ClientEarth has notified Shell of its claim against the Board of Directors in respect of their alleged failures to manage climate risks. In an unprecedented in ESG litigation, this claim has been framed as a derivative action – a claim brought by a shareholder on behalf of a company in respect of a breach of duty by a director. In other words, ClientEarth, which has been a shareholder of Shell since 2016, is not bringing a claim against Shell but on its behalf.
The claim is that the directors are in breach of their duties under the Companies Act to promote the company’s success and exercise reasonable care, skill, and diligence. ClientEarth argues that, following the Paris Agreement, the company must adopt and implement a climate strategy that aligns with the goal to keep global temperature rises to below 1.5°C. In failing to do so, ClientEarth alleges, the Board is increasing the company’s vulnerability to climate risk and putting its long-term value in jeopardy. Shell maintains that its strategy is consistent with the Paris Agreement, and has set a target to become net zero by 2050.
This is the first case in which shareholders have sought to hold company directors personally liable for failing to manage the transition to net zero. If the case proceeds, it will be an extraordinarily significant piece of litigation.
But will it proceed? As it stands, ClientEarth has sent a pre-action letter to Shell and must wait for a response. Assuming ClientEarth finds the response unsatisfactory, it may issue and serve the claim but must then apply to the court for permission to continue. To obtain such permission, ClientEarth would need to demonstrate that (1) there is a prima facie case and (2) that the action is one that an independent board of directors acting in the company’s best interests could reasonably have brought. While not entirely insurmountable, these are significant hurdles.