Comment: Legal implications are no reason to vote against Follow This resolution at Shell

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Shareholders in Royal Dutch Shell will vote next week on Resolution 19, a shareholder resolution by Dutch NGO Follow This, requesting that Shell “set and publish targets that are aligned with the goal of the Paris Climate Agreement to limit global warming to well below 2°C”.
ClientEarth believes Resolution 19 is in the best interests of Shell and its shareholders. Indeed, Shell itself agrees “on the objective of a transition towards a net-zero emission energy system and a world where temperature increases are limited to less than 2°C”.

The limited legal implications of the resolution contribute to its effectiveness and do not provide a reason for voting against it

But Shell’s board has recommended against voting for Resolution 19. One of its stated concerns is that the resolution could “tie the hands of existing and future Shell management to measures which could force the Company to move too quickly – or too slowly – through the energy transition”.
While a growing number of prominent institutional investors have publicly expressed their support for Resolution 19, others have echoed Shell’s concerns about its potential legal implications.
For the reasons set out in this comment, we consider that the limited legal implications of the resolution contribute to its effectiveness and do not provide a reason for voting against it.

The language of Resolution 19 deliberately preserves management flexibility

The scope of Resolution 19 is limited. It would bind Shell to set and publish Paris-aligned targets. The specified criteria are high-level and the resolution specifically provides for regular review, allowing Shell’s management to revisit the targets should circumstances change.
This broad drafting directly responds to directors’ concerns about the more prescriptive drafting of the 2017 Follow This resolution. For example, it removes the earlier requirement for a “medium-term (2030)” deadline, which Shell’s board had stated would tie its hands in the early stages and limit its flexibility to adapt. It also replaces the earlier requirement for “GHG emission reduction targets” with targets based on “tangible metrics such as GHG intensity metrics” or “other metrics that the company finds suitable to align its targets with a well-below-2°C pathway”. This confers significant flexibility on Shell’s management.
The language of Resolution 19, if passed, would also be interpreted in the light of (amongst other things) commercial common sense in accordance with ordinary principles of contractual interpretation. It is deliberately broad and would not unduly tie the hands of Shell’s management.h6. There are significant barriers to shareholder litigation against Shell or its directors

Resolution 19, if passed, would form part of Shell’s constitution and legally bind the company. In this respect, it is no different from the 2015 Aiming for A resolution, requiring specific climate-related annual reporting, which passed with the unanimous support of Shell’s board and 98.91% of voting shareholders.
It is possible that shareholders might challenge the targets if perceived as inadequate. One option would be a “derivative claim” (a claim brought by a shareholder but on behalf of the company) against Shell’s directors for failing to act in accordance with the company’s constitution. This would, however, face significant procedural and evidential obstacles, including requiring the shareholder to apply to the court for permission to continue the claim. The Commonwealth Climate and Law Initiative recently acknowledged the significant challenges associated with bringing such claims in its legal analysis available here.
It is also possible that a shareholder might attempt to bring a direct action against Shell for breach of the resolution. It is not clear, however, whether Resolution 19 would be regarded as creating obligations that could be directly enforced by a shareholder or if a shareholder could establish direct loss as a result of the breach. In either event, and particularly given the broad drafting of the resolution itself, the prospect of frivolous litigation against Shell or its directors is remote.

Resolution 19 may help protect Shell against future climate-related liability

Climate-related litigation against oil and gas companies is increasing and Shell is already the subject of significant actual and threatened climate-related lawsuits (including in New York, California, Colorado, Washington and the Netherlands). Resolution 19, by helping align Shell’s corporate decision-making with the goal of the Paris Climate Agreement, may have the effect of reducing Shell’s exposure to such litigation in respect of its future actions.

Conclusion

The transition to a net-zero carbon economy starts now. Governments have committed to the Paris temperature goals, but the scale of the transition required is such that governments can’t do it alone. We need investors and business to fully commit too.
Incorporating a requirement for Paris-aligned targets into Shell’s constitution would act as a clear signpost to shareholders and other stakeholders that Shell and its investors are firmly committed to the Paris Agreement. ClientEarth strongly supports institutional investors in voting in favour of it.

Alice Garton is Head of the Climate Programme at ClientEarth

To read comment from ShareAction’s Catherine Howarth on the Follow This resolution at Shell, published on RI this week, see here.