7 June 2021
On May 26th, climate litigators won a historic victory against Royal Dutch Shell in The Hague District Court over the oil and gas giant’s contribution to climate change.
Their challenge, filed in 2019 by Friends of the Earth Netherlands, other NGOs and 17,379 Dutch citizens, alleged that Shell was in breach of its duty of care under the Dutch Civil Code, informed by its human rights responsibilities, by contributing dangerously to climate change.
In a historic judgment, the Court agreed. Shell has been ordered to slash its net carbon dioxide emissions by 45% by 2030, in line with the global emissions pathway for meeting the 1.5°C temperature limit set out in the Paris Agreement.
This is a major win in itself, but the wider victory is the judgment’s reach beyond Shell and its fossil fuels peers: the legal implications are relevant to the business plans of all high-emitting companies, along with their investors, financiers, and advisers.
The judgement has underscored the relevance of climate science and international climate law to corporate liability – and critically, the business impacts on human rights.
ClientEarth lawyers give six reasons why:
For the first time in history, a court has issued an order for a company to reduce its emissions – an order which draws on climate science, including carbon budget assessments from the Intergovernmental Panel on Climate Change, analysis from the International Energy Association and UN Environment Programme.
Judges found that the climate ‘ambitions’ and strategy previously set out by Shell disregarded its legal responsibilities because they fell way short of the broad international consensus on what is needed to limit climate impacts on human rights.
By grounding its decision on the science underpinning net zero goals, the Dutch court has set a new corporate climate action benchmark.
Litigation risk – and the market, reputational and strategic risks relating to net zero transition – has now become very present for companies that purport to be addressing climate change, while failing to align with a 1.5°C future.
Ultimately, the court found that Shell’s inadequate climate policy constituted a breach of its legal duty of care towards Dutch citizens.
While Shell does not have a government’s direct human rights legal obligations, its human rights responsibilities under international law – most prominently the UN Guiding Principles on Business and Human Rights – shaped this interpretation.
These global standards require companies to identify, prevent, and address human rights impacts linked to their businesses, and apply to all corporations worldwide.
What the Shell decision made clear is that management of financial and business risks alone is not sufficient. Failure to act on the real-world environmental and social impacts of a business, irrespective of the bottom line, could also result in significant legal consequences.
It wasn’t just Shell’s Dutch operations that the court examined, but the entire Shell business.
That means the judgment extends to all the jurisdictions in which the fossil fuel conglomerate operates, with the order covering all direct and indirect emissions throughout its value chain – including those from its energy products.
For the coal, oil and gas companies that have typically tried to shirk responsibility for the massive emissions from their products, the decision was stark: polluters cannot simply place the onus on the end-users to change their behaviour.
As a matter of Dutch law – itself informed by international standards and laws – fossil fuel producers and sellers have a legal obligation to set adequate targets for emissions reduction, which includes ultimately changing their product offerings to reduce end-use emissions.
Investors also have some reflecting to do. Just weeks before the ruling that found Shell’s climate plan – coined the “Energy Transition Strategy” – was inadequate, the company’s shareholders voted in favour of its implementation.
High-profile investor engagement has been one of the driving forces behind companies increasing their climate ambition, but strategies and action still lag behind social expectations and scientific developments.
The court’s decision has forced Shell to catch up, to move faster than its existing commitments and those of its competitors. Investors need to move rapidly to keep pace, or risk not only their clients’ capital, but also their engagement efforts becoming obsolete.
Under a 1.5°C pathway, many high-emissions assets including coal and gas power plants must retire early.
This presents existential stranded asset risks to fossil fuel companies unless they fundamentally transform their energy offerings.
The costs of delayed action are evident in the forced, abrupt change Shell now contemplates. Others cannot ignore the consequences of deferring transition to a later decade.
The court made clear that rapid emission reductions must happen by 2030 in order to reach net zero by 2050, albeit with an allowance for risky carbon capture and storage, carbon offsets, and other negative emissions projects.
As time goes by, and further pressure mounts in light of the dwindling carbon budget, the room for companies to delay adequate policy adoption and implementation will become progressively more restricted.
Even if Shell appeals the case all the way to the Supreme Court, the fossil fuel major will still have to cut its emissions in line with the order in the meantime. A decision could take several years, drawing ever closer to the 2030 deadline.
There is also a risk that judgments from higher courts may confirm or strengthen The Hague District Court’s decision – as occurred in the landmark Urgenda litigation against the Dutch government – including in view of worsening climate change and narrowing carbon budgets.
This judgment is the first to require a company to reduce their emissions in line with the Paris Agreement and the imperatives of climate science.
It has implications for the requirements of corporate and financial law, for example the fiduciary obligations of directors and asset managers. It makes clear that compliance with legislation and weak, hedged voluntary ‘ambitions’ cannot absolve a company of the risk of liability.
It shows that companies may be held responsible for all emissions across their value chain, including those from the products they sell.
What’s more, it’s not difficult to imagine that further litigation will be brought against other companies that fail to align with a net zero future on similar grounds.
The court’s reasoning and framework could in principle be readily replicated in countries all over the world.
For high-emitting firms and investors, taking action now would be considerably cheaper, and less disruptive to business, than being forced to do so in a short time frame by investor action, by rapid regulatory developments or by a court order.
That means incorporating meaningful short-term targets and plans for the next five to 10 years to align with a global pathway to net zero by the end of the decade.
ClientEarth lawyers’ analysis of the judgment is available here.