UK firms ‘must be alive to risk’ of climate change litigation

In what the group described as the first ever case of its kind, ClientEarth said it was taking the energy giant’s board of directors to court, in an effort to hold them liable for failing to properly prepare for the transition to net zero carbon emissions.

Michael Fenn, litigation expert at Pinsent Masons, said that although it was “early days” for the charity’s proposed litigation, “the direction of travel we have seen in recent months shows, more than ever, that UK businesses must be alive to the risk of climate change litigation in the courts.”

In an announcement earlier this month, ClientEarth said Shell’s board breached its legal duties when it failed to implement a climate strategy “that truly aligns with the Paris Agreement goal to keep global temperature rises to below 1.5°C by 2050.” ClientEarth, which is a shareholder in Shell, said the directors had not acted in a way that promoted the company’s success - and had not exercised reasonable care, skill and diligence – as required under sections 172 and 174 of the UK Companies Act.

“We want to make sure the board’s ‘wait and see’ approach to the energy transition does not come at the expense of long-term viability for the company’s stakeholders, including shareholders and employees. Putting in place sufficient targets to reduce its emissions over the next three, five and 10 years in order to meet net zero will secure the company’s long-term value, while protecting investors’ capital and the climate,” the charity said.

A Shell spokesperson said: “To be a net-zero emissions business by 2050, we are delivering on our global strategy that supports the Paris agreement. This includes the industry-leading target we have set to halve emissions from our global operations by 2030, and transforming our business to provide more low-carbon energy for customers.”

“Addressing a challenge as big as climate change requires action from all quarters. 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,” they added.

ClientEarth’s action is not the first time Shell has been taken to court over its emissions. In May 2021, a court in the Netherlands ruled that the company must reduce its emissions by 45% – including those from the fossil fuel products it sells – by the end of 2030. Shell has appealed against the decision, maintaining that its target to become a net zero emission energy business by 2050 is “in step with society”.

Fenn said legal analysts have seen environmental organisations such as ClientEarth cite duties owed by directors under the Companies Act 2006 to put pressure on boards to amend their climate change strategies. “To date, this has largely been done through non-litigation means such as open letters. What has changed in recent months is that these arguments are now finding their way to the courts, and we are aware that at least one other such claim is already before a judge,” he said.

ClientEarth is pursuing its claim as a ‘derivative action’ – a claim brought by a shareholder on behalf of the company – in order to pursue a claim against its directors. Fenn said: “It appears that ClientEarth has not formally issued its claim against Shell. Instead, the charity has written to the board inviting it to respond - and since the claim is pursued as a derivative action the claimants will need the court’s permission to do this before the action can proceed,” Fenn added.