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June 01, 2021

Milieudefensie V. Shell—A Landmark Court Decision For Energy And Energy-intensive Companies

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MILIEUDEFENSIE V. SHELL – A LANDMARK COURT DECISION FOR ENERGY AND ENERGY-INTENSIVE COMPANIES

On May 26, 2021, the Hague District Court in the Netherlands granted a claim brought by a group of Dutch NGOs and ordered global energy company Royal Dutch Shell PLC (RDS) to reduce its group-wide CO2 emissions by 45 percent (net) compared to 2019 levels, by the end of 2030.[1] The decision is provisionally enforceable, pending an expected appeal by Shell.

The decision came just days after the International Energy Agency published a report on its proposed pathway to net zero by 2050, calling for an immediate stop to all new oil and gas projects and coal mines beyond those already committed, and in the same week as certain climate-related proposals were adopted in the annual shareholder meetings of major U.S. energy companies. Meanwhile in France, newly rebranded TotalEnergies is defending an action brought under the French ‘duty of vigilance’ law, seeking to force the company to curb its emissions.

Although the Shell decision was taken under Dutch law, the court drew heavily from international treaties and ‘soft law’ in giving content to Shell’s reduction obligation. As such, the court’s reasoning could be replicated by other national courts in assessing similar claims for climate-related liability, and it therefore has implications for energy and energy-intensive companies around the world.

Key Takeaways

The Hague District Court’s ruling is notable in a number of respects. The key takeaways include the following:

  • Shell was found to owe Dutch residents a duty of care to reduce its CO2 emissions, wherever those emissions occur. The duty is owed independently of actions of nation states on climate change: it was not sufficient for Shell to demonstrate compliance with prevailing laws and regulations on CO2 emissions.
  • Shell’s reduction obligation encompasses the CO2 emissions from its entire global value chain, including emissions associated with the end-use of its fossil fuel products (i.e. Scope 1, Scope 2 and Scope 3 emissions as classified by the World Resources Institute Greenhouse Gas Protocol).
  • It was undisputed that the Shell group’s global CO2 emissions—which the court noted exceeded the CO2 emissions of many states, including the Netherlands—contributed to the “serious and irreversible consequences of climate change” as experienced locally by Dutch residents.
  • The court took a negative view of Shell’s corporate strategy relating to Shell’s role in the energy transition, describing it as “intangible, undefined and non-binding plans for the long-term (2050)[2] and, as such, incompatible with RDS’s reduction obligation.
  • RDS’s reduction obligation in relation to the activities of the Shell group was held to be “an obligation of result”—binding RDS to reduce the Shell group’s own emissions by end-2030, failing which RDS may be held liable for non-performance.[3]
  • As regards the Shell group’s business relations, including those with suppliers and end-users, the court held that RDS was required “to take the necessary steps to remove or prevent the serious risk ensuing from the CO2 emissions generated by [such suppliers and end-users], and to use its influence to limit any lasting consequences as much as possible.”[4] The court described this as “a significant best-efforts obligation,” as distinct from an obligation of result.[5]
  • The court was unwilling to make any special allowances for Shell’s current obligations, such as those flowing from long-term oil and gas concessions, which the court described as “a given which [Shell] has to take into account in meeting its reduction obligation.”[6]
  • The court’s ruling gave Shell “leeway to develop its particular reduction pathway,”[7] although the court emphasized that Shell is “free to decide not to make new investments in explorations and fossil fuels.”[8]

Background

On April 5, 2019, a group of seven Dutch NGOs and more than 17,000 individual claimants (“Milieudefensie et al.”) filed an action against RDS before the Hague District Court, asking the court to (i) rule that the Shell group’s annual CO2 emissions and RDS’s failure to reduce the same constituted unlawful acts toward the claimants, and (ii) order RDS to reduce, by end-2030, the Shell group’s CO2 emissions by 45 percent (net), relative to 2019 levels.

The claimants argued that, as the top holding company with responsibility for setting the Shell group’s corporate strategy, RDS owed the claimants a duty of care under the Dutch Civil Code to take steps to meet the 1.50C cap on global warming set in the Paris Agreement.

The Hague District Court’s Decision

Preliminary Matters

The court first addressed the admissibility requirements under Dutch law for class actions. It found that “[t]he common interest of preventing dangerous climate change by reducing CO2 emissions”[9] was a suitable basis for a class action. However, the court ruled that the NGOs’ claims were admissible only to the extent that they related to the interests of current and future generations of Dutch residents, and not the world’s population as a whole. The court also struck out the claims of one NGO that worked to promote the interests of residents of developing countries, and not Dutch residents.

The court additionally struck out the individual claimants’ claims on the basis that the individual claimants had not demonstrated “a sufficiently concrete individual interest”[10] over and above the common interest that the class action sought to protect.

The court then turned to the question of the applicable law under Article 7 of the Rome II Regulation, providing that in cases of environmental damage, a claimant may choose to base its claim on the law of the country in which the event giving rise to the damage occurred.[11] Milieudefensie et al. argued that this country was the Netherlands, which was where RDS determined the corporate strategy of the Shell group from its headquarters in The Hague. RDS insisted that “the mere adoption of a policy does not cause damage,”[12] and that the relevant event was the CO2 emissions themselves—pointing to the applicability of a myriad of legal systems.

The court held that RDS’s approach was too narrow, and that RDS’s adoption of the Shell group’s corporate policy was “an independent cause of the damage.”[13] On that basis, Dutch law applied.

RDS’s Reduction Obligation

The court held that RDS’s reduction obligation derived from the so-called “unwritten standard of care” laid down in Book 6, Section 162 of the Dutch Civil Code.[14] In its assessment of the content and scope of that standard, the court took into account a number of factors.

International Human Rights Treaties

While acknowledging that international human rights instruments were not binding on RDS, the court reasoned that human rights “play[ed] a role in the relationship between Milieudefensie et al. and RDS”[15] and were therefore relevant in the court’s interpretation of the unwritten standard of care.

The court cited the decision of the Dutch Supreme Court in Urgenda to find that Article 2 “right to life” and Article 8 “right to a private and family life” of the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) protect against dangerous climate change. The court additionally referred to decisions of the UN Human Rights Committee determining the same with respect to Articles 6 and 17 of the International Covenant on Civil and Political Rights (ICCPR).

International ‘Soft Law’

The court also drew on sources of ‘soft law’ in its assessment of the unwritten standard of care, focusing on, in particular, the UN Guiding Principles on Business and Human Rights (UNGP). Although the court acknowledged that the UNGP do not impose legally binding obligations, the court reasoned that, due to their “universally endorsed content,”[16] they were a suitable “guideline”[17] for interpreting the unwritten standard of care. The court considered that it was irrelevant whether RDS itself had committed to the UNGP (although the Shell group’s website indicated that it had).

While noting that the UNGP apply with equal force to all enterprises regardless of size, sector or ownership structure, the court observed that these factors, as well as the severity of an enterprise’s adverse human rights impacts, are relevant in assessing the means by which the enterprise fulfils its responsibilities. In this regard, the court observed that “much may be expected of RDS.”[18]

The court also highlighted that the UNGP impose responsibility on enterprises not only for the human rights impacts of an enterprise’s own activities, but also for those arising out of an enterprise’s “business relations” up and down the enterprise’s value chain. On that basis, the court held that RDS was responsible for the impacts of (i) the Shell group companies, (ii) the entities from which Shell purchased raw materials, electricity and heat and (iii) the end-users of Shell’s products.[19]

Scope 1 Through 3 Emissions

The court emphasized that RDS must take responsibility for the Shell group’s Scope 3 (end-user) emissions—especially where, as here, Shell had reported that the majority (85 percent) of its emissions were Scope 3 emissions.[20]

However, the court gave RDS discretion in allocating emissions reductions across the Shell group’s entire energy portfolio (Scopes 1 through 3), provided that its total emissions were reduced by 45 percent in aggregate. The court further clarified that this target was on a net basis, leaving room for carbon capture and storage, and other offsetting technologies. The court also ruled that Shell was entitled to rely on the indemnifying effect of emissions trading schemes such as the European Union Emissions Trading System (EU ETS), “[u]p to the level of the reduction target these schemes aim to achieve.”[21]

Moreover, the court held that RDS’s obligation to reduce its Scope 1 emissions and “the part of RDS’s Scope 2 emissions which can be ascribed to the Shell companies” was an ‘obligation of result’ (resultaatsverplichting).[22] The court clarified that, “[f]rom the perspective of the Shell group as a whole, this constitutes the Scope 1 emissions of the Shell group.”[23]

The obligation to reduce emissions in relation to the business relations, including suppliers and end-users, of the Shell group (i.e., the Shell group companies’ Scope 2 and 3 emissions) was, however, expressed to be a ‘best-efforts obligation’ (zwaarwegende inspanningsverplichting).[24]

Comment

The Hague District Court’s ruling in Shell is part of a trend of decisions before the Dutch courts, which in the landmark Urgenda decision have also imposed obligations to mitigate climate change on the Dutch state.[25] It is worth noting that, the day after the Shell ruling in The Hague, the Federal Court of Australia delivered a judgment finding that an environment minister, in considering whether to approve the planned expansion of a coal mine, also owed a climate-related duty of care to Australian children.[26]

The Shell ruling is significant, however, as it marks the first time that a national court has ordered a private company to reduce its emissions in line with the Paris Agreement. As such, it is an important moment for energy and other energy-intensive companies around the world.

The court’s reasoning further reflects a trend by some courts and legislative bodies to force business enterprises to take responsibility for their supply chains. In March 2021, for example, the European Parliament adopted a resolution calling for mandatory human rights, environmental and governance due diligence standards across the value chain for companies operating in the EU internal market.[27]

The Shell ruling may compel the boards of European energy companies, in particular, to reevaluate their corporate strategies around climate change. At the same time, the ramifications of the decision are not limited to fossil fuel producers and could reach more broadly—including the aviation and shipping industries, as well as the mining and steel sectors, among others. Companies that supply, finance or insure carbon majors are also likely to be impacted.

The court’s focus on Scope 3 emissions suggests that oil and gas companies may also be held accountable for what end-customers do with their products. As such, the decision may cause energy companies to rethink their relationships with end-users and the type of energy products the companies sell.

As noted, RDS’s obligation to reduce emissions in relation to the business relations, including suppliers and end-users, of the Shell group was said to entail RDS’s ‘best efforts’, whereas its obligation in relation to the Shell group’s own activities was expressed by the court to be an ‘obligation of result’. However, the practical significance of this distinction is uncertain, given that the court’s order is expressed in absolute terms, requiring RDS to reduce the aggregated annual emissions of the Shell group by at least net 45 percent at end-2030, relative to 2019 levels, across Scopes 1, 2 and 3.

In reaching its ruling, the court rejected an argument from Shell that “the reduction obligation will have no effect, or even be counterproductive, because the place of the Shell group will be taken by competitors.”[28] The message from the court is clear: companies have an individual responsibility to ensure that they go further and faster to cut their emissions. All eyes will be on the appeal.

Footnotes

[1]  Vereniging Milieudefensie et al. v. Royal Dutch Shell PLC, Hague District Court, Decision of May 26, 2021 (hereafter, Milieudefensie et al. v. RDS).
[2] Milieudefensie et al. v. RDS, ¶ 4.5.2.
[3] Milieudefensie et al. v. RDS, ¶¶ 4.1.4, 4.4.39.
[4] Milieudefensie et al. v. RDS, ¶¶ 4.1.4, 4.4.39.
[5] Milieudefensie et al. v. RDS, ¶¶ 4.1.4, 4.4.39.
[6]  Milieudefensie et al. v. RDS, ¶ 4.4.48.
[7]  Milieudefensie et al. v. RDS, ¶ 4.1.4.
[8]  Milieudefensie et al. v. RDS, ¶ 4.4.25.
[9]  Milieudefensie et al. v. RDS, ¶ 4.2.2.
[10] Milieudefensie et al. v. RDS, ¶ 4.2.7.
[11] Regulation (EC) No 864/2007 of the European Parliament and of the Council of July 11, 2007 on the law applicable to non-contractual obligations (Rome II), Article 7.
[12] Milieudefensie et al. v. RDS, ¶ 4.3.6.
[13] Milieudefensie et al. v. RDS, ¶ 4.3.6.
[14] Dutch Civil Code, Book 6 (The law of obligations), Title 6.3 (Torts), Article 162.
[15] Milieudefensie et al. v. RDS, ¶ 4.4.9.
[16] Milieudefensie et al. v. RDS, ¶ 4.4.11.
[17] Milieudefensie et al. v. RDS, ¶ 4.4.11.
[18] Milieudefensie et al. v. RDS, ¶ 4.4.16.
[19] Milieudefensie et al. v. RDS, ¶ 4.4.18.
[20] Milieudefensie et al. v. RDS, ¶ 4.4.19.
[21] Milieudefensie et al. v. RDS, ¶ 4.4.47.
[22] Milieudefensie et al. v. RDS, ¶ 4.4.23.
[23] Milieudefensie et al. v. RDS, ¶ 4.4.23.
[24] Milieudefensie et al. v. RDS, ¶ 4.4.24.
[25] The Netherlands v. Stichting Urgenda, Supreme Court of the Netherlands, Decision of December 20, 2019.
[26] Sharma by her litigation representative Sister Marie Brigid Arthur v. Minister for the Environment [2021] FCA 560.
[27] See Shearman & Sterling, Perspectives: EU Signals New Mandatory Human Rights, Environmental and Governance Due Diligence for Companies Operating in the EU Internal Market, March 30, 2021.
[28] Milieudefensie et al. v. RDS, ¶ 4.4.49.

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