On 12 November 2024, the Court of Appeal in The Hague delivered its judgment in the climate case between Milieudefensie and Shell. Although the court overturned the judgment that had obliged Shell to reduce CO2 emissions by 45% across the Shell Group by 2030, the judgment still highlights the significant role that (large) companies play in combating dangerous climate change. Increasing pressure is also being exerted by society on companies to take climate targets into account when determining their policies and strategies.
How should directors navigate in these complex and difficult times? The judgment contains several key considerations, which we will discuss in this blog by Barbara Elion, Tanja Schasfoort, and Mathias Wielinga Carvajal.
Summary of the judgment
In 2021, the District Court of The Hague ruled that Royal Dutch Shell N.V. was obliged to reduce the CO2 emissions of both the Shell Group and its suppliers and customers by 45% (net) by the end of 2030, compared to 2019 levels. The Court of Appeal in The Hague has now overturned this judgment.
The court emphasized that companies like Shell, which significantly contribute to climate problems and have the ability to help combat them, have an obligation to limit CO2 emissions to prevent dangerous climate change. Companies like Shell, therefore, bear their own responsibility for achieving the goals of the Paris Agreement. This independent duty of care can also apply in addition to the obligation to comply with (public law) regulations in the countries where the company operates.
The court also determined that protection against dangerous climate change is a human right. While it is primarily the government’s responsibility to protect human rights, these rights also indirectly influence the duty of care that companies like Shell must observe. When assessing whether Shell is acting unlawfully, the court therefore took the position that citizens also have the right to protection against dangerous climate change in relation to Shell.
However, the court rejected the requested order to impose a specific reduction obligation on Shell and overturned the district court’s judgment. The court distinguished between Scope 1 and 2 emissions (direct emissions from Shell itself and indirect emissions from suppliers) and Scope 3 emissions (emissions from customers using Shell’s products):
- With respect to Scope 1 and 2 emissions, the court ruled that a ‘threatened breach of a legal duty’ has not been established. The court believes that Shell is taking sufficient measures and pursuing targets in line with international climate goals.
- Regarding Scope 3 emissions, the court concluded that a global average reduction target of 45% is not detailed enough to apply as a reduction target for a specific company. The average reduction target, according to the court, was not intended for this purpose. Additionally, the court determined that it has not been established that imposing an obligation on Shell to reduce its Scope 3 emissions by a specific percentage would be effective.
Implications of the Shell Judgment
The district court’s judgment was the first time a company was obliged to take emission reduction measures. It sparked a growing trend of lawsuits against companies for their role in contributing to climate change. Although the court of appeal has now overturned the district court’s judgment, we do not expect this to mark the end of climate litigation. In our view, the court’s reasoning leaves enough room for civil intervention, though the approach to such cases may differ.
Directors should also remain aware of the responsibilities and obligations that (large) companies have with regard to climate change. In 2022, Milieudefensie announced that it would investigate whether directors could be held personally liable for climate damage caused by the company. As far as we know, Milieudefensie has not yet taken concrete steps in this direction. However, the board of Shell in the UK did face a lawsuit brought by ClientEarth, which claimed that the board was not transitioning away from fossil fuels quickly enough. Although ClientEarth’s claims were dismissed, this development shows that directors of (large) companies must be aware of the risks they face in this area.
Key Takeaways for Directors
The legal debate over (responsibility for) climate change is far from settled with the Shell judgment. There are several key takeaways from the Shell judgment that directors should consider when setting the policy and strategy of a company.
- Duty of care to combat climate change and take responsibility. The Shell judgment confirms that (at least) large companies, such as Shell, have a social duty of care to contribute to preventing dangerous climate change. The exact scope and implementation of this duty of care will depend on the specific circumstances. Compliance with applicable regulations and (endorsed) soft law, such as the UNGP and OECD Guidelines, is relevant for fulfilling this duty of care. The Shell judgment identified several important considerations, including a company’s contribution to climate change and its ability to contribute to combating climate change. Directors must be aware of this. This means that in fulfilling their role, they should not limit themselves solely to financial or commercial considerations when making decisions.
- Freedom and flexibility in taking measures. In recent years, new regulations have been introduced to combat dangerous climate change. Many of these measures specifically target large companies with high CO2 emissions, such as Shell. However, these measures do not impose an absolute reduction percentage. Companies are generally free to choose their own approach to reducing emissions, as long as it aligns with the climate goals of the Paris Agreement.
- European directives and measures are not exhaustive. The Shell judgment emphasizes that the measures taken by the legislator to reduce CO2 emissions are not exhaustive. Neither the European nor the Dutch legislator has determined that companies complying with existing regulations to combat climate change would have no further obligations to reduce their CO2 emissions. Therefore, obligations arising from existing regulations do not preclude an individual company’s duty of care to reduce emissions based on societal norms. However, they may influence the extent of a company’s duty of care to combat climate change.
- New investments that contribute to climate change require special attention. Oil and gas companies may be expected to consider the negative impact that further expanding fossil fuel production could have on the energy transition when making investment decisions. Directors should carefully weigh the interests at this point and ensure that their decision-making is well-documented and substantiated.
- Documenting and reporting. Especially for directors of companies falling within the scope of the CSRD and CSDDD, it is important to comply with the extensive reporting requirements. More generally, directors should carefully document their decision-making process and seek (external) advice where necessary.
