The Shell Climate Change Case, By Richard Miller (Europe)

Milieudefensie et al. vs. Royal Dutch Shell ("Shell") case has now been heard by the Hague Court of appeal. The case was an appeal by Shell against the ruling of the District Court of The Hague in 2021, that Shell was ordered to reduce its greenhouse gas emissions across its global operations by 45 percent by the end of 2030. This would be utterly devastating to Shell's operations and would probably not have been achievable, so Shell would need to close up shop. This though was the aim of the climate changed litigation, to begin an existential attack upon oil companies who are keeping Western civilisation going, and people with food and energy to keep alive. That does not matter to fanatical environmentalists.

The Court of Appeal decision was somewhat mixed. It held that Shell, as with all corporations did have a duty of care to act to reduce greenhouse gas emissions. However, Shell did not have an obligation to reduce its greenhouse gas emissions by 45 percent, or any other specific percentage, companies "are free to choose their own approach to reducing their emissions in the – mandatory – climate transition plan as long as it is consistent with the Paris Agreement's climate targets," the Court of Appeal held.

Such a decision is probably as good as it gets today. It at least breaks the dangerous precedent that was established, which would open the flood gates to further climate change litigation against oil companies. Chalk up say an 80 percent victory here!

https://www.herbertsmithfreehills.com/insights/2024-11/dutch-court-of-appeal-upholds-appeal-on-landmark-climate-litigation-case-against-shell

"On 12 November 2024, The Hague Court of Appeal ("CoA") handed down its highly anticipated judgment in the appeal of the Milieudefensie et al. vs. Royal Dutch Shell ("Shell") case. The CoA was considering Shell's appeal against one of the most significant climate litigation rulings in recent years, namely the 2021 ruling of the District Court of The Hague ("Court") in which Shell was ordered to reduce its greenhouse gas emissions across its global operations by 45% by the end of 2030 as compared with 2019 levels.

Significantly, the CoA allowed Shell's appeal on the key issue, namely the specific emissions reduction which had been ordered in 2021. The CoA ruled that:

• corporate actors do have a duty of care under Dutch law to contribute to the mitigation of dangerous climate change by reducing their emissions, including as a matter of human rights law. Shell, as a major oil and gas producer, has a "special responsibility" to reduce its greenhouse gas emissions;
• however, Shell does not have an "absolute [emissions] reduction" obligation of 45%, or indeed any other percentage, and under EU law, it will not have such an obligation for the foreseeable future. The existence of EU regulation on climate change, including the EU Emissions Trading Scheme and the Corporate Sustainability Due Diligence Directive, does not in itself preclude the existence of an independent duty of care under Dutch law to reduce emissions. But that regulation is relevant to determining what actions are required in order for a company to comply with its duty of care in respect of climate change;
• therefore, beyond complying with the mandatory EU regulations that apply to large companies such as Shell to reduce emissions, companies "are free to choose their own approach to reducing their emissions in the – mandatory – climate transition plan as long as it is consistent with the Paris Agreement's climate targets".

In this bulletin, we discuss the background to this decision, the key findings of the CoA, and its potential significance for climate litigation against corporate actors.

Background: the 2021 ruling by the District Court of The Hague

In April 2019, seven environmental associations and NGOs, led by Milieudefensie (Friends of the Earth Netherlands), together with 17,319 individual co-claimants brought a case before the Court alleging that Shell's contributions to climate change violate its duty of care under Dutch law and human rights law. This case is covered in detail in our previous bulletin here.

The central question before the Court was whether Shell should be required to make further changes to the Shell Group's existing corporate policy to reduce the CO₂ emissions for the entire group's energy portfolio to achieve lower emission levels by the end of 2030, relative to 2019 levels.

The Court issued its decision in May 2021, holding that as a matter of Dutch law, Shell was subject to a duty of care in respect of the harmful effects of climate change which required it to reduce its carbon emissions. This decision was made on a range of legal and factual bases, including the provisions of the Dutch Civil Code, scientific evidence regarding climate change, human rights instruments including the European Convention on Human Rights, and soft law instruments such as the UN Guiding Principles on Business and Human Rights ("UNGPs") and the OECD Guidelines for Multinational Enterprises ("OECD Guidelines"). In particular, the Court reached the significant conclusion that Shell, as a corporate actor, had an obligation to protect the claimants' human rights as part of complying with the implied standard of care contained in Section 162 of the Dutch Civil Code, and that this involved an obligation to limit the human rights impacts associated with climate change.

The Court accordingly ordered Shell to reduce its net CO₂ emissions for the entire Shell Group's global activities by 45% by 2030 (compared to 2019 levels) through Shell Group's corporate policy.

Notably, the Court directed that emission reductions were required to ensure that Shell Group's corporate policies were in line with the Paris Agreement and that these emissions reductions were to apply across Shell's entire energy portfolio, including to the aggregate volume of its Scope 1, 2 and 3 emissions (i.e. the reductions would need to take account of the downstream effects of Shell's operations, including the emissions generated by end user customers purchasing fossil fuels from Shell). While the Court imposed an absolute obligation on the Shell Group to reduce Scope 1 emissions, the reduction obligation in relation to Shell's supply chain (Scope 2 emissions) and downstream effects (Scope 3 emissions) was expressed on a 'best efforts' basis.

The Court's decision was seen as highly significant and a substantial advance on the capacity for courts to intervene in the businesses of corporates when addressing climate change. It was the first time a national court had compelled a private company to align its group corporate policies with climate strategies and to reduce emissions in line with the Paris Agreement. The Court's ruling that corporates, much like States, must accelerate their existing emissions reductions programmes has in the intervening years served as an impetus for further climate change-related lawsuits against corporate actors across the world.1

Shell's appeal against the 2021 ruling

Shell appealed the Court's decision before the CoA, raising ten separate grounds for appeal as well as seeking recovery of its costs for both sets of proceedings.

In its appeal, Shell argued inter alia that corporate emissions reductions were not a matter for the courts to pronounce on, but a matter belonging to the domain of the legislators. Shell argued that lawmakers had not imposed any obligations on companies to reduce their CO₂ emissions by a certain percentage, and that the Court's decision should therefore be reversed on appeal.

Key findings of the CoA

Significantly, the CoA upheld Shell's appeal in respect of the specific percentage reduction which had been imposed by the Court in 2021, overturning the Court's order in this regard. Nevertheless, the CoA made a range of other findings which will be significant for climate litigation against corporate actors in the future. The key findings from the CoA were as follows:

Climate change and human rights

Importantly, the CoA confirmed the Court's 2021 conclusions in respect of the interrelationship between climate change and human rights law. The CoA relied on a series of national and regional climate change-related judgments, such as the landmark Urgenda decision by the Dutch Supreme Court in 2019, the recent decision of the European Court of Human Rights in KlimaSeniorinnen (see our discussion on this decision here) and judgments from other national courts, as well as various UN reports and resolutions, to conclude that "there can be no doubt that protection from dangerous climate change is a human right".

The CoA clarified that while "primarily" it is up to legislators and governments to take measures to minimise the effects of dangerous climate change, companies (including Shell) "may also have a responsibility to take measures to counter dangerous climate change".

The CoA then considered the application of the human right to protect against dangerous climate change to private relationships – namely, whether this human right was one that applied not just vertically (i.e. in a government-citizen relationship) but also horizontally (whether directly or indirectly to the relationship between citizens and private companies).

To answer this question, the CoA considered the UNGPs and the OECD Guidelines, both non-binding, soft law instruments which Shell had (like many multinationals) specifically endorsed, along with other soft law instruments such as the United Nations Global Compact, noting the explicit and implicit linkage in these instruments between corporate responsibility in respect of human rights impacts and climate change. The CoA held that these instruments are relevant in defining and giving substance to the "social standard of care in relation to climate" and that they place responsibility on large companies to take appropriate measures to protect against dangerous climate change.

The CoA held that the "climate problem is the greatest issue of our time" and that it "is an established fact that fossil fuel consumption is largely responsible for creating the climate problem". As a result, the CoA held that companies like Shell, "which contribute significantly to the climate problem and have it within their power to contribute to combating it", have an obligation to limit CO₂ emissions to counter dangerous climate change, "even if this obligation is not explicitly laid down in (public law) regulations of the countries in which the company operates".

The CoA affirmed, as the Court had done in its 2021 ruling, that companies like Shell have their own responsibility in achieving the targets of the Paris Agreement.

EU climate change law and the emissions reduction target of 45%

The CoA then discussed several recent EU legal instruments which have been introduced as a package of measures aimed at combating climate change and achieving a 55% reduction in greenhouse gases by 2030. This included the EU Emissions Trading System ("ETS") and the forthcoming Emissions Trading System 2 ("ETS2"), the Corporate Sustainability Reporting Directive ("CSRD") and the Corporate Sustainability Due Diligence Directive ("CSDDD"). The question for the CoA was the relationship between the duty of care found by the Court in its 2021 ruling and the suite of other laws in the EU to combat climate change.

The CoA held that the measures taken by legislators to reduce CO₂ emissions through these EU regulations were not exhaustive, such that they did not preclude a duty of care under Dutch law based on the social standard of care on the part of individual companies to reduce their CO₂ emissions. However, it acknowledged that none of these regulations (or the social standard of care itself) are premised on the starting point that each individual company is subject to any absolute emissions reduction, noting that the relevant regulatory requirements (including the obligation to adopt and put into effect a transition plan for climate change mitigation under the CSDDD) permitted some flexibility in relation to the actual reductions achieved. In particular, companies may include such an emissions reduction goal in their climate transition plan "where appropriate", but it is not binding or static, as changes in circumstances may cause the company to adjust the goal. Shell pointed out as part of its appeal that while it was proposed during the CSDDD drafting process that companies be required to impose an absolute reduction goal on themselves, this proposal was not adopted.

Accordingly, the CoA concluded that Shell "does not have the absolute reduction obligation of 45% (or any other percentage) under EU law and will not have such an obligation for the foreseeable future". The CoA ruled that beyond complying with the mandatory EU regulations that applied to large companies such as Shell to reduce emissions, companies "are free to choose their own approach to reducing their emissions in the – mandatory – climate transition plan as long as it is consistent with the Paris Agreement's climate targets".

In other words, the CoA concluded that the existence of these EU regulations did not impact on the independent existence of a duty of care on Shell and other corporate actors to combat climate change. But the CoA did consider that these regulations impact on the question of the means by which that duty can be complied with, stating:

obligations arising from existing regulations do not preclude a duty of care based on the social standard of care on the part of individual companies to reduce their CO2 emissions. That said, this existing legislation does affect Shell's obligations under the unwritten social standard of care. For instance, it must be assumed that the fulfilment of the said duty of care takes into account obligations that companies have under that existing legislation. The district court sought to do so in respect of the EU ETS. The EU ETS2 should also be taken into account in the interpretation of a social standard of care."

The CoA also separately considered whether scientific consensus on climate science required Shell to reduce its emissions by 45% by 2030. The CoA examined existing climate science by reference to various reports and studies, including the IPCC Report, and held that a 45% reduction standard (or any other percentage) agreed by climate science does not apply to every country and every business sector individually. Moreover, the CoA noted that no specific sectoral standard for the oil and gas industry can be established based on current scientific consensus. Therefore, the CoA concluded that even based on available science, it cannot be said that there is a specific reduction obligation that applies to Shell in respect of its emissions.

Nevertheless, the CoA observed that the content and scope of the relevant duty of care may vary from one company to another, depending on a company's contribution to climate change and its capacity to counter climate change and that "more can be expected of Shell than of most other companies, as Shell has been a major player in the fossil fuel market for over 100 years and as it continues to occupy a prominent position in that market today".

Obligations with respect to Scope 1, 2 and 3 emissions

Milieudefensie had argued that Shell's current policies were not contributing to the Paris Agreement goals as Shell had planned investments in new oil and gas fields which would mean that the Shell Group's overall emissions would not decrease.

On this issue, the CoA noted that while Shell's planned investments in new oil and gas fields may be at odds with the "reasonable" expectation for oil and gas companies to consider the negative consequences of a further expansion of the supply of fossil fuels for the energy transition, this issue was ultimately not relevant to the determination of whether a specific reduction obligation could or should be imposed on the company.² The CoA further referred to the specific emissions reduction targets that had been set by Shell to reduce its Scope 1 and Scope 2 emissions by 50% in 2030 relative to 2016 levels to note that Shell is already working to reduce its own Scope 1 and 2 emissions.

The CoA also ruled that an obligation for Shell to reduce its Scope 3 emissions relating to consumers of Shell products has the possibility of being ineffective. Although Shell could comply with this obligation by restricting third-party fossil fuels sales to end consumers, this would likely mean that other companies or intermediaries would then take over that trade in place of Shell, without resulting in a net reduction in CO₂ emissions.

Other issues on appeal

As part of this appeal, Milieudefensie and the other claimants had also asked the CoA to clarify a range of points from the Court's 2021 ruling relating to how Shell must meet the emissions reduction obligation ordered by the Court, including the capacity for Shell to rely on carbon offsets in reducing its net emissions, the role of the ETS in 'indemnifying' Shell for the emissions covered by that scheme, and the capacity for Shell to meet its emissions reduction obligation by selling its assets.

Ultimately, however, the CoA refused to consider these requests for clarification on the basis that they would have the effect of amending the operative part of the Court's judgment in a negative sense for Shell, and that Shell should not be placed in a worse position as a result of its own appeal in circumstances where Milieudefensie had not instituted cross-appeal proceedings.

The significance of the CoA's decision

Crystallising and identifying the specific responsibilities of corporates in combating climate change continues to be a hotly contested topic across jurisdictions as well as at the regional and global level.

This decision from the CoA is highly significant. Consistent with other climate litigation cases in recent years, it indicates that, at least as a matter of Dutch law, companies are obligated to contribute to the mitigation of climate change and that to comply with the social standard of care they must make an appropriate contribution to achieving the emissions reduction goals of the Paris Agreement.

However, the decision has also clarified that the CoA does not see either existing EU climate regulation or evidence of scientific consensus as dictating a concrete emissions reduction rate to which individual companies or industries are required to adhere as a matter of law. As a matter of Dutch law, companies are instead free to choose their own approach to reducing emissions as part of their climate transition plans, provided that these plans are consistent with the Paris Agreement's climate goals. The ruling can accordingly be expected to have wide implications for the energy sector, endorsing the discretion and flexibility of private players (especially those registered in the Netherlands) in developing and implementing their corporate energy transition and emissions reduction policies.

The ruling can be expected also to have an impact on existing and future climate-change related claims by or against corporate players – including because the CoA ordered Milieudefensie and the other claimants to bear the costs of both the first instance decision and the appeal proceedings. The weight which other judicial bodies will ultimately give to this decision in their rulings remains to be seen.

Milieudefensie has not yet announced its intention to appeal the judgment before the Supreme Court of the Netherlands, but it seems very likely that this will not be the end of the road on this matter.

[1] For instance, in March 2024 a Belgian farmer filed a claim for loss of profit caused by climate change against Total Energies before the Commercial Court of Tournai in Belgium seeking an order from the court that Total Energies stop investing in fossil fuel projects and reduce its gas and oil production by 75% by 2040. Similar lawsuits have also been brought against major oil companies for damages related to climate change before various courts in the US.

[2] The CoA had not separately been asked to answer the question of whether Shell's planned investments in new oil and gas fields are in violation of its social standard of care."