Illustration; Source: Shell

Lawsuit case against Shell directors ends with court dismissal

A lawsuit against the board of directors of the UK’s energy giant Shell has been thrown out of court, preventing ClientEarth, an environmental law charity, from pursuing derivative action over the alleged failure of the oil major’s board to put in place the right decarbonization and net zero tools to move the energy transition engine into high gear in line with the Paris Agreement.

Illustration; Source: Shell

ClientEarth’s plans to pursue derivative action against Shell’s board of directors were disclosed in February 2023. The legal step was being taken due to – what the law charity deemed as – a breach of the board’s legal duties under the UK Companies Act to manage risks to the firm that could harm its future success, as it was “failing to move away from fossil fuels fast enough.” The environmental law organization described the case as the first-ever of its kind since it was the first time a company’s board was being challenged on its “failure to properly prepare for the energy transition.”

After the High Court of England and Wales refused permission for the case against Shell’s board to proceed in a decision given on Friday, May 12, 2023, ClientEarth planned to ask the judge to reconsider the decision at an oral hearing, which was granted to the environmental law charity at the High Court. When 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 was “significant and more than the $3.5 billion investment.” The spokesperson also explained that the group of institutional investors collectively holding more than 12 million shares, referenced in ClientEarth’s statement, represent less than 0.2% of the firm’s total shareholder base.

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Bearing in mind Shell’s stance on the derivative action that was being attempted by London-headquartered boutique litigation firm, Pallas Partners, which acted pro bono for ClientEarth, the Court of Appeal refused permission to appeal based on procedural grounds, as the environmental law charity is only a very small shareholder. ClientEarth’s case argued that the board had breached its legal obligations by failing to properly manage the climate risk facing Shell, jeopardizing the firm’s long-term viability.

Responding to the decision, Paul Benson, ClientEarth senior lawyer, commented: “We are deeply disappointed by this decision, which we think is wrong and misguided. The courts have missed a critical opportunity to grapple with the enormity of the climate crisis, and clarify directors’ legal duties in light of the significant risks it presents to companies and shareholder value. It is astonishing that the court has refused to engage with detailed evidence as to the board’s failings, and dismissed out of hand the support from major institutional investors with more than 12 million shares in the company.

“No doubt Shell will say that this decision vindicates its board’s direction, but the reality is that by failing to grapple with the issues, or even hear our appeal, the court has given Shell a ‘free pass’. Even so, directors should not be breathing a sigh of relief. The High Court confirmed that corporate directors have a duty to manage climate risk, which is significant in itself. While this claim did not pass procedural hurdles, the legal risk facing boards is still very real. So too is the rapidly escalating threat that climate change and the energy transition presents to all fossil fuel majors.”

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Moreover, procedural objections raised by the court included the notion that, as an environmental legal organization, ClientEarth could not be acting in the best interests of the company. While accusing Shell of pursuing a “flawed transition strategy,” the environmental law organization claimed that the oil major had managed to evade legal scrutiny of its strategy due to the court’s dismissal of the case.

Sam Campbell, ClientEarth Supporter Engagement, remarked: “Since we launched this lawsuit, Shell’s board has further weakened its transition strategy, abandoning oil production reduction targets and slashing investment in renewables. They make £2 million in profit every hour and are investing five times as much in fossil fuels as their renewable energy ‘solutions’. That is why it is more important than ever that we continue to fight.”

Climate risks on the rise for oil & gas players

While Shell’s board maintains that its energy transition strategy and plan to be a net zero emissions business by 2050 are aligned with the Paris Agreement, ClientEarth is adamant that third-party assessments indicate that the strategy excludes short to medium-term targets to cut Scope 3 emissions from the products the company sells, even though these are estimated to account for more than 90% of the oil major’s overall emissions.

Jacqueline Amy Jackson, UK pension fund London CIV’s Chief Sustainability Officer, underlined: “This isn’t just a problem for Shell. While climate risks are rising for oil and gas investments, this issue extends across many more companies across a myriad of sectors. One thing is crystal clear – failing to meet climate goals and increasing emissions has a widespread impact on global biodiversity and GDP. This raises doubts about the long-term viability of companies often considered ‘safe’ (and therefore viable) investments across all sectors.”

This is not Shell’s first brush with the law regarding carbon emissions policies, since a Dutch court ordered the company 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, the oil major pledged to take some ‘bold but measured’ steps to accelerate the reduction of carbon emissions from its operations, the firm confirmed in July 2021 that 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.

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ClientEarth alleged that the board’s failure to fully comply with the Dutch Court’s judgment was also a breach of Shell’s legal duties, as the firm’s net emissions had been forecast to fall by just 5% by 2030. The environmental law charity considers this to be “a far cry” from the net 45% reduction in group-wide emissions by the end of this decade ordered by a Dutch Court in May 2021. Benson underlines that the environmental charity stands by the substance of its case, as “Shell is not aligning its business plans with a net zero future.”

The UK-headquartered player, just like other energy giants, is actively pursuing more oil and gas alongside low-carbon and renewable energy, which is in line with the company’s plans to spend around $40 billion on its Integrated Gas and Upstream businesses while investing $10-15 billion from 2023 to 2025 to support the development of low-carbon energy solutions, including biofuels, hydrogen, electric vehicle charging, and carbon capture and storage (CCS).

As Shell believes that LNG will play “an even bigger role” in the energy system of the future than it plays today, the firm intends to spend about $13 billion a year during this decade on oil and gas with a focus on LNG, which adds up to potentially over $100 billion in total by 2030. The oil major’s LNG hopes are supported by the International Energy Agency’s latest report, forecasting a surge in new LNG projects, which will ease prices and gas supply concerns from 2025.

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This rise in capacity is set to add more than 250 billion cubic meters per year of new capacity by 2030, equivalent to around 45% of today’s total global LNG supply. The United States and Qatar are expected to account for 60% of this increase.

Currently, Shell is in the process of bringing forth one of the biggest legal challenges Greenpeace has ever faced, in response to the 13-day occupation of its new circular FPSO earlier this year by the environmental group’s activists. This FPSO is destined for the oil major’s North Sea project off the UK.