Netherlands' Shell judgment does not spell end of reduction obligations for undertakings

The Dutch Court of Appeal in The Hague recently delivered a landmark judgment in the case against oil giant Shell brought by six non-governmental organisations. The plaintiffs argued that Shell is insufficiently acting to prevent dangerous climate change in line with the Paris Agreement and demanded that Shell would implement a company policy to reduce its emissions.

In 2021, Shell became the first private company to be held responsible for complying with climate obligations and reducing its emissions. The District Court in The Hague in first instance ruled in 2021 that Shell had to reduce its CO₂ emissions by 45% by 2030 compared to 2019 (in line with the Paris Agreement).

Shell appealed this judgment. On 12 November 2024, the Court of Appeal refrained from imposing a specific reduction obligation to Shell.

Court of Appeal findings

In its considerations, the Court of Appeal addressed the Urgenda climate case  of 2019, the recent judgment Verein Klimaseniorinnen Schweiz v Switzerland, other foreign case law on human rights and climate change, and resolutions and reports by bodies of the United Nations.

The Court of Appeal concluded that "there can be no doubt that protection from dangerous climate change is a human right". Although these human rights are in principle directed at the government, these human rights can give substance to the social standard of due care.

The Court of Appeal continued to consider that – without legislation that sets an absolute reduction rate for CO₂ emissions – the more general obligations are insufficient to order Shell to reduce its emissions by 45%.

In addition, the Court of Appeal considered that the claimants in this case have insufficient interest in the reduction targets they would like to impose on Shell – and the claimants failed to prove that downsizing the resale activities of Shell will actually lead to reduced CO₂ emissions.

Legislative climate obligations

The judgment of the Court of Appeal does not exempt undertakings from reduction obligations or having to mitigate their climate impact. The European Union and national legislation still imposes numerous obligations on undertakings in the context of environmental, social and governance (ESG) and environmental compliance.

For example, the so-called "European Green Deal" and the "Fit for 55" package have resulted in the creation of a considerable amount of new climate legislation within the EU in recent years and the tightening up of existing legislation.

These have included the EU Emissions Trading System (ETS) and the subsequent EU ETS2, the Carbon Border Adjustment Mechanism (CBAM), the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D).

EU emissions trading system

The EU ETS imposes a price on carbon emissions. Operators of polluting installations – including Shell – are granted tradable emission allowances and may emit CO₂ against the surrender of these allowances.

As the emissions cap is continuously reduced by a linear reduction factor, CO2 emissions have already fallen significantly: a decrease of over 37% of emissions covered by EU ETS has been achieved. In the context of Fit for 55 and with a view to meet the European greenhouse gas emission reduction targets, the EU ETS system was adjusted further in 2023. The current target is to achieve a 62% reduction in greenhouse gas emissions within the EU ETS system by 2030 relative to 2005.

CBAM and more

To prevent carbon leakage to third countries, the EU has also implemented a new levy, known as the CBAM, which was introduced in October 2023. The second emissions trading system – the EU ETS2 – was also introduced in 2023, applying to fuels supplied to the built environment, road transport and some other sectors such as small industries.

Under the CSRD, which entered into force in January 2023, larger undertakings will have to prepare a sustainability report as part of their annual report from fiscal year 2024. These undertakings must include in their annual report information needed to understand their impact on sustainability issues, as well as information needed to understand how sustainability issues affect their development, performance and position.

And, under the CS3D initiative, larger undertakings will have to adopt and implement a climate transition plan that ensures their business model and strategy are compatible with the goal of limiting global warming to 1.5°C, in line with the Paris Agreement. In addition, business model and strategy should be compatible with the EU’s goal of achieving climate neutrality by 2050.

Osborne Clarke comment

The judgment in the recent Shell case may be seen as a boost for undertakings that fear overly stringent reduction targets imposed by judges. Nevertheless, the ruling may prove to be a pyrrhic victory.

Firstly, the judgment does not detract from the various obligations imposed on undertakings in the context of ESG and environmental compliance. Moreover, the Court of Appeal has confirmed the principle of potential liability for climate damage by undertakings.

The judgment is only one ruling that remains open to appeal; ultimately, by 12 February 2025. At the same time, legal cases are also ongoing in other countries, where the judge in question may reach a different conclusion than the Dutch judge and could, therefore, still rule that an undertaking is liable for climate damages. Examples of cases against individual undertakings for climate damages are ongoing in Belgium, Germany and France

It will, therefore, remain important for undertakings to continue navigating carefully in an ever changing regulatory landscape. In the end, we all have a responsibility to take measures to counter climate change.