Climate risk may become a more important issue for corporate boards to tackle this year because of a lawsuit that accuses Shell oil company of failing to properly manage the company’s risks associated with climate change.
ClientEarth, an environmental law firm with a minor stake in Shell, filed the lawsuit in England in early February. It is supported by large institutional investors that own more than 12 million shares of Shell. Corporate board members should watch this lawsuit closely because:
• The case puts a spotlight on the personal responsibility of individual board members. Eleven of Shell’s directors are being personally sued. Most times, climate risk lawsuits sue the company, not individual directors. This suit appears to be making it personal. For directors to be personally liable for damages in a case of this magnitude would be concerning. If the lawsuit is allowed to continue, it may open the door to more lawsuits seeking to find board members personally liable for decisions that corporate boards make.
• The plaintiff appears to be suing the board because of a “flawed business strategy.” Shell claims that it has complied with all laws regarding climate change and has a plan to become a net-zero emissions business by 2050 which is aligned with the 2015 Paris Agreement. However, ClientEarth claims Shell’s strategy does not include short or medium-term targets to cut carbon emissions from the products it sells (scope 3 emissions), which makes it plan flawed. If the lawsuit is allowed to continue, would this open the door to other lawsuits that would argue that a company’s business strategy won’t work?
What boards can take from this lawsuit is that climate risk strategy will be highly scrutinized this year and, in the future, so companies will need to support their strategies for transitioning away from fossil fuels with greater details, analytics and projections for progress. Of course, the problem with providing more details is that if the projections are off, shareholders may want to sue boards for that too. This is why corporate boards need to improve their knowledge of climate change and climate change risk factors. It might be time to recruit board members with more experience in this area or hire consultants that can work with the board to craft climate risk strategies that will meet the additional scrutiny.
• The case shows that the issue of climate risk is becoming more complicated for boards to handle. While climate risk is a real issue that can affect the financial growth of a company, this valid shareholder concern is beginning to become very political. ClientEarth is an environmental law firm that is basically an advocate for keeping the planet healthy. Some would say that is a political agenda. Climate deniers, the anti-ESG movement, anti-woke politicians and others are turning a debate about how to handle climate risk into a debate over whether climate risk should be dealt with at all. As political views impact the issue of climate risk, boards are contending with banks refusing to fund projects from companies that do not follow certain climate risk guidelines; states refusing to do business with companies that agree with climate concerns or ESG; asset management firms and institutional investors vowing to vote against board members who do not support climate change regulations and more. The additional pressure from these entities and groups will influence board decisions on climate risk. Corporate directors may have to be aware of the different perspectives of stakeholders of the company and the communities the company serves before developing strategies to mitigate climate risk that will avoid more lawsuits.