ClientEarth has filed a lawsuit at the High Court in England against the Board of Directors of Shell plc in what is described as a global first, seeking to hold 11 of Shell’s directors liable for alleged inaction on climate change. Whilst in many jurisdictions shareholder claims against directors (whether on behalf of a company or otherwise) are commonplace, this action appears to be the first of its kind to base such a claim solely on the alleged mismanagement of climate risk by a board of directors. This case will be watched carefully by corporates, directors and insurers globally, who will be anxious to see how the court responds to ClientEarth’s allegations against Shell’s board.

The High Court will first determine whether the claim has met the requirements to proceed as a derivative action, and if permission is granted, the claim will proceed in a similar manner as a typical civil claim. The NGO ClientEarth continues its attempts to hold global corporations, and now their Boards, accountable for their alleged actions and inaction in relation to the green transition and climate risk. This development comes after ClientEarth sent a pre-action letter to the board in March 2022, warning of its intention to bring such a claim if the dispute could not be resolved between the parties.

It is understood that the directors are being sued for allegedly failing to manage climate risks to the company that could harm its future successes, failing to adopt an energy transition strategy aligned with the Paris Agreement, and failing to be on track to deliver a 45% reduction in the group-wide emissions by the end of the decade. It is understood that the legal basis of the claim is that the directors are alleged to have acted (and are continuing to act) in breach of sections 172 and 174 of the Companies Act 2006 (CA 2006), which (put broadly) confer duties on directors of companies to act in they way they consider (in good faith) would be most likely to promote the success of the company for the benefit of the members as a whole and to exercise reasonable care, skill and diligence. These are longstanding directors’ duties, with which all directors and D&O insurers will be familiar.

In fulfilling the duty under section 172 CA 2006, directors must have regard to multiple factors including the likely long term consequences of their decisions and the impact of the company’s operations on the community and the environment. Lord Sale, an English Supreme Court Justice wrote in 2019 that directors must “accord significant weight to climate change in their decision making… not least because a failure to act sustainably is more and more likely to have adverse financial impacts on companies who are, or are perceived to be, behind the curve on environmental issues.” (Directors’ duties and climate change: Keeping pace with environmental challenges (supremecourt.uk))

This appears to be the basis of ClientEarth’s claim, which is reportedly supported by a number of institutional investors. ClientEarth is seeking an order that Shell’s board adopt a strategy that is aligned with the aims of the Paris Agreement and execute a timely plan for compliance with the Dutch first instance court order for Shell to reduce carbon emissions by 45%, following a lawsuit brought by Milieudefensie. Shell have filed an appeal against this ruling, arguing that Shell can reach net zero only if society as a whole moves to net zero.