March 6, 2023
Written by
Meg Candler

Shell faces new round of ESG litigation

The 9th February 2023 saw environmental lawyers ClientEarth file a lawsuit against 11 Shell directors, arguing that the energy giant’s climate strategy is inadequate for meeting ESG targets and presents considerable financial risk. This lawsuit follows a ruling in 2021, where Shell was ordered by a Dutch court to step up their climate commitments, and arrives against a backdrop of increasing sustainability scrutiny. We take a look at what this rising tide signals for large companies.

2023: ClientEarth versus Shell

On the 9th February 2023, non-profit environmental lawyers ClientEarth filed a lawsuit at the high court in England against 11 directors at Shell plc. 

ClientEarth, bringing suit in its capacity as a Shell shareholder, argues that the oil major’s sustainability strategy amounts to mismanagement of current and future climate risk, failing to align with the Paris Agreement and thus violating their duties under the Companies Act.

Signalling a world-first, the lawsuit is the first time that litigation has sought to hold company directors explicitly liable for corporate sustainability failings. Commenting on the suit, ClientEarth Senior Lawyer Paul Benson argued that ‘[Shell’s] board is persisting with a [low-carbon economy] transition strategy that is fundamentally flawed, leaving the company seriously exposed to the risks that climate change poses to Shell’s future success – despite the Board’s legal duty to manage those risks.”

The claim has received considerable and unprecedented support amongst Shell investors including UK pension funds Nest and London CIV in addition to numerous other European pension funds and asset managers. Collectively, this group of institutional investors holds more than 12 million shares in the company, and $450bn in total assets under management. 

Nest’s Chief Investment Officer, Mark Fawcett, commented that “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”. He also expanded on the group of investors’ concerns further with his argument that “the company’s new oil and gas projects in development pose risks to investors in terms of carbon lock-in and stranded assets.”

Though Shell delivered a record-breaking $40bn in profit in 2022 thanks to rising prices resulting from shocks to the energy market in the wake of Russia’s broad-scale invasion of Ukraine, Benson points towards a bleak long-term outlook for Shell if it fails to invest in renewable energy, accusing Shell’s board of “wasting a golden opportunity to position the company for the energy markets of the future.”

“Shell may be making record profits now, but the writing is on the wall for fossil fuels long term,” he warned.

Shell’s climate strategy

Though Shell’s “Energy Transition Strategy” declares that the company intends to become a net zero emissions business by 2050, ClimateEarth’s press release on the lawsuit notes that “leading third-party assessments have found that the strategy is not Paris-aligned.”

While many large enterprises have set 2030 Net Zero reduction targets, the Shell group’s net emissions are estimated to fall by just 5% by the end of the decade. What’s more, despite 90% of the group’s total emissions sitting in scope 3 as “value chain” emissions, these emissions are excluded from its short- to medium-term declared targets. 

2021: Milieudefensie et. al versus Shell

These figures demonstrate that Shell is likely to fall far short of the emissions reductions that were mandated by the Hague District Court in 2021.

The 2021 case, which we covered in detail in our paper “Sustainability, Scope 3, & the 2021 Shell ruling: What this means for procurement and business leaders” saw environmental group Milieudefensie/Friends of the Earth Netherlands and more than 17,000 co-plaintiffs serve Shell with a class action suit, alleging that the oil giant’s effects on the climate amount to a violation of its human rights obligations and its duty of care under Dutch law. 

In particular, plaintiffs argued that Shell’s historical understanding of climate change, its allegedly misleading claims, and its inadequate action to prevent global warming constitute unlawful negligence and illegal endangerment of Dutch citizens. 

The Hague District Court ruled in favour of the plaintiffs, ordering Shell to reduce its emissions by 45% by the end of the decade relative to their 2019 figures – an enormous step up from Shell’s original stated aim to cut its emissions intensity by 45% over 2016 levels by 2035. 

Perhaps most importantly, this reduction was applied beyond Shell’s own operations, with Judge Alwin’s decision that “The court orders Royal Dutch Shell, by means of its corporate policy, to reduce its CO2  emissions… for the Shell group and the suppliers and customers of the group signalling that Shell must step up its commitments on scope 3. Excluding these value chain emissions from their carbon accounting has rapidly become unacceptable.

Litigation, regulation, and activist investor action will only increase

Though Shell has since declared its intention to appeal the 2021 ruling, this new suit from ClimateEarth demonstrates that climate scrutiny is unlikely to slow down any time soon: 

Mounting challenges for Shell

Notably, this year has already seen multiple challenges for Shell. Shortly after multi-national Greenpeace activists boarded and occupied an oil platform en route to Shetland at the end of January, non-profit group Global Witness lodged a complaint against the oil giant with the US Securities and Exchange Commission. In it they argue that Shell has misled investors by exaggerating its spending on renewables, and paying out five times more to shareholders than it spent on renewable energy. Shell has denied this claim. 

In the same month, Shell was also sued in London’s high court by 14,000 people arguing that Shell is responsible for devastating oil spill pollution of Nigerian water sources that have caused thousands to lose their livelihoods due to the effects of this pollution on farming and fishing in the Niger Delta. Shell has argued in response that it is not liable for the actions of its subsidiary companies in Nigeria. 

Echoes of Exxon’s coup

The pressure now being placed on the Shell group by investors closely mirrors another event in late 2020/early 2021, where activist investor Engine No. 1 staged a coup attempt at ExxonMobil. The hedge fund began to oust sitting Exxon board members, arguing – much like the investors supporting ClimateEarth’s suit – that the climate crisis poses “an existential threat to the business” that the board was failing to confront. Investors agreed then, too, with Engine No. 1, garnering the support of BlackRock, Vanguard, and State Street against Exxon’s leadership. 

Class action cases mount

Class action cases such as that brought against Shell in the Netherlands in 2021 are also mounting, with organisations such as Coca Cola and Allbirds coming under fire for perceived greenwashing in 2022. Though both class actions were ultimately dismissed, global law firm Norton Rose Fulbright alerts us to increasing corporate litigation, “due in part to the plaintiff’s bar in California having ‘figured out the blueprint for how to bring these cases.’”

The UN calls for increased governmental intervention

What’s more, pressure is further mounting on large organisations from other powerful actors – outside of courts and boardrooms. In its Integrity Matters report, launched at COP27 in November 2021, the UN’s High-Level Expert Group On the Net Zero Emissions Commitments of Non-State Entities brought attention to the dilatory efforts of large organisations around climate change, making “a call for governments to regulate net zero commitments, starting with large emitters.” 

Action beats inaction, every time

While broad-ranging legal regulations for meeting the global net-zero pledge agreed at COP 21 in Paris are yet to be either agreed or implemented by the world’s highest emitting nations, avoiding your responsibilities when it comes to the environment are clearly no longer consequence-free from a corporate point of view. Whether it’s third-party litigation, investor withdrawal, or your standing in the eyes of the public, it’s clear that taking evidence-based action towards science-based targets with your key suppliers, with the Paris Agreement in mind, must be more than just an ambition of large organisations – it should be day-to-day.

If you’re feeling stuck on the road to net zero, Vizibl’s Decarbonisation as a Service is your shortcut. Read more about Decarbonisation as a Service now, or if you’re still searching for how to get started, our 8-step guide to reducing scope 3 emissions through Supplier Collaboration is the paper for you.

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