Stuart McAlpine Global Head of Marine Projects
The rise in climate change litigation: Royal Dutch Shell and beyond
Climate change litigation is a growing trend, as the legal industry bears witness to a constant rise in claims brought against both governments and private corporations for either failing to prevent, or contributing to, harmful carbon emissions across the world.
The legal recourse taken by claimants is wide, with remedies sought under: (i) corporate law; (ii) securities law; (iii) human rights law; (iv) constitutional law; and (v) tort law, including the law of nuisance, negligence and product liability. What was once considered a political issue is now affecting investors’ decisions, share prices and long term contract negotiations.
To view our world map illustrating the figures for climate change litigation across the globe, click here.
We previously reported on the landmark decision handed down by the District Court of The Hague (the “District Court”) on 26 May 2021, in the matter of Milieudefensie et al. v. Royal Dutch Shell PLC (“Milieudefensie et al.”). The ground-breaking decision compelled Royal Dutch Shell (“RDS”) to reduce its global group carbon emission figures by 45% net (compared to its 2019 emissions), by 2030, with immediate effect. The timing of the decision was particularly significant as it came days after the International Energy Agency published a report, calling for an immediate stop to all new oil and gas projects and coal mines.
This is the first time that a private corporation has received a court order to reduce its emissions to align with the Paris Agreement, and the decision could pave the way for more positive action to be required of other corporations. For example, in the same week as the District Court handed down its decision, Exxon Mobil Corporation saw two board members unseated, when its shareholders expressed their dissatisfaction with the oil and gas giant’s commitment to carbon reductions, calling for greater measures to strengthen the company’s commitment to climate change issues.
As the changing energy market brings uncertainty on what the future may hold, we consider how a national court’s decision can impact the global market, and therefore why the District Court’s ruling is not to be ignored.
The key takeaway points from the District Court’s decision are as follows:
- RDS owed a duty of care to Dutch residents;
- It was not enough for RDS simply to comply with national laws or replicate the measures taken by States to reduce their CO2 emissions, RDS has its own individual responsibility to reduce its’ CO2 emissions;
- RDS’ corporate policies and ambitions for its energy transition were described as “intangible, undefined and non-binding plans for the long-term (2050)” and, as such, incompatible with RDS’ individual responsibility to reduce its’ CO2 emissions;
- The District Court gave RDS “leeway to develop its particular reduction pathway and to differentiate as it sees fit, as long as it achieves a net 45% reduction in CO2 emissions”; and
- The obligation imposed on RDS to reduce its CO2 emissionsis applicable against RDS’ entire energy portfolio (encompassing CO2 emissions released by the end-users of RDS’ products).
These points are addressed in further detail below.
Regulation Rome II: did the District Court have jurisdiction?
Milieudefensie et al. filed proceedings in the District Court, alleging that it had jurisdiction pursuant to Article 7 of Regulation Rome II (Regulation (EC) No 864/2007) ("Rome II")) because under Rome II, a claimant can choose to base its tortious claim in the country where "the event giving rise to the damage occurred". Since RDS’ headquarters were situated in The Hague, from which it had drafted its corporate policies – including its environmental policies - this cut across all entities within its group structure (commonly referred to as the “Shell Group”). Milieudefensie et al. argued that the District Court had jurisdiction to hear the dispute. This argument was rejected by RDS, who contended that the adoption of a policy did not cause any potential damage; it was the CO2 emissions themselves that were potentially harmful so the applicable law here could fall within a myriad of legal systems around the world.
While the District Court acknowledged that the wording of Rome II indicated a singular “event”, it was nevertheless of the opinion that the characteristics of environmental damage created situations in which multiple events could give rise to damage in numerous jurisdictions. RDS' defence argument was considered too narrow, and not in line with the characteristics of responsibility for environmental damage, and the District Court concluded that the adoption of the corporate policy in The Netherlands constituted an independent cause of damage, which could have contributed to environmental damage that affected Dutch residents.
The District Court’s interpretation of Rome II is striking, as it suggests that the Dutch courts are willing to exercise Dutch law in cases against multinational CO2 emitting companies, so long as the emissions are deemed to be contributing to the environmental damage faced by Dutch residents. Accordingly, companies with a presence in, or connection to The Netherlands could face proceedings under Dutch law. Due consideration should, therefore, be given to the climate change litigation risks associated with a company’s place of incorporation, policy-making position and location of any other act of the parent company and/or its subsidiaries that may risk being considered as contributing to environmental damage.
Parent Company Risk
While the District Court accepted that the Shell Group had a shared responsibility to implement and execute the corporate policy, it found that it was RDS' responsibility as the parent company to "shape the corporate policy of the Shell group", ensuring that it "observe[s] the due care exercised in society". Accordingly, the District Court imposed obligations on RDS to reduce the CO2 emissions of its subsidiaries' entire energy portfolio.
The obligations imposed on RDS, as the parent company of the Shell Group, follows the growing trend by courts when addressing environmental issues to examine group structures and global corporate practices, to take note of where they cut across group structures. As a result, they find that they can demonstrate a responsibility of a parent company over the actions of its subsidiaries. In particular, this is the second time this year that the Dutch courts have reviewed the Shell Group’s corporate structure, to examine the degrees of RDS’ responsibilities for its subsidiaries. In February 2021, The Hague Court of Appeal was tasked with deciding whether action could be brought against RDS for negligence, with environmentally damaging consequences, caused by its subsidiaries, Shell Nigeria. For more information on this decision please see: The Hague court of appeal finds in favour of Nigerian farmers against Shell.
Control and influence over end users
One of the most contentious issues between the parties in Milieudefensie et al., was the assumption of control and influence that RDS exerted over the carbon emissions of the Shell Group and other end users.
The World Resources Institute Greenhouse Gas Protocol categorises greenhouse gas emissions as either Scope 1, Scope 2 or Scope 3, which are:
- Scope 1: direct emissions from sources that are owned or controlled in full or in part by the organisation;
- Scope 2: indirect emissions from third-party sources from which the organisation has purchased or acquired electricity, steam, or heating for its operations; and
- Scope 3: all other indirect emissions resulting from activities of the organisation, but occurring from greenhouse gas sources owned or controlled by third parties, such as other organisations or consumers, including emissions from the use of third-party purchased crude oil and gas.
It was suggested that 85% of the Shell Group’s carbon emissions were Scope 3.
RDS argued that it should not be held responsible for indirect emissions caused by third parties, as otherwise the District Court would just be unfairly passing all of societies’ culpability on to one party.
While the District Court accepted that other parties bore responsibility, it concluded that RDS had a "significant best-efforts obligation” to reduce emissions concerning the business relations of the Shell Group, including the end-users of the products produced and traded by the Shell Group. It found that there was a broad international consensus that each company must work independently towards the goal of net-zero emissions.
This demonstrates the global effect of the District Court’s decision, as it shows the high risk of companies being held liable for the actions made by end-users worldwide, despite having no control over their actions. The courts, nevertheless, expect energy companies to use their influence as much as possible to minimise the risk of damaging CO2 emissions being generated. What is considered “significant best-efforts” in this instance is still to be determined, but the decision seems to have resonated with RDS, who released a short statement after the District Court handed its decision down, advising of its plans to work with customers to achieve real, meaningful change.
In the meantime, the energy market is seeing more companies divesting emission heavy parts of their portfolio to minimise risks, where possible. For example, it has been reported that Shell is looking to sell some or all of its US shale operations in the wake of the District Court decision. Equally, BP is targeting $25 billion of divestment proceeds between the second half of 2020 and 2025 in their strategy to achieve net-zero emissions by 2050; and Exxon Mobil Corp reported in April 2021 that it had divested 22 of 43 refineries since 2000 in its pursuit for a lower-carbon energy future.
Divestment, however, will not guarantee protection particularly as divested assets may be sold to less skilled operators who are unable to manage the asset appropriately, and one cannot guarantee that the courts will not still hold the original asset owner responsible for failing to conduct its due diligence to ensure the sale was appropriate. The unpredictability of this area of litigation requires careful consideration, and not rash decisions.
Seeking guidance internationally
Although the Shell decision was taken under Dutch law, the District Court drew heavily from international treaties and ‘soft law’ in giving content to Shell’s reduction obligation. As such, the court’s reasoning could be replicated by other national courts in assessing similar claims for climate-related liability, and therefore has implications for energy and energy-intensive companies around the world.
Climate change litigation is still in its infancy, and there is still much to be defined. Different jurisdictions have different interpretations of decarbonisation, and this new era of climate change litigation is bringing new considerations to the legal market. While it opens up opportunities to the most diverse disputes, it also raises many questions, such as how to interpret international instruments, such as the Paris Agreement.
The legal market is seeing national courts worldwide readily relying on courts' judgments in different jurisdictions for guidance, and distinctions between civil and common law jurisdictions do not appear to play a part. For example, when the Land & Environment Court of New South Wales, Australia considered the environmental impact of the Rocky Hill Coal mine project in Gloucester Resources Limited v Minister for Planning, the Judge, in upholding the government's decision to deny Gloucester’s coal mine application, referred to the Hague Court of Appeal’s reasoning in Urgenda Foundation v. The State of the Netherlands (“Urgenda”)where the Dutch national court relied on soft law provisions to establish that States have a duty of care to mitigate greenhouse gas emissions.
Whether other national courts will hear arguments based on the decision made in the Milieudefensie et al. case remains to be seen but given that the District Court’s judgment has effectively extended the above-mentioned duty of care principles established in Urgenda to private corporations; and Urgenda has beencited in disputes worldwide including Australia, New Zealand, Ireland, Brazil, Spain and the United Kingdom, this would not be surprising. Care should be taken, therefore particularly by large energy companies that have a global footprint to ensure that their business is both protected, and proactive to ensure any entities connected to it are likewise mindful of the risks of its actions.
Where do we go from here?
Whether governments will choose to revisit commitments made, and revise legislation, policies or procedures to align with the world’s growing climate change commitment remains to be seen, but market whispers suggest that it is an exciting time for investors looking to enter into a new and challenging market, rife with emissions generating projects.
In the meantime, the District Court ruling presents significant risks and practical implications which energy companies, and end-users across the supply and value chain must consider acting upon now before being caught up in the global climate change litigation trend themselves. The ruling creates a precedent of corporate responsibility for businesses to comply with soft law principles, such as the Paris Agreement. Parent companies should consider how these judgments feed through to their corporate structure, and where, in some jurisdictions, they can be held liable for the actions of their overseas subsidiaries.
Although it is a difficult time for businesses to navigate through, there are steps that can be taken to reduce risks, such as undertaking risk assessments and internal audits to identify vulnerabilities, and drafting extensive environmental, social and corporate policies that monitor compliance with climate focused issues. Ensuring climate change is at the forefront of a company’s decision making process should help reduce risk and naturally, legal guidance should always be sought if in doubt.
There is still much to be determined about the future of climate change litigation but one thing is for certain, ignorance here is not bliss.
If you have any questions about the content in this article or would like to discuss further, please do not hesitate to reach out to a member of our Energy team.
This article, written by Stuart McAlpine, was co-authored by Danielle Maidment, Senior Associate, and Waled Salih, Trainee Solicitor.