A Change of Climate in the Courts

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On 26 May 2021, the Hague District Court in the Netherlands issued an historic judgment in Milieudefensie et al. v. Royal Dutch Shell plc, a case brought by a number of environmental groups and individual claimants against Royal Dutch Shell plc (RDS), the well-known Anglo-Dutch oil major.

RDS’ wider corporate group (Shell Group) said in February 2021 that it would accelerate the transition of its business to net-zero emissions, including targets to reduce the carbon intensity of energy products by 20 percent by 2030. The court found that this target was insufficiently “concrete” and ordered that Shell Group’s emissions be brought broadly in line with the targets in the Paris Agreement, an international treaty adopted by 196 parties at COP21 on 12 December 2015 that is binding only on sovereign governments.

RDS indicated that it intends to appeal the judgment, but irrespective of the outcome of that appeal, this unprecedented ruling will draw considerable global interest. It is the first time environmental groups have used the courts to try to force an energy major to change strategy, and the decision is likely to have significant implications for almost all multinational companies, particularly those in the energy sector and which bear the practical burden of delivering energy transition.

What happened?

The plaintiffs maintained that Shell Group’s sustainability policy was in breach of article 6:162 of the Dutch civil code, which refers to an “unwritten standard of care,” on the basis that Shell Group had been aware for many years of the dangers of rising carbon dioxide emissions. They also maintained that Shell Group’s future planning was in violation of articles 2 and 8 of the European Convention on Human Rights (ECHR) — the right to life and the right to family life.

RDS argued that there was no legal basis for the case and that governments alone are responsible for meeting Paris Agreement targets. It also argued that forced emissions targets are pointless, as other oil majors will step in and extract more oil in any event. The court acknowledged that RDS cannot solve this global problem on its own, but said that does not absolve RDS of its individual responsibility to do its part.

The court accepted that RDS had obligations under both Dutch law and the ECHR. It adopted a broad approach to applying the Dutch standard of care, taking into account RDS’s policy-setting influence over the rest of the companies in the Shell Group, the rights of individuals under the ECHR, and the duty to respect human rights set out in the UN Guiding Principles. It accepted the general consensus among climate scientists that a global emissions reduction of at least 45 percent is required to avoid global warming of 1.5℃ (which is the target limit set out in the Paris Agreement). It concluded that, if that target is not met, the human rights of the plaintiffs in the case will be harmed.

A particularly extraordinary aspect of the judgment, however, is that it in effect creates obligations that extend beyond Shell Group. The court found that Shell Group’s policy was inadequate to meet the requisite standard of care under Dutch law and ordered that RDS reduce its emissions by 45 percent by 2030, compared to 2019. It also observed that 85 percent of the emissions for which Shell Group is responsible are indirect emissions — i.e., emissions created by the combustion of products sold by Shell Group — and it held that Shell Group has a “significant best efforts obligation” to “take the necessary steps to remove or prevent the serious risks ensuing from the CO2 emissions generated by them, and to use its influence to limit any lasting consequences as much as possible.” In other words, not only is RDS required to address emissions created during Shell Group’s extraction and refining activities, but it also has responsibilities relating to the emissions created when its end customers burn its fuels.

What does this mean for the future?

The judgment marks a number of historic firsts. It is the first time environmentalists have used the court system to try to force a private company to change tack. It is the first time the effect of climate change on human rights has been used to justify a binding emissions reduction obligation for a private company. It is also the first time a court has found that a company has a legal duty to reduce its emissions in line with the Paris Agreement, which previously was thought to be binding only on governments.

Climate change litigation has been growing in prevalence across the world. In February 2021, the UK Supreme Court found in an interlocutory decision that RDS could, in theory, be held liable for environmental damage caused by one of its overseas subsidiaries (see McGuireWoods’ March 15, 2021, legal alert, “UK Supreme Court Allows Nigerian Environmental Damage Claims to Proceed Against UK Parent Company”). The day after the Hague District Court delivered its judgment in Milieudefensie, Australia’s Federal Court handed down a ruling in Sharma v Minister for the Environment [2021] FCA 560, finding that the Minister for the Environment owes a common law duty of care to Australian children who might suffer “catastrophic harm” in the future as a result of climate change. Other cases have recently been heard in Ireland, Canada and France. These cases predominantly have been brought against governments in connection with their obligations under international treaties or other statutes. By contrast, the Milieudefensie judgment clearly indicates that companies, and not just governments, will be targets for strategic climate change litigation in the future.

Whatever the outcome of RDS’s intended appeal, it is clear that oil supermajors will be directly targeted to drive change. Although the Dutch judgment can be downplayed as something peculiar to Dutch law, it is important to remember that the judgment also relied on aspects of human rights law and intergovernmental agreements that are similar across a large number of jurisdictions. Therefore, this judgment may be a harbinger of how courts may take to this subject, in the literal and metaphorical climate; in which case, the Dutch may just have shown the way for more to follow.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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