Redirecting Shell

The claim has received the unprecedented support of a group of institutional investors collectively holding more than 12 million shares in the company and more than half a trillion US dollars (£450 billion) in total assets under management. The group includes, among others, 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 and pension funds Danica Pension and AP Pension in Denmark.

ClientEarth has also received letters of support from shareholders who stated that their position is aligned with the arguments that ClientEarth makes, including from UK local government pension scheme Brunel Pension Partnership.

AkademikerPension, a Danish pension fund, had divested from Shell amid concern with the Board’s transition strategy. They too wrote to ClientEarth, saying that if ClientEarth’s claim was successful and Shell’s strategy was to become Paris-aligned, the company could become an attractive investment again. 

Similarly, ACTIAM, a Dutch asset manager which divested from Shell in 2020, wrote that it expected Boards of energy companies to adopt credible energy transition strategies and demonstrate their long-term viability and ability to create long-term value for shareholders.

• The derivative action argues that Shell’s Board of Directors has failed to properly prepare the company for the low-carbon transition, putting the long-term value of the company at risk.
• It asserts that Shell’s Board is mismanaging the material and foreseeable climate risk facing the company, in breach of its legal duties.

As acknowledged by Shell’s Board, climate change and the energy transition pose a significant threat to companies in the energy sector, and system-level risk to the economy as a whole.

Shell’s physical assets are heavily exposed to extreme weather events and the wider economic impacts of climate breakdown.

Even more fundamentally, as the low-carbon transition progresses, bringing regulatory, market and societal shifts, Shell is facing potentially massive limitations on its operations, while its assets are at serious threat of becoming stranded in future.

Meanwhile, climate inaction is increasing Shell’s exposure to the risk of legal action and reputational damage.

• Shell has announced an “accelerated” net-zero strategy and Energy Transition Strategy, which Shell’s CEO says “are fully consistent with the more ambitious goal of the Paris Agreement: to limit the increase in the average global temperature to 1.5°C above pre-industrial levels". The Board’s stated objective is to “be a net-zero emissions energy business by 2050”.
• However, the corresponding emission reduction targets do not add up. In fact, the company’s reliance on ‘carbon intensity’ reduction targets mean that its absolute emissions into the atmosphere could even increase.
• Although the company has now set a 50% absolute emissions reduction target by 2030, this only relates to its Scopes 1 and 2 emissions – i.e. less than 10% of the company’s emissions.
• Meanwhile, investments in renewable energy are limited, and the Board intends to grow the company’s fossil fuel business which is incompatible with the 1.5°C compliant pathway produced by the International Energy Agency.

• Shell’s delayed transition plan fails to adequately prepare for the energy transition-related risks posed by stranded assets, write downs, and costly additional legal, regulatory and compliance measures and operational restrictions that the company will face.
• It overlooks the opportunities presented by the energy transition and the competitive advantage Shell could gain by increasing investment in renewable energy projects and new green technologies, or the possible route of shrinking the company and returning capital to shareholders.
• The longer Shell takes to implement a credible strategy, the more likely it is that the company will have to execute a costly ‘handbrake turn’ that could erode significant value.
• In May 2021, Shell was ordered by a Dutch Court to reduce its group-wide Scope 1-3 emissions – i.e. including those from the fossil fuel products it sells – by net 45% by the end of 2030. To date, the Board has failed to put forward a meaningful strategy to comply with the Scope 3 part of that judgment – increasing the risk that the company will be forced to make rapid adjustments to its strategy.
• There’s also a glaring disconnect between the Board’s climate commitments and Shell’s business plans. In the disclaimer presented in the 2021 Annual Report the Board states: “Shell’s operating plans cannot reflect our 2050 net-zero emissions target and 2035 NCF target, as these targets are currently outside our planning period.”

• Under English law, company directors have a duty to assess, disclose and manage material risks to the company. ClientEarth’s claim is that the Board’s mismanagement of climate risk puts it in breach of their duties under the UK Companies Act.
• Section 172 of that Act requires company directors to act in a way that they consider will best promote the success of the company for the benefit of its members as a whole. In doing so, they are required to have regard to a range of factors that includes the likely consequences of any decision in the long term, the interests of the company’s employees, and the impact on the environment. Under section 174 of the Act, Shell’s directors are also legally required to exercise reasonable care, skill and diligence in the discharge of their duties.
• We say that the Board has breached these duties.