In what the client has billed ‘the first case of its kind seeking to hold corporate directors personally liable’, Pallas Partners is representing ClientEarth pro bono in its case against Shell’s board of directors for ‘mismanaging climate risk’.
After nearly a year of pre-action proceedings, Pallas Partners has filed a derivative action against the energy giant for what its client says is a failure to adopt a business strategy that will mitigate its exposure to climate risk.
Natasha Harrison (pictured), founder and managing partner of Pallas Partners, explained that the firm is ‘uniquely positioned to support ClientEarth given our expertise in ESG and class action litigation’. But the case is complex and novel, with the potential to set new precedent for climate litigation moving forwards.
Transition plan
ClientEarth outlined the rationale for the claim in its press release. ‘The [Shell] board has failed to adopt and implement a climate strategy that truly aligns with the Paris Agreement goal to keep global temperature rises to below 1.5°C by 2050.’
‘One of the things we say in this claim’, said Will Hooker, a partner at Pallas leading on the case, ‘is that, while Shell says to its investors that its energy transition plan is in line with the objectives of the Paris Agreement, on any view it’s impossible to understand how they could have reached that conclusion’.
ClientEarth also alleges that Shell is failing to comply with a Dutch court order that requires it to cut its emissions by 45% from 2019 levels by 2030. In a judgment delivered on 26 May 2021, The Hague district court found that Shell had an ‘obligation of result’ to reduce CO2 emissions from its own activities, as well as a ‘best-efforts obligation’ to reduce the emissions generated by its suppliers and end-users.
Shell, which is being represented by Slaughter and May partner Peter Wickham, is firm in its denial of the claims. ‘We do not accept ClientEarth’s allegations,’ the company said in a statement. ‘We believe our climate targets are aligned with the more ambitious goal of the Paris Agreement’. In comments provided to Legal Business, Shell also argued that it ‘is not ignoring the Dutch court ruling’, and that ‘any suggestion otherwise is misleading. As we wait for the outcome of the appeal, we are taking active steps to comply’. Neither Wickham nor Slaughter and May would comment on an ongoing matter.
‘This claim is ultimately about money’
ClientEarth bought shares in Shell in 2016, and is bringing the case in its capacity as a shareholder. It alleges that what it sees as Shell’s failure to prepare for the net-zero transition will leave the company vulnerable to climate risk and negatively impact its profitability in the long term. In ClientEarth’s view, Shell is failing to meet its obligations to its shareholders.
‘Pallas Partners is uniquely positioned to support ClientEarth given our expertise in ESG and class action litigation.’ Natasha Harrison, Pallas Partners
In Hooker’s words, ‘ClientEarth’s claim is ultimately about money. It’s about Shell being a better-run company if it is meaningfully adapting to changes in market conditions.’
This approach makes this case distinct from many other recent pieces of climate litigation. ‘That was effectively a tort claim,’ Hooker said of the Dutch case. ‘The argument there was that Shell’s contribution to emissions constitutes a breach of duty to people in general in the Netherlands.’ In this case, by contrast, ClientEarth alleges that Shell is in breach of duty to a specific class of people: its shareholders.
Though ClientEarth brings the case alone, it cites support from a raft of other shareholders, including institutional investors and pension funds. Notably, the claim has received public backing from Nest, the largest workplace pension scheme in the UK with ten million members. But Shell stresses that none of these supportive investors is a litigant, and that they collectively represent less than 0.2% of the company’s total shareholder base.
Hooker argued that this does not bear on the legitimacy of the claim. ‘In a company of Shell’s size, any shareholder is a small shareholder – even a massive investment company. This kind of procedure, the derivative claim, is usually used in quite small companies, or companies that are held by a small number of shareholders. But the fact is, the right under the Companies Act is there for any shareholder in any company.’
Potentially precedent-setting
The statutory basis for the claim is found in ss172 and 174 of the Companies Act 2006, which impose upon directors duties to act in a way that ‘would be most likely to promote the success of the company’ and ‘to exercise reasonable care, skill and diligence’.
‘These are parts of the Companies Act that have never been tested,’ Hooker explained. ‘Every director of every English company has an express statutory duty to take into account the environmental effects of every decision they make. Nobody has ever meaningfully litigated that duty.’
For this reason, the case has the potential to set important precedent. Climate litigation has increased significantly in recent years. According to a 2021 report from Oxford University’s Environmental Change Institute, just over 800 climate cases were filed between 1986 and 2014, while over 1,000 were brought from 2015 to the time of the report’s publication.
The increase in climate litigation has seen companies like Shell facing a wide variety of claims, and Hooker noted that the nature of the regulatory environment makes bringing cases like ClientEarth’s an attractive proposition for activists who are able to do so. ‘At the moment, these cases are about money, because that’s the category of claim that courts in England understand.’
At a time when law firms and clients alike are abuzz with talk of the importance of environmental, social and governance (ESG) impact, a favourable ruling for ClientEarth would likely be followed by a rush of similar claims.
‘It will be important whatever happens,’ said Hooker. ‘If we’re successful and the courts say that board members of a company of this kind have the sort of obligations that we say they have, then that obviously becomes hugely important to every company that has, for want of a more elegant phrase, a really huge carbon footprint. If we succeed, then every company of this kind in the UK will have to give serious effect to what the court says.’
On the other hand: ‘If we’re not successful, then that will demonstrate that there is a gap in the current framework of company law, and the question will be, “what has to happen in that situation?”. There would certainly be a campaign to close every gap.’
But the endgame remains a long way off. The next step in the process is for the Chancery Division to grant initial permission for the case to proceed. If that is granted, Shell will then be able to intervene to seek refusal – which it will almost certainly do. This will start a period of procedural wrangling, which Hooker estimated would last up to nine months. Only after that, if permission is not refused, will the full trial begin.