A campaign group is bringing a lawsuit against Shell claiming the energy giant’s board has failed to manage climate risk, in what is thought to be the first legal action of its kind.

The case is being brought by campaign group ClientEarth, which claims board members have breached their directors’ duties by allegedly failing to “properly prepare” for climate change. The claim rests on a interpretation of section 172 of the Companies Act which sets out directors’ duties.

The ClientEarth action will take the form of shareholder litigation. Paul Benson, a lawyer with ClientEarth says: “Shell is seriously exposed to the physical and transitional risks of climate change, yet its climate plan is fundamentally flawed.”

He adds: “Despite Shell’s current profits, failing to properly prepare the company for the inevitable net zero transition only increases the company’s vulnerability to stranded asset risk, and to massive write-downs of its fossil fuel assets.”

Section 172 of the Companies Act demands directors must act in a way that will most likely “promote the success of the company” for its “members” but have regard to long-term consequences of their decisions and the interests of employees, the community and the environment.

ClientEarth says Shell’s current approach and “insufficient targets” put the “enduring commercial success of the company and employees’ jobs at risk and is no good for people or the planet”. It adds that Shell’s strategy does not square with “emissions reduction pathways” scientists say are needed.

Shell’s ‘reshaped’ strategy

In a statement Shell says its is aiming to halve carbon emissions from global operations by 2030. Its annual report says its governance is designed to reach net zero by 2050.

“Addressing a challenge as big as climate change requires action from all quarters,” Shell says. “The energy supply challenges we are seeing underscore the need for effective government-led policies to address critical needs such as energy security while decarbonising our energy system. These challenges cannot be solved by litigation.”

Shell’s annual report says the company is committed to targets set in the Paris Agreement to pursue efforts to limit global warming to 1.5 degrees C above pre-industrial levels, or well below 2 degrees C at least.

The report says Shell’s operations have been “reshaped’ to place its “energy transition strategy at the heart of everything we do.” An environment and sustainability committee operates alongside the audit and remuneration committees and oversees efforts to reduce carbon emissions. The committee met 13 times in 2021 and discussed climate change at nine meetings. A report on the committee’s work says it discussed safety, environmental topics, energy transition plans and executive remuneration metrics. Its work includes contributions to the company’s targets for net-zero emissions and provides updates to the company’s board.

Shell did not attract good press last year for its climate plans. In May a Dutch court described a transition plan approved by 89% of shareholders as “rather intangible, undefined and non-binding”.

The ruling added: “The court concludes that RDS [Royal Dutch Shell] is obliged to reduce the CO2 emissions of the Shell group’s activities by net 45% at end 2030, relative to 2019, through the Shell group’s corporate policy.” It added that the obligation “relates to the Shell group’s entire energy portfolio and to the aggregate volume of all emissions”.

The war in Ukraine has focused a new spotlight on energy and triggered a debate over continued fossil fuel production versus an accelerated transition to renewables. Companies like Shell will remain at the centre of this controversy and its board members should brace for more turbulence to come.