London disputes boutique Pallas Partners has filed a pioneering suit against the directors of Shell on behalf of a shareholder, claiming the board has failed to manage risks posed to the company by climate change.

In what is being dubbed as the first climate change legal claim against individual company directors, Pallas has initiated a derivative action under the Companies Act on behalf of ClientEarth alleging Shell has failed to adopt an adequate energy transition strategy compliant with the Paris Agreement. 

Shell, represented by Slaughter and May partner Peter Wickham, robustly denies the claim. 

Pallas, which is acting in a pro bono capacity, has instructed an impressive counsel team which includes Edward Brown KC of Essex Court Chambers, Dan Saoul KC of 4 New Square, Sam Goodman, of Twenty Essex and Judy Fu of 3VB.

Pallas partner Will Hooker said: “Company law will play an important role in shaping society's response to the energy transition. This case marks a significant effort to give effect to directors' duties to manage the energy transition for the long term.”

For the case to proceed, however, the Chancery Division must first give permission.

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ClientEarth alleges Shell has failed to comply with an order of the Dutch court to reduce emissions and is seeking an order requiring its board to adopt a strategy to manage climate risk in line with the court’s judgment and English company law.

ClientEarth senior lawyer Paul Benson said: "The board is persisting with a transition strategy that is fundamentally flawed, leaving the company seriously exposed to the risks that climate change poses to Shell's future success – despite the board's legal duty to manage those risks."  

Shell firmly denies ignoring the Dutch court ruling, calling the suggestion misleading. Pending an ongoing appeal, it says it took active steps to comply and cites associated investments as evidence.

The directors “have complied with their legal duties and have, at all times, acted in the best interests of the company", a spokesperson said, adding: “ClientEarth's attempt, using a derivative claim, to overturn the board's policy as approved by our shareholders has no merit. We will oppose their application to obtain the court's permission to pursue this claim.”

ClientEarth, which has a token shareholding in Shell, cites support from an array of institutional investors, including Nest, whose chief investment officer Mark Fawcett, said: "Investors want to see action in line with the risk climate change presents and will challenge those who aren't doing enough to transition their business. We hope the whole energy industry sits up and take notice." 

Shell noted the investors were not litigants in the case and represented less than 0.2% of Shell's total shareholder base. "Our shareholders strongly support the progress we are making on our energy transition strategy, with 80% voting in favour of this strategy at our last AGM." the spokesperson said.

The case comes at a time when global corporates have acknowledged difficulties in managing ESG risk. A survey published last August by Hogan Lovells found that global multinational companies are struggling to integrate environmental, social and governance (ESG) risk into their compliance programmes.

Sinéad Lester, a partner at BDB Pitmans, said ClientEarth's suit was in line with other actions challenging company decisions on the ground they did not align with ESG objectives, including climate change. 

She added: "This is the first legal claim that targets individual board members for their alleged failure to prepare an investment strategy that both manages climate risk and secures the viability of a world-leading energy business."  

Gus Sellitto of Byfield Consultancy agreed, saying: “The Shell directors will be under an intense public spotlight and will need to think carefully about their reputations, as well as that of Shell.”