Shell under fire: Climate change litigation showcases extraordinary impact of ESG

ClientEarth has fired the starting gun for its derivative action against the directors of Shell in the High Court. Simon Konsta considers the wider impact of ESG developments on the insurance market.

Climate change litigation sits squarely at the heart of ESG, at the intersection of environmental, social and governance issues. It is a crucible where we are now seeing important new precedents develop.

With documented cases more than doubling since 2015, this is also an area that is evolving rapidly, inspiring copycat proceedings across different jurisdictions.

Shell has found itself at the centre of this litigation and in a way that demonstrates vividly the complexities confronting corporates, governments, regulators and insurers as societies proceed along the transition to lower carbon economies.

In 2020, early into the pandemic, Shell announced very significant impairment charges arising from revised views on mid- and long-term commodity pricing and reflecting a strategy to reshape its refining profile to support the decarbonisation of its energy product mix.

Some three years later, it stands accused of generating unprecedented profits from its traditional fossil fuel activities and revising downwards its net-zero targets for 2030, citing the obligation to act in its shareholders best interests.

This raises the question – how should the boards of corporates handle these competing demands against the backdrop of increasing litigation threats?

Climate activist litigation

Against this complex background, we have seen the development of climate activist litigation, initially targeting governments.

In the 2019 Netherlands Supreme Court decision in Urgenda, they successfully argued that the Dutch government’s inadequate action on climate change breached a duty of care to its citizens.

This success was then extended to actions against companies. In Milieudefensie v Royal Dutch Shell, litigation was brought by various NGOs and over 17,000 citizens, with the Hague District Court finding that Shell’s contributions to climate change violated its duty of care under Dutch law and human rights obligations. It ordered a reduction in CO2 emissions by 45 percent by 2030, compared to 2019 levels. This is currently being appealed but remains provisionally enforceable.

Most recently, on 9 February 2023, just days after the company announced its record annual profits of $40bn, ClientEarth advised that it had issued derivative proceedings against Shell Plc’s 11 directors.

This is the first action brought by shareholders against directors personally for failing to prepare properly for the energy transition.

The allegation is that Shell is in breach of its legal duty under Section 172 of the Companies Act 2006 to promote the success of the company and to act with reasonable care, skill and diligence.

We now wait for the High Court to decide whether to grant permission for ClientEarth to bring the derivative claim.

This action also has to be considered in the context of other developments.

Parent company liability

The Supreme Court decisions in Vedanta and Okpabi provided an early indication that the English courts were increasingly prepared to push the boundaries on where there may be a common law duty of care on parent companies for the wrongful acts of their subsidiaries in the ESG arena.

In Vedanta, for example, Zambian claimants brought claims in England against a UK-domiciled parent company following environmental damage to their farmland from discharges from the copper mine owned by its Zambian subsidiary.

Third-party funding

Add to this mix the growing interest in third-party litigation funding, particularly in relation to ESG litigation, as climate change litigants seek financial payouts from fossil fuel companies and other polluting industries for the impacts of the climate crisis, greenwashing and damaging investments.

At a time of ongoing economic uncertainty, litigation funding may provide an attractive alternative to traditional investments which may not offer significant immediate returns.

Social inflation

One of the wider impacts of this general anti-corporate sentiment, targeting those perceived as having deep pockets, is the rise in social inflation in a number of jurisdictions.

There is a direct financial impact on settlements and judgments, forcing higher premiums in turn, as well as promoting a tendency to broader readings on policy coverage.

It is the interplay between different jurisdictions which will once again truly ignite this trend.

The way forward

This growing body of litigation demonstrates the implications for directors (and insurers that provide D&O cover) confronted with potentially existential short- to longer-term business planning and investment decisions in the volatile global economy.

The implications of this latest litigation will be significant.

If successful, this is a blueprint for many further actions, in all sectors perceived to be contributing to carbon emissions. It is to be wondered who will want to be a director or non-executive director in such a climate, and the effect that will have on business and wider strategy as a whole.