Shell-shocked: Shareholder Activism and Implications for Manufacturers

Shareholder activism is not new, but the emphasis on environmental, social, and governance standards has expanded its scope.

Shareholders of companies may have a legitimate expectation that directors must meaningfully commit to long-term sustainability goals.

Typically, minority shareholders have limited influence on corporate governance, of which directors are responsible.

However, shareholders may demand greater accountability from directors for failure to comply with their duties to the company, which can result in legal action being taken.

A recent example of this form of shareholder activism may be seen in the case of ClientEarth v Shell PLC [2023] EWHC 1137 (ch).

In February 2023, ClientEarth, a UK-based environmental law charity, brought a derivative claim against Shell PLC's board of directors.

A derivative claim is a statutory claim brought by shareholders on behalf of a company.

It is made pursuant to Section 260 of the Companies Act 2006. Whilst ClientEarth held only 27 shares in Shell, it was, in accordance with the Companies Act, legally entitled to bring a derivative claim and stand in the shoes of the company to bring an action in its name.

It was alleged that Shell's directors had breached their duties by failing to adequately manage climate risks in the context of Shell's commitment to becoming a net-zero business by 2050.

ClientEarth argued that Shell's interim targets and reliance on technologies like carbon capture and offsets were insufficient and placed the company at significant risk, including exposure to stranded assets, regulatory action, and shifting investor sentiment.

The claim asserted that Shell's directors breached duties to promote the company's success and to exercise reasonable care, skill, and diligence in connection with their decision-making.

ClientEarth alleged that Shell's board had breached these duties by:

• Insufficiently addressing risks associated with climate change.
• Failing to establish credible strategies to meet Shell's net-zero goals.
• Continuing significant investments in fossil fuel projects.
• Not adhering to an earlier Dutch Court ruling requiring Shell to reduce emissions by 45% by 2030.

Accordingly, the charity sought a declaration of breach of duty and an injunction compelling the board to adopt an improved climate strategy.

Whilst ClientEarth's derivative action was unsuccessful, it attracted significant media attention and brought into focus the growing role of shareholder activism in influencing corporate responses to climate change.

For manufacturing businesses, addressing climate risks appears no longer optional, and board members may need to prepare for increased shareholder scrutiny, ensuring they are compliant with climate initiatives and leaders in the transition to a more sustainable future.