By Jessica Tasman-Jones
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards
Environmental activists frustrated by companies’ slow progress on climate change are increasingly turning to litigation – with success.
Last year a Dutch court ordered Shell to reduce its emissions by 45 per cent relative to 2019 levels by 2030, which set a precedent after many similar cases failed.
Shell now faces legal action in the UK. ClientEarth, the environmental law charity, wants the oil company’s 13 directors to be held personally liable for what it says is the mismanagement of climate risks. It claims that Shell’s board is in breach of its duties under the UK Companies Act.
Shell rejects the allegations. “We believe our climate targets are aligned with the more ambitious goal of the Paris Agreement: to limit the increase in the global average temperature to 1.5C above pre-industrial levels,” it says.
It points out that 80 per cent of votes cast at its annual meeting this year backed its report on energy transition progress.
According to data from ISS ESG, climate litigation nearly doubled over four years. The number of cases has grown from 884 cases in 24 countries before 2017 to 1,500 cases in 38 countries in 2020.
Litigation can range from challenging an investment decision to seeking better disclosure of climate risks, according to a 2021 report by the Grantham Institute, part of the London School of Economics. Fifty eight per cent of cases have a favourable outcome for the environment, the report says.
Gone are the days when companies could be sure they had deeper pockets than environmental litigators, says Richard Calland, fellow of the Institute for Sustainability Leadership at the University of Cambridge. The urgency of the climate crisis means that rich and powerful funders are now involved in litigation, he says.
ClientEarth is backed by, among others, the Children’s Investment Fund Foundation, founded by Sir Chris Hohn, the billionaire hedge fund manager.
The charity has called on institutional investors to support its action publicly, join as co-claimants or engage privately with Shell.
“We think that all of Shell’s shareholders need the certainty that the company is using their capital effectively in its navigation of the global energy transition,” says Paul Benson, a ClientEarth lawyer based in Berlin.
According to the Edelman Trust Barometer 2021, some 81 per cent of UK investors believed that companies overstate their progress on environmental, social and governance issues and 88 per cent anticipated a rise in ESG-related litigation.
Climate change litigation is increasingly viewed by investors as a tool to influence corporate behaviour, says Bruce Duguid, head of stewardship EOS at Federated Hermes. It is also an indicator that companies are in danger of losing their social licence to operate, which Duguid’s group sees as a significant risk to investors.
Odey Asset Management, a Shell shareholder, has already criticised the oil company’s decision to appeal against the Dutch ruling. The asset manager wrote to Ben van Beurden, chief executive, and said Shell should instead litigate to try to impose the same ruling on all oil and gas companies in Europe, so creating symmetry. Odey also called on Shell to fund an independent body to audit emissions across the sector.
Climate change litigation is focused on confirming what companies say in public, says David Baay, head of the energy litigation team at Eversheds Sutherland (US).
He says that as well as verifying emissions data, litigators look to see if a company is meeting its own standards, if the board is paying attention, if an independent committee focused on climate disclosures has been appointed and whether it has policies and governance in place.
The largest companies in the United Kingdom must report climate risks and opportunities in line with standards set by the Task Force on Climate-related Financial Disclosures. Since 2019 the Companies Act has required boards to state how they consider wider stakeholders, including the effect of their operations on the environment.
Too many sustainability teams are tacked on to the communication department with a remit to “collect data to tell a good story”, says a blog from the Institute of Chartered Accountants in England and Wales. The work of sustainability specialists needs to be embedded across an organisation, says the institute.
The act of bringing legal proceedings can trigger action because of the reputational risks involved, says Calland. “People don’t like the bad headlines that come from being litigated against. Smart litigators know that. They know that often they can take cases against the company even if they fear they may lose.”
ClientEarth has not yet filed its claim against Shell and because of the type of “derivative” claim involved, would need permission from the court to proceed to a full trial.
If a judgment goes against Shell, the court could declare that the members of the board are in breach of their legal duty, says Benson. Judges could also order the board to take steps to align Shell’s strategy with the Paris climate agreement.
Calland says that it makes sense for lawyers to target directors because “the board is the place where the real authority sits for a company”.
Boards can reduce the risk of litigation by putting in place explicit structures to cover oversight and responsibilities for climate strategy, says Viola Lutz, the head of climate solutions at ISS ESG. Directors should also examine their own climate competencies, she says.
It is necessary to have a robust and accurate transition plan that is aligned with the best available science and includes interim targets, says Lisa Benjamin, an assistant professor at Lewis & Clark Law School.
Calland, though, says boards need to go still further. They should examine whether they have the intellectual and professional diversity to challenge groupthink and business-as-usual assumptions. “I suspect that many boards that are serious in asking themselves that question will end up saying ‘actually, we need to change who’s on this board’,” he says.
This article is based on a piece written by Carl Winfield forAgenda.