On 26 May 2021, the District Court in The Hague ordered Royal Dutch Shell (“RDS”) to reduce its global carbon emissions by 45% by 2030 compared with 2019 levels. This covers not only emissions of the Shell group (globally), but also the emissions of its suppliers and its customers.
Whilst previous climate litigation against companies had focused on obtaining damages for harm caused by past activities, the current case is the first time a court has required a company to align its climate strategy (and Scope 3 emissions) with the goals of the Paris Agreement, thereby focusing on curtailing future emissions.
The case is being heralded as a “watershed moment” and “tipping point” in climate litigation worldwide. In this blog post, we analyse the legal reasoning behind the court’s decision. For an analysis of the practical impact of the court’s decision on corporates’ climate strategies, see our previous blog post.
Claimants and standing
The claimants in the case were: (1) Milieudefensie (the Dutch arm of Friends of the Earth); (2) Greenpeace Nederland; (3) Fossielvrij NL; (4) Waddenvereniging; (5) Both Ends; (6) Jongeren Milieu Actief; (7) ActionAid; and (8) 17,379 individual claimants.
In its decision, the court limited the class action to the interests of current and future generations of Dutch residents and of the inhabitants of the Wadden Sea area, ruling that the collective claims insofar as they relate to the interest of the world’s population were not allowable.
On this basis, the court allowed the class action by (1) Milieudefensie, (2) Greenpeace Nederland, (3) Fossielvrij NL, (4) Waddenvereniging, (5) Both Ends, and (6) Jongeren Milieu Actief (the “Claimants”), as the interests in the class action (i.e. the interests of current and future generations of Dutch residents) aligned with the objects stated in their articles of association.
Accordingly, the court rejected claims by Action Aid, as it did not sufficiently promote the interests of Dutch residents, and the individual claimants, as their interests were the same as the common interest of the class action.
The Claimants argued that RDS has a duty of care under the Dutch Civil Code to take action in preventing dangerous climate change through the corporate policy it determines for the Shell group.
The court based its findings on Dutch tort law under the Dutch civil code and used this to conclude that, when applying Shell Group’s corporate policies, RDS must observe due care in relation to those affected by its acts or omissions.
In interpreting the standard of care, the court took into account a range of factors. Key to its analysis were the UN Guiding Principles on Business and Human Rights (“UNGPs”). The court considered that, because of the wide acceptance of the UNGPs and similar soft law instruments, they were suitable as a guideline in the interpretation of the relevant standard of care.
The court held that due to the universally endorsed content of the UNGPs, it was irrelevant whether RDS itself had committed to them (although they had publicly stated that they supported them). The court applied the UNGPs, which envisage that companies will remedy or contribute towards remediation where they have caused or contributed to an adverse impact, and where there is only a business linkage (i.e. no contributory action), the organisation should use leverage to try to get its counterparty to remediate.
The court found that RDS’ value chain included both members of the Shell Group over which it had a policy-setting influence, and the Group’s supply chain and customer business relationships. The court therefore held that RDS’s responsibility extended to the CO2 emissions of the end users of its products (Scope 3 emissions).
Referring to an Oxford University report, the court found there was an internationally endorsed need for companies to take responsibility for their Scope 3 emissions, particularly for fossil fuel producers where these form the majority of their CO2 emissions. Applying the UNGPs, the extent of RDS’ Scope 3 responsibility is defined by the influence and control it can exercise over those emissions. The court interpreted this as a significant best efforts obligation and that control and influence existed through RDS’ purchasing policies and RDS’ ability to determine the energy package it offers to its customers.
The court recognised there were limits to RDS’ ability to determine its energy package by virtue of existing commitments, but that RDS was free to decide not to make new investments in exploration and fossil fuels and to change the energy package it offers to future customers.
In its interpretation of the Dutch unwritten standard of care, among other factors, the court also took some account of the right to life and the right to respect for private and family life. These rights are enshrined in Articles 2 and 8 of the European Convention for the Protection of Human Rights (“ECHR”) and Articles 6 and 17 of the International Covenant on Civil and Political Rights.
The court held that the Claimants could not directly invoke these human rights with respect to RDS as human rights apply in relationships between states and citizens. Nevertheless, the court decided that these human rights would factor into the relationship between the Claimants and RDS given the fundamental relevance of human rights and their value for society as a whole. Further, the court reaffirmed the position in the Urgenda case that Articles 2 and 8 of the ECHR offer protection against the consequences of dangerous climate change, reiterating the connection between human rights and dangerous climate change.
The Paris Agreement is non-binding on state signatories and non-state parties such as RDS. Instead, the court relied on the Paris Agreement in its construction of the Dutch standard of care under the code of obligation. It drew from the Paris Agreement a consensus that there was a need for “non-state action” in tackling dangerous climate change, stating that the “non-binding goals of the Paris Agreement represent a universally endorsed and accepted standard that protects the common interest of preventing dangerous climate change”. The court concluded that the Paris Agreement, and the broad consensus which it embodies, is relevant in its interpretation of the Dutch unwritten standard of care and that as a result RDS is under a duty to bring its climate transition plan into line with the goals of the Paris Agreement.
Meeting the goals of the Paris Agreement is not only up to governments. The court agreed that RDS cannot solve the global climate crisis on its own but concluded that this does not absolve it of the responsibility to curb the emissions it can control and influence.
RDS’ climate transition plan
RDS sought to argue that the Shell group was taking concrete steps in the energy transition, and that its climate policy, intentions and ambitions were compatible with its reduction obligations. However, the court rejected this argument, finding RDS’ policy and policy intentions to be “intangible, undefined and non-binding”.
In particular, the court drew attention to the disclaimers and cautionary notes in RDS’ documents which stated that RDS’ plans were dependent on the pace at which global society moved towards the climate goals of the Paris Agreement. In the eyes of the court, by inserting these caveats and failing to set out reduction targets for 2030, RDS was disregarding its individual responsibility for its reduction obligations and was reserving the right to undergo a less rapid energy transition if society were to move slower. The court therefore concluded that RDS’ climate plan is not “concrete” enough.
This is a construction that puts companies between a rock and hard place. In developing its climate targets and transition plan any company doing a proper job will be sensitive to the fact that delivery is to some extent subject to factors outside of its control. This will include how suppliers or customers behave, how governments regulate (or fail to regulate) and how markets react. It is not surprising in these circumstances if companies wish to include disclaimers or caveats to warn investors and other stakeholders of these risks. It may be in light of this case that companies will wish to revisit their plans and ensure that disclaimers and caveats are not too broad, and focus precisely where possible on particular uncertainties and dependencies of concern.
EU ETS and other emission trading schemes
The court rejected arguments by RDS that the European Emissions Trading Scheme (“ETS”), and similar “cap and trade” systems around the world, precluded a court order for further emission reductions. However, it recognised that the ETS did have an indemnifying effect such that Shell would not have an additional obligation with respect to emissions already regulated under the ETS (i.e. Scope 1 and 2 emissions in the EU that fall within the scheme). That said, the court held that this effect only applied up to the reduction target of the relevant ETS. Where the reduction obligation exceeds this target, RDS would have to fulfil this individual obligation.
The court ruled that the order is provisionally enforceable notwithstanding that RDS has indicated it intends to appeal. The court weighed the interests of the parties and decided that the interests of the Claimants for immediate compliance outweighed the interests of RDS in maintaining the status quo until a final decision is reached.
The court noted that the provisional enforceability of its order may have far-reaching consequences, which may be difficult to undo at a later stage, but that this did not stand in the way of declaring the order provisionally enforceable. This is likely to have very significant financial implications for RDS as reducing its Scope 1, 2 and 3 carbon emissions, globally, by 45% by 2030 (compared with 2019 levels) is considerably more stringent than the group’s current climate plan.
In a similar vein, the court rejected RDS’ argument that the reduction obligation was too onerous. It concluded that the interest served with the reduction obligation outweighed the Shell group’s commercial interests, stating that “the serious threats and risks to the human rights of Dutch residents … [means that] private companies such as RDS may also be required to take drastic measures and make financial sacrifices to limit CO2 emissions to prevent dangerous climate change”.
The director at Milieudefensie, Donald Pols, has been quoted in the Financial Times as saying that they would file subsequent lawsuits should the company not take sufficient action to meet the 2030 order: “If our sense is they are not implementing the order, then we will file an execution order that will also include a financial sanction”.
Precedent for wider litigation?
There has been a great deal of speculation as to whether this decision has set a precedent for wider litigation.
In particular, is this case likely to lead to similar claims against other companies and businesses with a high carbon footprint - not just oil companies? What about similar claims in other countries - not just in the Netherlands? And is it possible that this could lead to other human rights claims against corporates - not just climate-related human rights claims?
Although it is quite possible that the District Court’s decision may eventually be overturned on appeal (either in full or in part), that process is likely to take several years and in the meantime the court’s ruling is enforceable.
That may well serve as inspiration for similar legal challenges both in the Netherlands and in other countries, regardless of the strength of the Dutch court’s legal reasoning and how well those legal principles translate into other countries’ legal regimes. According to the former general counsel of Greenpeace International, Jasper Teulings: “The ruling is a beacon of hope. Perhaps that’s the biggest impact; beyond the legal impact, and the concrete impact on carbon emissions, the ruling offers hope. It’s what we’ve been waiting for.”
Much of what the District Court said in respect of RDS’ climate plan could be argued in relation to other companies and businesses (including non-energy sectors) that have a significant carbon footprint or which facilitate companies in carbon-intensive sectors.
It is also possible that the Shell case could lead to other types of human rights challenges against corporates by applying the same reasoning to other impacts. In the Shell decision, the court integrated UNGPs and other soft law instruments such as the UN Global Compact (UNGC) principles and the OECD Guidelines for Multinational Enterprises into the duty of care, ruling that the responsibility of businesses to respect human rights is a global standard of expected conduct for all business enterprises wherever they operate. This has the potential to extend to wider human rights beyond climate litigation, given the court effectively incorporated the UNGPs into Dutch law. And so this may result in an increase in claims seeking to hold corporates (including individual group companies) accountable for adverse human rights impacts in their business or value chains. See our podcast series for a primer on what human rights means for businesses and our cross-border summary of key business and human rights initiatives.
The bigger picture
It is important to see the Dutch court’s decision in the wider context of what else is happening on climate change – both in terms of other climate litigation across the globe and investor engagement.
For example, the courts in Germany, France and Ireland have held that their countries’ climate targets and legislation are insufficient to meet the goals of the Paris Agreement and need to be amended. Similar litigation is currently underway in Italy. And an Australian court has also recently held that the Australian government has a duty of care to protect children from the future impact of climate change, in a case challenging the expansion of a coal mine.
And on the same day as the Dutch’s court ruling in the Shell case, Exxon and Chevron shareholders won significant climate votes at the companies’ AGMs, leading the press to dub it a new “Black Wednesday”. So it’s not just the courts that are scrutinising climate plans, investors have also got their radars firmly tuned in to the same station.
For a discussion of how recent climate change litigation against governments is likely to impact corporates, join us for our webinar on 17 June.
For how to review and update any climate strategy and action plan, see our publication, Climate Change Plans and Targets.