Victim and Villain?

Exploring ClientEarth’s creative lawsuit against Shell

3rd March 2023

Erin Lynch

Earlier this month ClientEarth filed a groundbreaking lawsuit in the High Court against 11 directors at oil giant Shell. The case, which is believed to be the first of its kind worldwide, seeks to leverage ClientEarth’s position as a minority shareholder in Shell to hold the latter’s corporate directors personally liable for its failure to drive the company away from fossil fuels quickly enough.  It’s not clear when ClientEarth became a shareholder in Shell, but this capacity allows them to bring what’s called ‘derivative action’ on behalf of the company against some or all of its directors.

Section 172 of The UK Companies Act 2006 puts a duty on company directors to ‘promote the success of the company for the benefit of its members’, giving regard to factors such as

• The likely consequences of any decision in the long term,
• The interests of the company's employees,
• The need to foster the company's business relationships with suppliers, customers and others,
• The impact of the company's operations on the community and the environment,

ClientEarth’s argument is that the Shell Board’s current strategy to meet the Paris Agreement targets is unreasonable and its plan to shift away from fossil fuels to more competitive, cheaper, cleaner energy will be too slow. As things stand, Shell will be tied to fossil fuel projects and investments which are likely to become unprofitable as the wider world shifts towards renewable sources and cleans up its energy systems. Shell’s strategy threatens the company’s long-term commercial viability, which could cost jobs, damage shareholder value, and decimate pensions.

ClientEarth’s case has received support from investors holding over 12 million shares in the company, amounting to over half a trillion US dollars in total assets under management, although that’s still only 0.15% of the total. Supports include UK pension funds Nest and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS, Degroof Petercam Asset Management (DPAM) in Belgium, as well as Danske Bank Asset Management. Mark Facwett, CEO at Nest was quoted saying ‘Robust short to medium term strategies are needed to meet the goals of the Paris Agreement’ ‘[Shell’s] new oil and gas projects in development pose risks to investors in terms of carbon lock-in and stranded assets.’ Climate change presents an existential threat to all of us, but by focusing on its effect on investors, ClientEarth has opened up a new window of opportunity for those seeking to use the courts to challenge powerful people.

Why Shell?

Shell is one of the largest oil and gas companies in the world, reporting annual profits last month of $40bn which is double the previous year's total and the highest in its 115-year history.  As a market leader in these sectors, ClientEarth argues Shell is ‘exceptionally vulnerable’ to the physical and transitional impacts of climate change — including risks to its business. According to research from ClientEarth’s Greenwashing Files, Shell disclosed emissions of 1,377 million tonnes of carbon dioxide in 2020, and its planned emissions leading up to 2030 are estimated to account for a staggering 1.6% of the global 1.5°C carbon budget. Up until 2018, Shell was reported to have dedicated just 1% of its long-term investments into low-carbon energy sources, and today the company is still openly committed to finding new sources of oil and gas, and has no plans to reduce its production amount of oil and gas by 2030. It is perhaps no surprise then, that this isn’t the first time Shell have had to defend their environmental position in the Courts.

Strategic Litigation and Shareholder Activism

ClientEarth’s lawsuit is the latest instalment in a series of high profile litigation against the energy Anglo-Dutch giant (full name Royal Dutch Shell). Following the Paris Agreement, In 2021, the Hague District Court in the Netherlands ordered Shell to reduce its worldwide CO2 emissions by 45% by 2030 compared to 2019 levels. The Court found that the company’s sustainability strategy was insufficient and put them in danger of imminently breaching Article 6:162 of the Dutch civil code as well as violating Articles 2 and 8 of the European Convention on Human Rights — the rights to life, and to family life.

The Dutch Court’s order was intended to cover emissions three main areas:

• Scope 1 — ‘emissions caused directly by an organisation’s activities’,
• Scope 2 — ‘indirect emissions’ resulting from an organisation’s energy consumption, and
• Scope 3 — ‘encompassing all other indirect emissions caused across an organisation’s value chain, including end-users.’

This case was considered to be a watershed moment in climate change litigation.

Unfortunately, the company has still failed to put forward a strategy to comply with ‘Scope 3’ of the Hague Court’s judgement. In 2018, RDS (the top holding company of the Shell Group) reported that 85% of the Shell group emissions were in fact from Scope 3. It’s argued that a strategy that doesn’t address Scope 3 is essentially meaningless.

Following Shell’s failure, in 2022, the Dutch environmental group Milieudefensie (Friends of the Earth) sent a letter to Shell’s boards and individual representatives (including CEO Ben van Beurden) highlighting the company’s failure, and threatening further legal action.

Shell’s Response

Shell has robustly rejected the allegations and attempted to appeal the 2021 finding, saying its climate targets are both ambitious and on track. A spokesperson said:

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.

In response to the Paris Agreement and the threat of further litigation, In 2021 Shell announced new targets. These include:

• Becoming a ‘net-zero emissions energy business by 2050’
• Creating an ‘Energy Transition Strategy’
• Reduction targets to reduce Scope 1 and Scope 2 absolute emissions by 50% by 2030.

This, the Shell Board argues, is consistent with the Paris Agreement to limit increases in average global temperature by 1.5°C above pre-industrial levels.

ClientEarth believes there are a number of serious shortcomings in these plans. Two notable weaknesses are that:

• The zero emissions target is not reflected in operating plans or budgets
• 50% of Scope 1 and Scope 2 emissions accounts for only 5% of the company’s overall emissions.

Research from Global Climate Insights, an initiative of the The Australasian Centre for Corporate Responsibility suggests that the Board’s strategy would result in a 4.4% rise in net emissions by 2030.

Significance

This is a really clever tactic from ClientEarth, and one that could have wide-ranging implications not only for fossil fuel giants, but more generally for companies worldwide. It’s part of a broader trend of shareholder activism where investors, like ClientEarth and many others, purchase minority stakes in companies to change them for a multiplicity of reasons. Paired with strategic litigation, it really is a force to be reckoned with.

Will it succeed? Writing shortly after the idea of the lawsuit was first floated in April 2022, legal academic David Gibbs-Kneller said the case had no real prospect of success; arguing that they neither had ‘sufficient legal merit’, nor were they ‘the proper person to litigate’. One of the reasons for that is because courts generally like to stay out of the way of questioning corporate strategy, as it is a matter of ‘business judgement’. A further complicating factor is, if ClientEarth is unsuccessful, they will have to shoulder Shell’s legal fees.

What’s clear is that it’s becoming harder and harder for companies to argue ‘business as usual’. The climate crisis presents a novel threat to human existence and it is no longer that outlandish to argue that what we understand to be ‘reasonable’ business strategy might have to shift. As you’ll see below in our discussion about Ocean Conservation, the public seems to be increasingly receptive to the idea of imposing legal liability on corporate directors for their climate failures.

Good Tythings

Carbon Reduction

Earlier this month, two technology companies, Heirloom Carbon Technologies and CarbonCure successfully demonstrated the possibility of storing carbon in concrete. While the companies only used around 37 kilograms of carbon, at scale this solution could provide an interesting solution to carbon storage. Anu Khan from Carbon 180 called the tests ‘meaningful’ , highlighting how finding permanent storage for captured carbon presents a ‘major bottleneck’ in the way of carbon capture success

Lee Beck, senior director for Europe at the Clean Air Task Force penned an op-ed for Euractiv calling on EU policymakers to change course if they want to meet net-zero targets on time. Beck argues that in addition to renewable sources, policymakers need to support nuclear energy, carbon capture and storage solutions, and zero-carbon fuels. This comes as the European Commission announced its €250 billion Green Deal Industrial Plan, designed to enhance the competitiveness of Europe's net-zero industry and support the fast transition to climate neutrality. The plan includes ambitions to simplify the regulatory environment, speed up access to finance, enhance skills and open trade for resilient supply chains, however significant uncertainty remains about the full details.

Next month, the EU Commission is expected to table new proposals further concretising these goals, while the The European Parliament is expected to vote on landmark legislation requiring fossil fuel companies to measure, report, and reduce methane emissions. CATF has been intensifying its push for EU leaders to urgently reduce methane — a strategy widely seen as the quickest, least expensive way to immediately slow global warming. A study from the Environmental Defense Fund Europe suggests that cutting leaks could prevent 80 billion cubic metres of methane entering the atmosphere.

Marine Conservation

The Australian government has announced plans to triple the size of the Macquarie Island marine protection zone, placing over 388,000 sq km (close to the size of Germany) under high protection in a significant move for marine conservation. Macquarie Island has a remarkably rich ecosystem, hosting the entire royal penguin population during their nesting season, as well as providing habitat for southern rockhopper penguins, subantarctic fur seals, southern elephant seals, and many more species.

The Scottish Government is consulting the public on ambitious proposals to develop Highly Protected Marine Areas in Scottish Waters. The proposals would make Scotland the first country in the world to designate at least 10% of its seas as Highly Protected Marine Areas (HPMAs), reflecting a solid commitment to the 30x30 agreement made at COP15. The organisation Scottish Environment LINK is asking those impacted to email Environment Minister Mairi McAllan in support of the plans. The consultation runs until 20 March 2023.

Meanwhile, Surfers Against Sewage continues to put pressure on the Government over lacklustre plans to tackle sewage overflows on beaches. Thérèse Coffey, the environment secretary recently ordered England's water and sewerage companies to share a ‘clear plan’ to reduce storm overflow sewage spills. SAS allege this move is ‘inaction masquerading as action’. Prevailing public opinion, on the other hand, seems to endorse much harsher strategies. According to a new poll by Redfield & Wilton, 72% of those 1500 people interviewed  supported the idea of holding individual executives criminally liable for contributing to river pollution.

Forest Conservation

Dr. James Deutsch, CEO of Rainforest Trust, joined Charity Talks, a podcast on creative solutions to intractable problems, to discuss the protection of rainforest habitat, combating climate change, indigenous rights, and safeguarding endangered species.

The Rainforest Trust also just released a remarkable video of highlights from its partners’ camera trap footage from 2022. The footage is a testament to their impact on wildlife across the world, and a reminder of how wonderful and fascinating nature can be.

World Land Trust has reached its £1,430,000 fundraising target for its Life on the Edge Appeal, meaning its partner, EcoMinga, can double the amount of land protected in the astonishing cloud forests of Río Anzu and Río Zúñac, located in Ecuador’s upper Río Pastaza watershed. Cloud forests are a unique habitat, accounting for just 1% of global woodland cover, and often displaying an abundance of flora and fauna. The Río Zúñac preserve is home to at least 20 endemic plant species, and has recently been the site of astonishing new species discovery. In 2014, two new Magnolia species, Magnolia vargasiana ined and Magnolia llangantensis ined were discovered in Río Zúñac. EcoMinga President Lou Jost calls the ecosystem ‘an evolutionary island every bit as interesting as the Galapagos’. The reserve also protects a wide range of mammals, eastern Andean birds, amphibians, and more.

Climate Resilience

Sand Dams Worldwide refreshed its strategy at the beginning of the year, with an overarching goal to help build 1 million sand dams for 0.5 billion people by 2050. Its targets are to build 100 sand dams every year by 2025, while also continuing to pioneer sand dams, and collect the necessary evidence and knowledge to make it more accessible to others. Over the past 20 years the organisation (previously known as Excellent Development) have provided sand dam projects assisting over 1.1 million people. Over 1 million trees now grow in places where they could not have previously survived. Food security has improved, and families have saved significant time for leisure, school and business. Its focus is now in working with others to share knowledge, collaborate and deliver maximum impact for end-users.

SolarAid’s Zambian team have been travelling across the country (which is over triple the size of the UK) to meet with Solar Entrepreneurs to run training sessions on how to become a Solar Light repair agent. Having a clear strategy to combat E-waste is vital as the organisation seeks to expand renewable energy across the country and region. SolarAid have also been highlighting user successes, featuring an interview with Goodwell Kongalwa from Ntchisi, Malawi to discuss the impact solar light has had on him and his family’s life.

Brave Mhonie, General Manager of SolarAid’s operations in Malawi was interviewed by the Turner Kirk Trust on the organisation’s mission, challenges, and impact. One of the most interesting topics he covers is why traditional businesses struggle to reach rural communities, and what SolarAid are doing to overcome this and other logistical challenges.

Food & Agriculture

Small abattoirs across the country are celebrating after Defra farming minister Mark Spencer announced funding to support and promote smaller, rural abattoirs. The Sustainable Food Trust have been vocal advocates for the sector over the past few years, arguing the funding was absolutely vital not only for farmers, but also for food supply chains and animal health and welfare. There has been a remarkable decline in small abattoirs over the past few years, with some estimates suggesting only 45 remain in Britain. The full details of the funding will be announced later this year.

Alternative Protein advocates, including Good Food Institute Europe’s Carlotte Lucas, are calling on governments to support the sustainable protein industry and create a more sustainable food system. After a euphoric high of $5.1b in 2021, global investment in sustainable proteins fell to $2.9bin 2022. Lucas argued that this suggests ‘we can’t rely on private investment alone to build a new sustainable food system, and governments need to step up’. Lucas compared sustainable protein’s current state as akin to that of solar panels in the 1990s, something ‘available for eco-conscious consumers who are willing to pay a premium’, but not much more widely.

Education & Advocacy

Action for Conservation’s award-winning rewilding work with the Penpont Project has just been featured in Carbon Copy’s new 23 Community Actions Guide. The guide collates community action ideas which exemplify ‘big-thinking local action’ and celebrates remarkable local successes and ingenuity.

In addition to ClientEarth’s lawsuit against Shell, its lawyers have been challenging the Retained EU Law (REUL) Bill currently going before the House of Lords. Partnering with WWF-UK and the RSPB, ClientEarth argues the Bill, which concerns more than 3,700 domestic laws retained from the UK’s time in the EU, gives too much discretion to Government ministers, and threatens to undermine Parliament’s law-making responsibility by preventing scrutiny and debate around existing and future law. Under the Bill, every one of the 3,700 laws would need to be preserved, replaced or amended by the end of 2023, or else be wiped from the statute book automatically. Retained EU laws relate to everything from drinking water, pesticide regulation, air quality, consumer rights and food and drug regulation. According to the Retained EU Dashboard, 588 of these laws relate to the environment and 493 relate to agriculture, forestry and fishing. The process by which these laws would be kept or thrown would be left entirely to government ministers, which ClientEarth, as well as other prominent legal commentators, argue is undemocratic. In contrast, supporters of the Bill believe that the plan would be the most effective way to comprehensively re-write the UK’s approach to regulation, opening the door to more business and/or avoiding pitfalls of retained legislation that was previously harder to amend.