Shell lawsuit should sound alarm bells for directors

Media outlets call it a ‘first-of-its-kind’ – the story that all eleven directors of British oil giant Shell are being sued in the UK over environmental issues.

What are they being sued for? Failing to uphold a commitment to combat climate change. 

Activist investors and pension funds support the lawsuit. Shell itself denies the allegations. But one thing is certain: directors should look at this as a sign of the future trend. 

Quite simply, critics want to replace corporate liability with personal liability.

This week, it emerged that Shell’s eleven directors were each sued personally by ClientEarth – a London-based environmental law charity and frequent fan of legal intervention in the corporate world. 

ClientEarth claims that Shell violated the UK Companies Act, mismanaged climate risk, failed to live up to the Paris 2015 Climate Agreement standards, and fell short of legally mandated targets. 

Institutional investors, including London CIV and Danske Bank Asset Management, have voiced their support for the lawsuit.

According to the Financial Times, Shell’s profits doubled to just under $40 billion in 2022, but only $3.5 billion was spent on renewables and energy solutions.

While the company will have explainers ready for gaps like this, many investors could have their minds made up about it already.

“The shift to a low-carbon economy is not just inevitable, it’s already happening,” ClientEarth lawyer Paul Benson said in a statement announcing the Shell lawsuit.

“Yet the [Shell] board is persisting with a transition strategy that is fundamentally flawed, despite the board’s legal duty to manage those risks.”

On the other side, Shell denies there’s a problem at all. It maintains that the lawsuit will have “no merit” in court. 

“Our directors have complied with their legal duties and have, at all times, acted in the best interests of the company,” it said.

Several reasons.

You’re probably aware that it’s common for companies to be sued for corporate failings. So common, in fact, that firms expect it to the point that they have cash set aside for settlements. 

But this is different. Directors themselves are being sued, not the company they work with. This automatically places far more pressure on their personal track records and the rest of their careers.

Lawsuits can flourish in the aftermath of environmental disasters, where finger-pointing is typical, and stakeholders want to see accountability for what went wrong. 

This lawsuit, however, isn’t driven by one specific event. ClientEarth, and the investors supporting them, are blaming Shell for simply falling behind on promises. 

In other words, they are accusing shell of not doing enough. Their legal effort against the company can simply be a way of spurring it towards more robust policies and faster action. 

This trend is likely to persist in a world increasingly dominated by ESG (environmental, social and governance) ideals.

The old “hands-off” idea of boardroom life dissolves with cases like this. 

In the past, candidates may viewed directorships as a CV boost, a way to offer advice, and an elite club at the end of a long career. 

As the Shell lawsuit shows, today’s boards see far more responsibility. They are, after all, responsible for shaping an organisation’s business goals and ensuring they have the resources to reach them. In the eyes of many stakeholders, this is more than enough power to be personally liable for shortcomings.

Keep an eye on the Shell case as it makes its way through the English legal system. Whether the lawsuit succeeds or fails, the culture of holding directors personally liable has received a boost.