A claim has been filed in the High Court against individual Shell directors by an environmental group (and Shell shareholder), ClientEarth, alleging board members had failed to prepare the company adequately in response to the “material and foreseeable” risks arising from climate change. This is the first time that a company board has been challenged on its ability to properly prepare for the energy transition.
The claim is backed by other institutional investors, including UK pension schemes Nest and London CIV (though they are not joined in the action themselves), and it comes in the context of the world’s major oil companies reporting record 2022 profits.
In a public statement, Shell said it did not accept the allegations and that directors had acted in the best interests of the company in line with their legal duties. The proceedings are clearly still very much in the early stages, so it is not clear whether the claim will be successful.
However, the claim itself does represent a broader shift in the way investors seek to put pressure on companies to effect climate-related policies. Traditionally, shareholders have been reluctant to target individual directors, saying it could leave potential board recruits reluctant to take up positions. In recent years, however, BlackRock (the world’s largest asset manager), Fidelity International and other big investors have begun voting against the re-election of directors over a lack of progress over climate change.
It is perhaps not surprising that pension schemes are backing the claim as the Pensions Regulator (TPR) has made it clear in its climate change strategy that it expects trustees to start exploring the opportunities that will come from a global pivot towards low carbon economies. For occupational pension schemes, this expectation is being taken forward through the Pension Schemes Act 2021, which writes climate change into pensions law in the most comprehensive way to date.
TPR’s draft guidance on governance and reporting of climate-related risks and opportunities sheds some further light on how TPR expects trustees to deal with their new obligations, such as the requirement for trustees to work out the scheme’s carbon footprint by calculating greenhouse gas emissions of the investment portfolio.
The claim is in line with what we predicted in our Climate litigation risk – five trends to watch in 2023 article, as we expect litigation to become more prevalent as a means to force fossil fuel producers to change their climate-related policies. As businesses in every sector strive to pick up the pace in their transition to net zero, managing litigation and regulatory risk must form a key part of any climate strategy.