LGPS Central has given the High Court access to its recent engagement efforts with Shell. The documents have been offered as evidence in a lawsuit ClientEarth is trying to bring against the directors of the oil and gas major. Shell strongly denies the allegations by the campaigners. 

 

The Local Government Pension Scheme pool’s director of responsible investment and engagement, Patrick O’Hara, said the pool’s escalation process can involve litigation, but it has decided not to join directly in ClientEarth’s claim. 

 

“Taking into consideration our current engagement with Shell and our approach to escalation, we felt that supporting the litigation directly wasn’t appropriate at this time. However, we recognised the broad alignment between the requests that ClientEarth are making of the Shell board members and our own engagement objectives,” O’Hara explained. 

 

“Therefore, after due reflection, we decided to provide our engagement letter to the court to be used as evidence in the case. We felt that our perspective should be heard in the legal debate,” he added. 

Shell disputes the claims by ClientEarth.

 

“We do not accept ClientEarth’s allegations; there can be no credible suggestion that our directors have not complied with their legal duties or have not, at all times, acted in the best interests of the company,” a spokesperson said. 

 

Alongside providing evidence, LGPS Central has sent a letter to the company to outline the rationale for its decision, having already written to the chair before voting against the transition plan at the company's AGM. It has a long-running engagement with Shell, most recently through investor group Climate Action 100+. 

 

LGPS Central does not consider the transition strategy of Shell to be Paris-aligned because of the absence of absolute scope 3 emission targets in the short and medium term, among others. Its voting principles state that it expects companies to present net zero strategies in absolute emissions, not emissions intensity only, covering the full lifecycle of emissions in the short, medium and long term. 

 

It also considers Shell’s commitment to renewable energy to be insufficient, believing a consistent and substantive capex strategy is key for averting risks and benefitting from the opportunities of the transition to a low carbon economy. 

 

“Earlier action is required,” said O’Hara, pointing out that emissions are cumulative. “If we keep pushing the can down the road, we are going to find that we’ve left it too late to achieve our climate objectives, and we won’t be able to avoid the worst effects of climate change.”   

 

LGPS Central said about its decision to offer evidence: “We hope that the significance of this escalation will be recognised and that it stimulates a genuine improvement in transition strategies both at Shell, in the oil and gas sector more broadly, and in the wider market across sectors." 

 

The pool also acknowledged progress by the firm, saying: “We applaud Shell for taking strong steps in target setting and increasing transparency related to the energy transition, which is a complex undertaking for both the supply and demand side of the energy industry.” 

 

LGPS Central stressed the complexity and nuanced nature of the energy transition, saying Shell, despite its significant carbon emissions, was uniquely placed to help deliver the energy transition globally. It added that its decision to share documents with the court “was not taken lightly”. 

 

 

ClientEarth alleges that Shell’s 11 directors have breached their legal duties under the Companies Act by failing to adopt and implement an energy transition strategy that aligns with the international Paris Agreement to keep global warming to well below 2 degrees Celsius and preferably no more than 1.5 degrees.  

 

The non-profit group is seeking permission to bring a claim before the High Court which would oblige Shell to accelerate its climate strategy and comply with a 2021 Dutch judgment to reduce its emissions by 45% by 2030. Shell has branded the UK claim “baseless” and “frivolous”. 

 

The current claim has the support of several institutional investors, including master trust Nest, local authority pool the London CIV, Swedish national pension fund AP3 and Denmark’s Danica Pension and AP Pension.  

 

    

ClientEarth's claim is the first derivative action against a board of directors over failure to properly prepare for the energy transition. 

 

Shell disputes the claims by the campaigners, saying its directors have acted in the company's best interests at all times.

 

“We believe our targets are aligned with the more ambitious goal of the Paris Agreement: to limit the increase in the global average temperature to 1.5°C above pre-industrial levels. Our energy transition strategy and the progress we are making is strongly supported by our shareholders, with 80% voting in favour of this strategy at our last AGM,” the spokesperson added. 

 

The firm said that there is no standard methodology to determine how to align companies’ plans and targets with the goal of the Paris Agreement. Shell studied a subset of Intergovernmental Panel on Climate Change scenarios that achieve Paris alignment, saying it focussed on earlier action while placing less reliance on the use of carbon sinks.  

 

In May 2021, the Hague District Court ordered Shell to reduce group-wide emissions by 45% by 2030 compared with 2019, a ruling which Shell has appealed.  

 

“Importantly, while we are appealing the Dutch court ruling, we are taking active steps to comply with it and any suggestion to the contrary is misleading,” the spokesperson said.  

 

Aside from aiming to be net zero across its business by 2050, Shell has set a target to reduce absolute scope 1 and 2 emissions by 50% by 2030 compared with 2016 levels. By 2030, it also aims to reduce the net carbon intensity of the energy products it sells by 20%, which includes scopes 1, 2 and 3.  

 

The oil major also pointed to the hurdles that need to be cleared before the claim gets permission to be heard in court.  

 

 

Shell stressed that shareholders who have either written letters in support of the claim or indicated that some of their positions align with the points raised by ClientEarth hold just 0.36% of the nearly 7bn Shell shares in issue. 

 

Shell made a $40bn (£32bn) profit last year, its highest in over 100 years, amid the energy crisis that followed Russia’s invasion of Ukraine. The recent high oil price highlights the issue of long versus short-term returns and shareholders’ role in this.  

 

O’Hara said LGPS Central recognises that it is challenging for management to take drastic and timely action on climate change when so much of the shareholder base seems to be indifferent to climate issues and the share price is more sensitive to short-term dynamics than longer term fundamental challenges. He finds it worrying that shareholder resolutions related to climate typically only garner the support of about 25-30% of investors. 

 

“It is essential that more mainstream investors consider E and S factors when voting at AGMs and integrate these considerations into their voting decisions... There are still too many investors who don’t use their votes proactively or holistically or with a long-term lens,” he said. 

 

Nonetheless, he believes this AGM season will be an important one for climate commitments.  

 

“One of the escalation tools you have is to try and change the management of these companies if you feel they are not performing,” he noted. 

 

O'Hara also expects there to be more litigation in future. “It is going to be something investors increasingly look to,” he predicts.