Disputes Quick Read: ClientEarth v Shell – climate change litigation shifts focus to UK companies

In January 2022, we anticipated that while governments and public authorities have so far been the primary targets for climate change litigation in the UK, companies could be next in the firing line. That shift in focus now appears to be taking place: earlier this month, ClientEarth announced it intends to take legal action against Shell's Board of Directors, by way of a 'derivative' claim on the company's behalf.

In its capacity as a shareholder of Shell, ClientEarth alleges that the directors are mismanaging the risks of climate change through an inadequate energy plan and that this leaves Shell's long-term commercial viability and competitiveness in danger due to the government's Net Zero Strategy. ClientEarth say that this is in breach of the directors' statutory duties to: (i) promote the success of the company; and (ii) exercise reasonable care, skill and diligence (sections 172 and 174 of the Companies Act 2006).

ClientEarth will need the UK court's permission to bring its claim against Shell's directors. In the absence of obvious egregious conduct on the part of the directors, ClientEarth may struggle to get that permission. For example, the court might decide that the question of Shell falling behind in the transition to net zero is a matter for commercial judgement for the directors, rather than a matter justifying the court's intervention.

Despite this, climate change activism by litigation in the UK is clearly stepping up a gear. ClientEarth's proposed action is the first (notable) attempt in the UK courts to hold directors personally liable for failure to properly prepare for transition to net zero. Their announcement could be the start of a shift in focus for climate activists and shareholders alike.

All companies facing climate-related financial risks should bear in mind that activist shareholders will be watching how these risks are managed and may consider a similar kind of derivative claim against the directors if the company's strategy falls short.

This also isn't the first example of climate change activists becoming shareholders of some of the world's 'carbon majors' in order to then bring a shareholder action against the company in whom they hold shares: ClientEarth brought a successful shareholder action in Poland against energy company Enea in October 2018.

In that claim, they challenged Enea's intention to build a new coal-fired power plant, arguing that the new plant would quickly become a stranded asset and was therefore an unjustifiable financial risk to shareholders. The Polish Court agreed and, in August 2019, the resolution authorising construction of the plant was held to be legally invalid.

Whether or not ClientEarth is granted permission, its latest claim has already seen a measure of success through wide-spread press coverage. This coverage has:

• promoted ClientEarth's own climate change agenda
• brought Shell's net zero strategy into public scrutiny
• acted as an example of shareholder activism challenging the strategies and actions of UK companies.

ClientEarth is also using the proposed claim to actively seek support from other shareholders in Shell, particularly institutional shareholders, which ClientEarth suggests are themselves under a fiduciary duty to support the claim and compel Shell to change its strategy. Regardless of the legal merits on which the claim might be based, the reputational impact could be enough to push Shell's Board to act in a way which vindicates ClientEarth's objectives.

Reach out to a member of our Disputes and Investigations team if you want to know more about what this might mean for you.