Authors: Conor Chell, Samina Ullah
The directors of energy giant Shell are facing potential legal action from shareholders who allege the company’s board of directors breached their legal duties by failing to articulate a credible net zero plan. Although setting net zero emissions targets to 2050 is a key commitment under the Paris Agreement, this marks the first time in history shareholders have sought to hold directors personally liable for a company’s alleged failure to set meaningful emissions targets.
On March 15, 2022, ClientEarth – a group of environmental lawyers who hold shares of Shell – announced it was seeking to initiate legal action against Shell’s board of directors (13 executive and non-executive directors) in the High Court of England and Wales over the company’s alleged mismanagement of its climate-related obligations. ClientEarth argued Shell’s “wait-and-see” approach to the climate transition would come at the expense of the company’s shareholders and employees. Shell has committed to reduce its carbon intensity of energy products it sells by 20% by 2030 and 45% by 2035, but not to a reduction in gross emissions, which would require reducing production.
ClientEarth Alleges Net Zero Plan Will Fail to Meet Paris Targets
ClientEarth alleged the directors of Shell breached their legal duties by mismanaging the material and foreseeable climate risks facing the company, arguing Shell’s net zero plan will fail to meet Paris Agreement commitments to keep global temperature increases below 1.5°C above pre-industrial levels by 2050. Specifically, ClientEarth argues that Shell’s directors breached their duties under sections 172 to 174 of the UK Companies Act, which requires directors to act in good faith, exercise independent judgment and reasonable care, skill and diligence.
“Shell is seriously exposed to the risks of climate change, yet its climate plan is fundamentally flawed,” Paul Benson, a lawyer with ClientEarth, said in a statement. “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 the long-term value of the company in jeopardy.”
ClientEarth contends that although Shell has a goal to cut emissions in half by 2030, that only applies to Scope 1 and 2 emissions, which account for approximately 5% of Shell’s overall emissions. The shareholder group pointed to analyst research that found Shell’s strategy would actually result in a 4% increase in emissions by the year 2030.
In a statement to The Guardian, a Shell spokesperson said: “To be a net-zero emissions business by 2050, we are delivering on our global strategy that supports the Paris agreement. This includes the industry-leading target we have set to halve emissions from our global operations by 2030, and transforming our business to provide more low-carbon energy for customers.”
Activists Continue to Target Energy Companies
This is not the first time activists have targeted Shell. In 2019, a lawsuit filed by Greenpeace and other organizations on behalf of more than 17,000 Dutch citizens alleged Shell was threatening human rights by continuing to invest in fossil fuels. That eventually resulted in a Dutch court ordering Shell to reduce its emissions by 45% from 2019 levels by the year 2030.
Last year, another energy company, Exxon Mobil, was the target of a climate-related activist shareholder claim. We wrote about Engine No.1, a shareholder activist group that succeeded in forcing Exxon Mobil Corporation to replace three of its directors – a move that was supported by juggernaut institutional investors BlackRock, Vanguard and State Street. Hedge fund First Point LLC, another shareholder activist group, called on Shell to split into two companies last year after acquiring $750 million in the company’s stock.
What Does This Mean for Canadian Companies?
While the cases described in this blog are happening outside of Canada, that doesn’t mean Canadian energy companies are immune to shareholder activism – and potential litigation. As we’ve discussed in previous blogs, the rise of ESG investing will likely turn more Canadian companies into litigation targets and companies in the energy sector cannot afford to delay making net zero plans that are credible, verifiable and supported by data. With the increasing trend toward companies making net zero commitments (supported by large institutional investors like the Canadian Pension Plan Investment Board), the potential for litigation is on the rise.
As a separate matter, and in addition to litigation initiated by activist shareholders, could companies also face potential criminal liability for failing to set credible emissions targets in Canada? We’ll tackle that topic in a future blog. In the meantime, the lawyers in the MLT Aikins ESG practice group have extensive experience advising clients in the oil and gas sector on developing robust ESG strategies and credible net zero targets. Contact us to learn how we can help.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.