Shell directors facing potential UK ESG shareholder derivative lawsuit
In the wake of COP26, more focus than ever is being given to the climate risks which apply to every aspect of business.
Scrutiny of a company's climate awareness and adherence to applicable regulation is at the forefront of company stakeholders' minds. Particularly so, when it involves the fossil fuel industry and how companies are managing climate risks, compared with how they are publicising it. Indeed, many commentators have recently suggested that the "greenwashing" of financial investments will soon become the new mis-selling scandal.
Directors and Officers (and their insurers) will need to be on high alert for this new and evolving area of risk. This risk not only arises from a regulatory perspective, where new regulation and guidance is constantly being developed, but also from shareholder actions. Directors will need to ask themselves (or, if they don't, their shareholders will): have they done enough to manage, disclose and mitigate the relevant climate risks that their companies face? Have they delivered on their commitments to address these risks and are the company shareholders on board with their strategy? If not, it is becoming increasingly likely that those companies and their directors may face litigation.
ClientEarth's claim against Shell
Whilst the UK has not seen the same kind of ESG related shareholder litigation as the US, on Monday, it was reported that a letter before action was sent by ClientEarth against the board of directors of Royal Dutch Shell ("Shell"), in what could be the first of its kind shareholder derivative litigation in the UK. Shell is no stranger to climate related litigation. In 2021, the Hague District Court in the Netherlands directed Shell to reduce global emissions.
Last year, ahead of a May 2021 Annual General Meeting, Shell announced its Energy Transition Strategy, which asserts its aim is "to become a net-zero emissions energy business by 2050" which it states is "in step with society's progress towards the goal of the UN Paris Agreement on Climate Change". In October 2021, it announced a new target which was to "halve [our] absolute emissions by 50% by 2030"
However, despite these targets and renewed strategy, ClientEarth alleges that Shell has not done enough. In fact, ClientEarth goes much further and claims there is a disparity between Shell's net-zero ambition and the company's board accounts and investment plans. ClientEarth claims that, the fact these two are not aligned, "should raise questions for investors about what the company's real strategy is" and concludes that Shell's board of directors are guilty of mismanaging the climate risks of the company and have therefore breached their duty to promote the success of the company under section 172 of the Companies Act 2006.
Depending on any response to the letter before action from Shell’s board of directors, the next step would be for ClientEarth to seek the Court’s permission to bring a derivative claim on behalf of the company against the directors personally under the Companies Act 2006. This will likely prove a high bar for ClientEarth to clear.
Should D&Os and D&O insurers be concerned?
ClientEarth describe the claim as a “world-first” effort to hold a company’s individual directors personally liable for failing to properly prepare for the net zero transition. ClientEarth is encouraging institutional investors to join or support the claim in advance of Shell’s annual meeting in May.
Whether permission to bring the derivative claim will actually be sought and granted remains to be seen, but it does have the potential to set a blueprint for other shareholder activists seeking to hold boards of UK companies to account.
It is clear that organisations, like ClientEarth, are willing to take a deep dive into a company's strategy and targets to ensure that, not only do they align with what is shown in the accounts and investment portfolio, but that future climate risks are accounted for and appropriately managed. ClientEarth's claim may well motivate other investors to turn the magnifying glass on their own investments and, if they don't like what they see, may shift their focus to the actions (or inactions) of the board.
If it wasn't apparent enough already, ESG must be high on the priority list for companies and their directors, who must ensure all risks are disclosed and managed adequately. Directors may want to establish a committee with responsibility for the company's ESG objectives and developing their ESG policies, as well as future proofing their strategies. One thing is for sure, investor relations and shareholder engagement is more important than ever. Boards that engage with and listen to their key stakeholders' concerns will be better placed to navigate the growing risk of ESG related shareholder actions.
D&O insurers are closely monitoring these litigation trends and will be searching for innovative ways to underwrite ESG risk faced by their insureds. Boards and their D&O brokers will be expected to provide greater information and specificity on how companies are managing, disclosing and mitigating their ESG risks. A lack of clarity and direction, especially from companies in the most exposed sectors to ESG risks, could make for some difficult renewals.
For any questions on this article, please contact James Wickes, for further information.