Climate group sues Shell's board, says long-term value 'in jeopardy'

Shell PLC's board of directors is being sued over the oil major's "fundamentally flawed" climate strategy that activists said fails to meaningfully reduce emissions and continues to center on fossil fuel production.

Environmental law nonprofit ClientEarth said Feb. 9 that Shell's strategy to reach net-zero emissions by 2050 includes interim targets that "simply don't add up" and will instead "tie the company to projects and investments that are likely to become unprofitable as the world cleans up its energy systems."

The activists claimed that the legal action, which started in March 2022 but is now formally filed, is the first time ever that a company's board has been challenged on its failure to properly prepare for the energy transition.

"Shell is seriously exposed to the risks of climate change, yet its climate plan is fundamentally flawed," Paul Benson, a senior lawyer at 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 its long-term value ... in jeopardy."

Shell, which last week announced record annual earnings of $39.87 billion for 2022 on the back of soaring energy prices, has a goal to achieve a 50% absolute reduction in Scope 1 and 2 emissions by 2030 compared to a 2016 baseline, on its way to net-zero across all scopes by midcentury.

However, ClientEarth pointed to research by analysts at Global Climate Insights that said the strategy would only achieve a 5% reduction in net emissions by the end of the decade. The company's 2030 target also excludes products sold, known as Scope 3 emissions, which account for the vast majority of Shell's emissions.

Shell is already under pressure to reduce its carbon footprint at a faster rate, having lost a landmark court case in the Netherlands in 2021 ordering it to cut emissions by 45% by 2030. The company is appealing the case while also taking "active steps" to comply with the ruling, such as with investments in low-carbon fuels, renewables and hydrogen, a spokesperson said.

ClientEarth's legal claim takes the form of so-called "derivative action" against Shell in the U.K., a mechanism used by shareholders to allege breaches of duty by the board. The action requires permission from the U.K.'s High Court to proceed to a full trial.

If the claim is successful, the High Court will order Shell's board to adopt a strategy to manage climate risk in line with its duties under the U.K. Companies Act and with the 2021 Dutch court judgment, Benson said in an email.

ClientEarth itself has only a token shareholding in Shell but has received letters of support for its case from several institutional investors in the U.K., France, Belgium, Denmark and Sweden, including London LGPS CIV Ltd., Degroof Petercam Asset Management, AP Pension Livsforsikrings A/S and Danske Bank Asset Management. The supporting investors collectively own more than 12 million shares in Shell. The company noted that the group represents less than 0.2% of the total shareholder base.

"Investors want to see action in line with the risk climate change presents and will challenge those who aren't doing enough to transition their business," Mark Fawcett, chief investment officer at Nest, the U.K. government-backed pension plan which is also supporting ClientEarth's case, said in a statement. "We hope the whole energy industry sits up and take notice."

The Shell spokesperson said the company does not accept ClientEarth's allegations and believes its climate targets are aligned with the Paris Agreement on climate change, pointing to the fact that 80% of shareholders voted in favor of Shell's energy transition strategy at its 2022 annual general meeting.

"Our directors have complied with their legal duties and have, at all times, acted in the best interests of the company," the spokesperson said in an email. "ClientEarth's attempt ... to overturn the board's policy as approved by our shareholders has no merit. We will oppose their application to obtain the court's permission to pursue this claim."

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