The board of Shell PLC (LSE:SHEL, NYSE:SHEL) is facing legal action from the environmental law organisation ClientEarth, which alleges that failure by the oil giant’s directors “to properly prepare the company for net zero” puts them in breach of their legal duties.
ClientEarth, a shareholder in Shell, is taking action against the company’s 13 executive and non-executive directors. It said this is the first ever case seeking to hold company directors personally liable for failing to properly prepare for the energy transition.
Paul Benson, ClientEarth lawyer, said: “We believe that there are sufficient grounds to assert that Shell’s board is mismanaging the material and foreseeable climate risk facing the company.
“Shell is seriously exposed to the physical and transitional risks of climate change, yet its climate plan is fundamentally flawed. If, as we claim, the company’s plan is being held up to be Paris-aligned when it is not, then there is a risk of misleading investors and the market at large.
“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.”
ClientEarth said many of Shell’s largest institutional shareholders have expressed concern about the company’s climate strategy. More than 30% of shareholders voted against the board in support of a resolution calling for Paris-aligned emissions targets at Shell’s 2021 AGM. The Climate Action 100+ Initiative, supported by the world’s biggest investors, is calling on all companies to align their business plans with the goals of the Paris Agreement.
Shell was last year ordered by a Dutch court to reduce its emissions by net 45% by the end of 2030. The company’s directors said this was “unreasonable” and Shell has since appealed the Dutch ruling.
Instead, Shell’s board has implemented its ‘Energy Transition Strategy’, which the company maintains is consistent with the 1.5°C temperature goal of the Paris Agreement. The company has set a target to become a net zero emission energy business by 2050, in step with society.
ClientEarth said its lawyers believe Shell’s strategy “does not square with the emissions reductions pathways scientists say are needed to meet that goal and avoid catastrophic climate change, nor does it square with the company’s own net zero ambition”.
Benson added: “The longer the board delays, the more likely it is that the company will have to execute an abrupt ‘handbrake turn’ to retain commercial competitiveness and meet the challenges of inevitable regulatory developments.
“Shell’s shareholders need certainty that the company is using their capital effectively in its navigation of the global energy transition and is genuinely pursuing the climate goals that it says it is.”
In its earnings release last month, Shell announced an increase in dividends and plans to buy back more shares after reporting profits of US$19bn. The announcement came as households were facing crippling energy bills, which have continued to soar as the war in Ukraine has thrown the fossil fuel energy market into further chaos, ClientEarth noted.
“Boosting dividends and buybacks might placate investors temporarily, but that approach is short-sighted, if – as the board maintains – the money is critically needed to prepare the company for a net zero landscape,” Benson added.
“The proportion of investment currently going to Shell’s transition is, relatively speaking, miniscule. There needs to be greater focus on the long term and greater investment in renewables to break free from fossil fuels and their inherent volatility.”