In 2021, the Hague District Court made history in the case of Milieudefensie et al v Shell Plc by ordering Shell to reduce its CO2 emissions by 45% by 2030 compared to 2010 levels and to zero by 2050. It was the first time a national court had ordered a private company, rather than a state, to reduce emissions in line with the Paris Agreement, and the decision prompted a slew of claims by climate activists around the world. In a hotly anticipated judgment, the Court of Appeal in The Hague has now overturned the landmark decision, holding that Shell does not have a specific reduction obligation. However positive that might sound for corporates concerned about their exposure to climate claims, it is clear from the judgment that they cannot breathe a sigh of relief.
For more detail about the 2021 decision and background to this appeal, please see our article here.
Below, we consider some key points for corporates and their directors to bear in mind about this latest important decision and its likely impact.
1. Companies have broad-ranging obligations to combat climate change
Notwithstanding its decision to overturn the first instance judgment, the Dutch Court of Appeal was clear that everyone, including private companies, has a responsibility to take steps to combat climate change. Certain companies may be held to higher standards for reducing emissions than others. The Court held that companies that have particularly contributed to the climate crisis, for example, oil and gas companies like Shell, will have a greater obligation to reduce emissions.
Significantly, it may no longer be sufficient for corporate climate policies to comply with existing environmental legislation. The Court held that complying with existing legislative obligations does not preclude companies from having a separate duty of care to reduce their emissions, stating "the measures taken by the legislator to reduce CO2 emissions are not exhaustive in and of themselves" (para 7.53). It rejected Shell's argument that it is for the legislator and not the civil courts to make decisions requiring companies to reduce emissions.
2. Protection from climate change is a human right
The Dutch Court of Appeal discussed and drew on the principles of various decisions from across the world establishing protection against climate change as a fundamental right, for example, Urgenda[1], Verein Klimaseniorinnen Schweiz v Switzerland[2], Held v State of Montana[3]and a Brazilian Federal Supreme Court ruling that treaties on climate change are a species of treaties on human rights. The Court concluded: "there can be no doubt that protection from dangerous climate change is a human right" (para 7.17).
The Court held that companies have obligations to protect human rights and placed emphasis on 'soft law instruments' like the UN Guiding Principles on Business and Human Rights and the OECD Guidelines on Responsible Business Conduct stating that they can, "have an impact on private law relationships by giving substance to open standards, such as the social standard of care". It is significant that the Court acknowledged that areas of public law can influence a legally binding standard of care in private law, and it is clear that companies should be prepared for any breaches of their climate change obligations to also be considered breaches of human rights in the future.
3. Internal emission reduction targets are key
Shell was able to demonstrate that it had in place rigorous internal targets in respect of its Scope 1 and Scope 2 emissions (i.e. emissions from sources that Shell owns or controls, and emissions that Shell causes indirectly from the energy it purchases and uses, such as electricity) and that it was already on track to meet those targets. The Court considered the following factors:
- Shell had set its own specific reduction target of 50% in 2030 relative to 2016 levels.
- Shell could show that it was already on track to meet the 45% reduction target for its Scope 1 and Scope 2 emissions (having already achieved a reduction of 31% compared to 2016) so that the necessary "threatening violation of a legal obligation" did not exist.
- Shell had committed to achieving its targets in various documents, including its business plan and SEC filings.
- Shell had outlined specifically how it would achieve these targets in public documents.
The Court clearly placed considerable weight on these factors in deciding to overturn the District Court's emission reduction order for Scope 1 and Scope 2 emissions. It is crucial, where companies have obligations to mitigate environmental damage, to ensure that appropriate targets are implemented and that progress towards them is measured (and recorded) on an ongoing basis.
4. Scientific understanding of climate change needs to develop, particularly in respect of Scope 3 emissions
The first instance decision required Shell to limit all CO2 emissions, including Scope 3 emissions (i.e. emissions generated by the use of products sold by Shell in Shell's value chain, including by end users of oil and gas products).The attempt to compel Shell to limit its Scope 3 emissions was particularly controversial. It was also very significant - 95% of Shell's reported emissions consist of Scope 3 emissions, meaning that a change to their business model would likely be needed to achieve a 45% reduction in Scope 3 emissions.
The Court of Appeal dismissed out of hand Shell's argument that it has no control over Scope 3 emissions, reiterating that corporate responsibility was presupposed. However, it found the order as imposed was not case-specific enough, and was particularly problematic as regards Scope 3 emissions after considering a number of hypothetical scenarios, including:
- Where Shell started supplying gas to a company that previously obtained its energy from coal, leading to an increase in Shell's Scope 3 emissions but lower global CO2 emissions.
- Where Shell partially ceased trading in third-party fossil fuels, Shell would simply be replaced by another company in the value chain meaning that there is insufficient evidence of a causal relationship between a sales limitation and a reduction in CO2 emissions.
The Court considered the possibility of imposing a more tailored emissions reduction obligation, but found that (i) the recommended percentages provided in expert evidence diverged too significantly to enable it to reach a conclusion, and (ii) fluctuations in industry standards render them too unstable to be imposed as legally binding obligations.
Ultimately, there was insufficient scientific consensus on the appropriate CO2 reduction target to make a legal order. However, the clear indication was that in the future, as climate science develops, a specific CO2 reduction target could be imposed on a company, including in relation to Scope 3 emissions.
What next?
There has not yet been formal confirmation whether Milieudefensie will appeal to the Supreme Court of the Netherlands; an appeal would need to be based on the Court of Appeal's legal reasoning and not the facts.
Despite favouring Shell's argument, the Dutch Court of Appeal emphasised that climate change is one of the most pressing issues of our time. It is clear from the judgment that companies operating in high-emission industries and those investing in new polluting activities in particular remain at risk of successful claims from climate activists. The Court's ardent defence of its role in determining the obligations that can be imposed on companies, together with its clear indication that companies should be held to account in respect of their climate change obligations, could well encourage future climate litigation, despite the outcome of this particular claim.
[1] Please see our article on Urgenda here.
[2] Please see our article on Verein Klimaseniorinnen Schweiz v. Switzerland here.
