Is A New Wave Of Lawsuits Against Oil Company Directors Looming?
- Last week, ClimateEarth filed the first-ever lawsuit that attempts to hold corporate directors liable for failing to prepare their company for the energy transition.
- Shell has said that it does not accept the allegations and believes its directors have complied with their legal duties and have acted in the best interests of the company.
- Legal experts believe the case is unlikely to stand up in court as it deals with matters of business judgment that the court will not challenge
The suing of energy firms for greenwashing or climate action failure by environmental organizations is nothing new. But ClientEarth entered new territory last week by taking legal action against the 11 directors of Shell, rather than the company itself. This has led to speculation over whether a new wave of climate litigation aimed at company directors might be on its way. So, is ClientEarth’s lawsuit legitimate or is it all hot air?
ClientEarth has a token shareholding in Shell and is suing the firm under the U.K. Companies Act, with support from a group of large pension funds and other investors. The group decided to take legal action against Shell last year, stating that the oil major has failed to move fast enough regarding climate, which has threatened the company’s success and wasted its investors’ money on unnecessary fossil fuel projects.
ClientEarth’s lawyer, Paul Benson, stated that “Shell may be making record profits now, but the writing is on the wall for fossil fuels long term”. He argues that “The shift to a low-carbon economy is not just inevitable, it’s already happening. Yet the board is persisting with a transition strategy that is fundamentally flawed, despite the board’s legal duty to manage those risks.” Benson added, “Long term, it is in the best interests of the company, its employees and its shareholders – as well as the planet – for Shell to reduce its emissions harder and faster than the board is currently planning. The International Energy Agency said in 2021 that no new oil and gas projects were compatible with net zero emissions by 2050. Doubling down [by Shell] on new oil and gas projects isn’t a credible plan – it’s a recipe for stranded assets.”
The lawsuit appears to be the first of its type and while unconventional, it has received major financial backing from several institutions. Nest, the UK’s largest workplace pension scheme with 10 million members, which is helping to fund the lawsuit, believes “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… We hope the whole energy industry sits up and takes notice.”
Shell was already ordered to cut its oil and gas emissions by 45 percent by 2030, in a Dutch court in 2021. ClientEarth is now asking that the company’s board of directors adopt a strategy to manage climate risk in line with its duties under the Companies Act, as well as in accordance with the Dutch court’s emissions ruling. The environmental group is currently waiting for the high court to determine whether the claim can proceed.
In response, a Shell spokesperson stated: “We do not accept ClientEarth’s allegations. Our directors have complied with their legal duties and have, at all times, acted in the best interests of the company. We believe our climate targets are aligned with the more ambitious [1.5C] goal of the Paris agreement. Our shareholders strongly support the progress we are making on our energy transition strategy, with 80% voting in favour of this strategy at our last AGM.”
While Shell claims its climate targets are in line with the Paris Agreement objectives, ClientEarth assessments suggest otherwise. Third-party analyses provided to ClientEarth show that Shell’s strategy does not include short to medium-term targets to cut the emissions from the products it sells, despite the fact this business accounts for 90 percent of the company’s emissions.
The question now is whether this first-of-its-kind lawsuit will mark a new era of accountability in oil and gas, and potentially in other industries. While the litigation may have drawn the world’s attention, some law experts believe it is unlikely that the lawsuit will stand up in court. David Gibbs-Kneller, a lecturer at the University of East Anglia, stated that “Corporate strategy and management are typically matters of business judgment that the court will not challenge.” In addition, “ClientEarth’s evidence that the strategy may impose increased risk to the company does not evidence they did not have regard to the wider interests of the company or the directors do not believe, in good faith, the strategy will promote the success of the company. In fact, it is implicit in Shell’s strategy to lower carbon emissions that they have considered those wider interests in discharging their duty to the company. No director would consider this claim to be in the company’s interests when the evidence, at best, appears to be speculative,” explained Gibbs-Kneller.
While ClientEarth waits for the U.K. high court to decide the fate of its lawsuit, it is certainly succeeding at drawing the eyes of the world to its cause. The environmental group calls into question the accountability of the directors of a company for its ESG strategy and action, rather than the company itself, likely encouraging others to do the same. No matter the result, ClientEarth has attracted greater attention to the situation and may potentially provide precedence for future legal action.
By Felicity Bradstock for Oilprice.com
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