamentally flawed, leaving the company seriously exposed to the risks that climate change poses to Shell’s future success — despite the Board’s legal duty to manage those risks,” Benson said.

The group of investors supporting the claim include U.K. pension funds Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS and Danske Bank Asset Management, among others. Altogether, the institutional investors hold more than half a trillion U.S. dollars in total assets under management.

“We do not accept ClientEarth’s allegations,” a Shell spokesperson said. “Our directors have complied with their legal duties and have, at all times, acted in the best interests of the company.”

“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,” they added.

Shell, which is aiming to become a net-zero emissions business by 2050, said it believes its climate targets are Paris-aligned.

ClientEarth said leading third-party assessments have suggested this is not the case, however, noting Shell’s strategy excludes short to medium-term targets to cut the emissions from the products it sells, known as Scope 3 emissions, despite this accounting for over 90% of the firm’s overall emissions.

The aspirational goal of the Paris Agreement is to pursue efforts to limit global heating to 1.5 degrees Celsius above pre-industrial levels by slashing greenhouse gas emissions. The fight to keep global heating under 1.5 degrees Celsius is widely regarded as critically important because so-called tipping points become more likely beyond this level. These are thresholds at which small changes can lead to dramatic shifts in the Earth’s entire support system.

To be sure, the burning of fossil fuels, such as oil and gas, is the chief driver of the climate emergency.

The case comes shortly after Shell reported its highest-ever annual profit of nearly $40 billion.

The energy giant’s 2022 earnings smashed its previous annual profit record of $28.4 billion in 2008 and were more than double the firm’s full-year 2021 profit of $19.3 billion.

Shell CEO Wael Sawan described 2022 as a “huge year” for the company, saying he felt privileged to be stepping into the role he started on Jan. 1.

“As we look ahead, I think we have a unique opportunity to be able to succeed as the winner in the energy transition. We have a portfolio that I think is second to none,” Sawan said.

Shell’s results came as part of a Big Oil profit bonanza last year, bolstered by soaring fossil fuel prices and robust demand since Russia’s full-scale invasion of Ukraine.

Nest Chief Investment Officer Mark Fawcett said the case against Shell’s board of directors showed investors were prepared to challenge those who aren’t deemed to be doing enough to transition their business.

“We hope the whole energy industry sits up and takes notice,” Fawcett said.

Separately, London CIV’s Head of Responsible Investment Jacqueline Amy Jackson said, “In our view, a Board of Directors of a high-emitting company has a fiduciary duty to manage climate risk, and in so doing, consider the impacts of its decisions on climate change, and to reduce its contribution to it.”

“We consider that ClientEarth’s claim is in our client funds’ interests as a shareholder of Shell, and we support it,” Jackson added.