In legal action thought to be the first of its kind, Shell board directors could be subject to litigation claiming they “breached their legal duties” over the company’s energy transition strategy. Experts believe the case could have the potential to clear the way for more claims against directors.

ClientEarth, a campaign group, has filed a claim arguing Shell’s board failed to uphold their duties under the Companies Act “by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement”.

If given permission to proceed, the High Court will be asked for an order requiring the board to adopt a strategy in line with a previous ruling handed down by a Dutch court which described the company’s transition plan as “rather intangible, undefined and non-binding”.

According to Nigel Brook, a partner at law firm Clyde & Co and an expert on legal obligations arising from climate change, the case could clarify—for directors and insurers alike—the duties of board members for corporate climate policies.

“While climate lawsuits have been brought against companies, this is the first substantive attempt to hold directors personally accountable for the alleged failure to properly prepare a company for the energy transition,” says Brook.

“There is much debate about the fiduciary and statutory duties owed by boards in the climate context and if this case receives court permission to proceed, it should provide valuable insight and guidance for directors and their insurers as to the application of the relevant duties in this context.”

For the moment, as a “derivative” case, ClientEarth still needs permission from the courts to go ahead. That will likely require evidence to support a claim that Shell directors failed in their duties to manage climate change risk.

According to Jacqueline Amy Jackson, head of responsible investment at London CIV, a shareholder in Shell managing assets worth £48bn in the UK’s Local Government Pension Scheme, the company’s board has failed to adopt a “reasonable or effective” risk strategy.

“In our view, a board of directors of a high-emitting company has a fiduciary duty to manage climate risk and, in doing so, consider the impacts of its decisions on climate change, and to reduce its contribution to it,” she says.

London CIV is one of a group of investment managers holding 12 million shares in Shell supporting the ClientEarth action.

Litigation cases over corporate climate policies have been growing in number. A report last year from the London School of Economics revealed that so far more than 2,000 climate litigation cases have been filed around the world, though a quarter of these happened in the past two years. The success rate stands at around 50%, higher than the average rate for litigation.

Attendees at Davos last month heard from a panel of legal experts that the number could grow in the near future. Some believe cases will rise once new EU legislation comes online forcing companies to make more non-financial disclosures and to report on efforts to undertake human rights and sustainability due diligence.

Across jurisdictions

Elsewhere, a joint report from the Climate Governance Initiative and the Commonwealth Climate and Law Initiative says that claimants are using diverse aspects of the law to pursue companies including contract law, human rights law and tort. Claims do not respect legal boundaries: risk arising in one jurisdiction can cause legal action in another. And there has been a clear shift from pursuing governments to targeting corporates. There is the growing number of claims for “greenwashing”, mostly brought by NGOs.

According to Emily Farnworth, director of the Centre for Climate Engagement at Hughes Hall, Cambridge University, a win for ClientEarth would indeed set a “precedent”. “The question then is, OK, who else could be falling foul of the same challenge?”

But Farnworth’s work is not just about using the law as a stick to beat companies over climate change but potentially as a means of bringing them together. Her own work is focused on helping in-house counsel and external advisors interpret the law to support climate change policies. Contract law, for example, could be used to address issues in supply chains; competition law could be harnessed to bring companies together to collaborate on new technologies rather than keeping them apart.

“It’s quite important that we have all aspects of how we use regulation at our fingertips otherwise there is potentially a danger of only using it as a stick and not using it as a carrot as well,” says Farnworth.

For now the ClientEarth action moves forward. Shell has rejected the claims saying their directors have “complied with their legal duties” and acted “in the best interests of the company”. It says its climate plans are in line with the Paris Agreement and it has the support of shareholders after 80% voted in favour of the company’s transition plan at the last AGM.

“ClientEarth’s attempt, by means of a derivative claim, 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,” Shell says. The case continues.