Shell to Appeal Court Ruling in Netherlands Climate Case

Sam Eastwood is partner, Nadine Pieper is an associate, and Armineh Gharibian is senior associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Eastwood, Ms. Pieper, Ms. Gharibian, and Johannes Weichbrodt. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

In a recent Blog Post on May 28, 2021, we discussed a landmark court ruling issued by the Hague District Court in May 2021, [1] requiring Royal Dutch Shell (Shell) to reduce the CO₂ emissions of the Shell group by net 45% in 2030, compared to 2019 levels. In a statement on July 21, 2021, Shell confirmed that it will appeal against this decision. In the meantime—and pending any final determination—Shell remain bound by the earlier court ruling.

In this post, we highlight key aspects of the Hague District Court’s decision and Shell’s recent decision to appeal.

The Hague District Court’s Decision

The case against Shell, the top holding company of the Shell group, was brought by several NGOs, led by Milieudefensie, and around 17,000 individual claimants. Shell establishes the general policy of the group and reports on the greenhouse gas emissions of the various Shell companies.

The claimants alleged that Shell has an obligation, derived from the unwritten standard of care pursuant to Book 6, Section 162 Dutch Civil Code, to contribute to the prevention of dangerous climate change through the corporate policy it determines for the Shell group.

As regards the standing to sue, the court ruled that the NGOs’ class actions were admissible to the extent that they related to the interests of current and future generations of Dutch residents and (with respect to the Waddenvereniging) of the inhabitants of the Wadden Sea area, a part of which is located in the Netherlands. The court declared the claims of the individual claimants to be inadmissible given that their interests are already served by the class actions and they do not have an interest in a separate claim in addition to the class actions.

The court ruled that Shell owed an “unwritten standard of care” under the Dutch Civil Code to Dutch residents and the inhabitants of the Wadden region requiring it to limit, or cause to be limited, the aggregate annual volume of all CO₂ emissions into the atmosphere due to the business operations and sales of the Shell group by at least net 45% at end 2030, relative to 2019 CO₂ levels. Further, Shell’s reduction obligation encompasses the CO₂ emissions from the group’s entire value chain, which includes not only the closely affiliated companies of the Shell group, in relation to which it has a policy-setting influence, but also the emissions attributable to the businesses from which the Shell group purchases raw materials, electricity and heat and the end-users of the products produced and traded by the Shell group (i.e., “Scope 3” emissions). [2]

The court described Shell’s policy, policy intentions and ambitions for the Shell group to amount to “rather intangible, undefined and non-binding plans for the long-term (2050)”, and, therefore incompatible with Shell’s reduction obligation. [3] The court stated that it is up to Shell to design the CO₂ emission reduction obligation taking account of its current obligations and other relevant circumstances. As regards the business relations of the Shell group, including the end-users, the court held that Shell “may be expected to take the necessary steps to remove or prevent the serious risks ensuing from the CO₂ emissions generated by the business relations, 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.” [5]

Shell’s press statement

In its press statement, [6] Ben van Beurden, Shell’s chief executive, said the company agrees that “urgent action is needed” to reduce carbon emissions, and vowed to accelerate the company’s strategy towards becoming a “net-zero emissions energy business by 2050, in step with society’s progress towards the goal of the Paris Agreement on climate change.” He said that Shell will still appeal against the ruling “because a court judgment, against a single company, is not effective. What is needed is clear, ambitious policies that will drive fundamental change across the whole energy system. Climate change is a challenge that requires both urgent action and an approach that is global, collaborative and encourages coordination between all parties.” Shell further stated that it was the first energy company to put its energy transition strategy to a vote of shareholders at its Annual General Meeting. 89% of the shareholders voted for the plan. Under its current plan, Shell will cut the carbon intensity of its products by at least 6 percent by 2023, by 20 percent by 2030, by 45 percent by 2035, and by 100 percent by 2050 from 2016 levels. [7]

Comment

Shell’s appeal will not suspend its CO₂ emission reduction obligations arising from the court decision, as the court has declared the order provisionally enforceable. The court stated that the interest of Milieudefensie et al. for the immediate compliance with the order by Shell outweighs the company’s possible interest in maintaining the status quo until a final and conclusive decision has been made. Thus, the court took into account that the provisional enforceability of the order may have far-reaching consequences for Shell, which may be difficult to undo at a later stage.

Shell can file its appeal by August 26, 2021. The appeal proceedings could take several years. However, there is no guarantee that Shell will successfully overturn the verdict of the District Court. In December 2019 in the Urgenda case, the Supreme Court of the Netherlands upheld a ruling holding the Dutch government responsible to reduce greenhouse gas emissions by at least 25% by 2020 (compared to the 1990 levels). The Supreme Court might adhere to its case law and extend these reduction obligations to individual companies such as Shell.

Endnotes

1Vereniging Milieudefensie et al. v. Royal Dutch Shell PLC, Hague District Court, Judgment of May 26, 2021 (hereafter, Milieudefensie et al. v. Shell). An English version of the decision is available at: ECLI:NL:RBDHA:2021:5339, Rechtbank Den Haag, C/09/571932 / HA ZA 19-379 (engelse versie) (rechtspraak.nl)(go back)

2Milieudefensie et al. v. Shell, 4.4.18.(go back)

3Milieudefensie et al. v. Shell, 4.5.2.(go back)

4Milieudefensie et al. v. Shell, 4.1.4.(go back)

5Milieudefensie et al. v. Shell, 4.1.4.(go back)

6The statement is available at: https://www.shell.com/media/news-and-media-releases/2021/20-july-press-release.html/(go back)

7Shell’s Powering Progress targets are available at: https://reports.shell.com/sustainability-report/2020/our-performance-data/our-powering-progress-targets.html?tabc=1e1(go back)

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