ClientEarth has announced plans to appeal the High Court's dismissal of its lawsuit against Shell’s board of directors over climate risk management.

ClientEarth initially filed the claim in February, with backing from a number of institutional investors, including UK pension schemes Nest and London CIV, and a number of European pension funds, such as the Sweden's AP3, and Danica Pension and AP Pension in Denmark.

In particular, the claim argued that Shell’s board is in breach of its legal duties under the UK Companies Act to manage the climate risk facing the company, also failing to ensure compliance with the Dutch Order.

The judge dismissed the application for permission to bring a derivative claim against the board of directors of Shell plc in May, after concluding that “there is no basis for a claim for breach of directors’ duties (arising from the allegations ClientEarth has made on the board’s management of climate risk or compliance with the Dutch Order)”.

Although a reconsideration hearing was granted for this month, the Judge maintained his decision, concluding that there is a "fundamental defect in ClientEarth’s case because it ignores the fact that the management of a business of the size and complexity of that of Shell will require the directors to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere".

Despite the latest ruling, ClientEarth said that it stands by its claim that the board is breaching its legal duties by failing to properly manage the risks of climate change, confirming that it will no request permission to appeal.

Commenting on the news, ClientEarth senior lawyer, Paul Benson, stated: “We are disappointed that the Judge has declined to reconsider his decision. The hearing was the first step towards appeal, which we will now pursue.

“The court has accepted that climate change poses significant and foreseeable risks to Shell. We firmly stand behind our claim that the board is currently neglecting to address those risks adequately, to the detriment of its shareholders.

“The board’s strategy to manage the risks of the energy transition was fundamentally flawed as it was. Now the board seems to be dropping even any pretence that it will take meaningful action.

“The board’s refusal to take decisive action to prepare the company for the fast-advancing energy transition puts Shell’s future commercial viability at risk and, we maintain, is in breach of the board’s duties under English law.”

However, a spokesperson for Shell said that the group “remains confident” that the court will stand by its previous rulings if ClientEarth appeals, stating: “This is the right outcome – the court has reaffirmed its decision that this claim is fundamentally flawed and has, once again, dismissed it.

“We believe our directors have always complied with their duties and acted in the company’s best interest. This claim entirely ignores how directors of a business as large and complex as Shell must balance a range of competing considerations.

“This claim is utterly misconceived and a clear misuse of the English courts. Should ClientEarth seek permission to appeal, we remain confident that the court will stand by its rulings.”

Herbert Smith Freehills partner and head of its environmental, social and governance (ESG) practice, Silke Goldberg, highlighted the latest judgment as demonstration that "it will be difficult to challenge directors’ strategic and long-term decision making via a derivative action".

"This judgment confirms that the court is very reluctant to interfere in company management decisions, particularly where they require directors to balance competing considerations," she continued.

"This applies to both the strategy directors adopt and how it is implemented on a day-to-day basis.

"The motive for challenging directors' actions in court may also be relevant – it is clear that the court is unlikely to allow a derivative action to proceed if it considers that legal action has been brought for an ulterior purpose."

Also commenting on the ruling, Cripps commercial disputes partner, Joanna Ford, stated: "The judge rightly highlighted that in complying with their duties, the Shell directors have various competing considerations that they must take into account.

“These factors are often finely balanced, and prioritising one above the others could lead to directors being accused of breaching their duties towards other stakeholders. This doesn’t mean that climate litigation claims are dead in the water, but there would need to be clear evidence of an serious breach in order for a claim to stick.”

However, Ford argued that the decision “shouldn’t be seen as a licence for company directors to simply ignore ESG issues”.

“As we get closer to the net-zero target date of 2050 there is likely to be less and less scope for directors to argue that climate issues shouldn’t weigh heavily into their decision making about the management of the companies they are in charge of,” she added.

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