Could you be held personally responsible for a sub-par Net Zero strategy? – Corporate/commercial law

Canada: Could you be held personally responsible for a sub-par Net Zero strategy?

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Directors of energy giant Shell face potential legal action from shareholders who allege the company’s board breached its legal obligations by failing to articulate a credible net zero plan . While setting net-zero emissions targets through 2050 is a key commitment under the Paris Agreement, it is the first time in history that shareholders have sought to hold directors personally accountable. a company’s alleged inability to set meaningful emissions targets.

On March 15, 2022, ClientEarth – a group of environmental lawyers who own shares in Shell – announced that they were seeking legal action against Shell’s board (13 executive and non-executive directors). executives) in the High Court of England and Wales for the company’s alleged mismanagement of its climate-related obligations. ClientEarth argued that Shell’s “wait-and-see” approach to climate transition would come at the expense of the company’s shareholders and employees. Shell has pledged to reduce the carbon intensity of the energy products it sells by 20% by 2030 and 45% by 2035, but not to a reduction in gross emissions, which would require cutting production .

ClientEarth alleges Net Zero plan will not meet Paris targets

ClientEarth alleged that Shell’s directors breached their legal obligations by mismanaging material and foreseeable climate risks the company faced, arguing that Shell’s net zero plan would fail to meet Paris Agreement commitments to to keep global temperature increase below 1.5°C above pre-industrial levels by 2050 Specifically, ClientEarth argues that Shell’s directors failed in their duties under Sections 172 to 174 UK companies law, which requires directors to act in good faith, exercise independent judgment and exercise reasonable care, skill and diligence.

“Shell is seriously exposed to the risks of climate change, but its climate plan is fundamentally flawed,” said Paul Benson, attorney at ClientEarth, in a statement. “By not properly preparing the company for the transition to net zero, Shell’s board is increasing the company’s vulnerability to climate risk, putting the company’s long-term value at risk.”

ClientEarth argues that although Shell aims to halve its emissions by 2030, this only applies to Scope 1 and 2 emissions, which account for around 5% of Shell’s overall emissions. The shareholder group pointed to analyst research that found Shell’s strategy would actually lead to a 4% increase in emissions by 2030.

In a statement to The Guardiana Shell spokesperson said: “To be a net zero emissions company by 2050, we are implementing our global strategy which supports the Paris Agreement. , and transform our business to deliver more low-carbon energy to our customers.”

Activists continue to target energy companies

This is not the first time militants have targeted Shell. In 2019, a lawsuit brought by Greenpeace and other organizations on behalf of more than 17,000 Dutch citizens alleged that Shell was threatening human rights by continuing to invest in fossil fuels. This ultimately resulted in a Dutch court ordering Shell to cut emissions by 45% below 2019 levels by 2030.

Last year, another energy company, Exxon Mobil, was the target of a climate-related activist shareholder complaint. We wrote about Engine No.1, an activist shareholder group that successfully forced Exxon Mobil Corporation to replace three of its directors – a move backed by behemoth institutional investors BlackRock, Vanguard and State Street. Hedge fund First Point LLC, another activist shareholder group, called on Shell to split into two companies last year after acquiring $750 million worth of shares in the company.

What does this mean for Canadian businesses?

While the cases profiled in this blog occur outside of Canada, that doesn’t mean Canadian energy companies are immune to shareholder activism — and potential litigation. As we’ve discussed in previous blogs, the rise of ESG investing will likely turn more Canadian companies into litigation targets and energy companies can’t afford to delay developing credible net zero plans. , verifiable and supported by data. With the growing trend of companies making net-zero commitments (supported by large institutional investors like the Canada Pension Plan Investment Board), the potential for litigation is on the rise.

Alternatively, and in addition to litigation initiated by activist shareholders, could companies also face potential criminal liability for failing to set credible emissions targets in Canada? We will cover this topic in a future blog. Meanwhile, lawyers in the MLT Aikins ESG practice group have extensive experience advising clients in the oil and gas sector on developing sound ESG strategies and credible net zero goals. Contact us to find out how we can help you.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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