Netherlands Court of Appeal Milieudefensie v. Shell Decision to have Far-reaching Implications

On November 12, the Court of Appeal in The Hague rendered a landmark judgment in the climate case of Milieudefensie et al. v. Shell, which has garnered worldwide attention given its broader implications for corporate responsibility in addressing climate change. The following article delves into the key elements of the court's decision structured around the seven pillars that guided the judgment and explores the ruling's potential implications. 

1. Climate change and human rights: The court began by affirming that protection against climate change is a fundamental human right. This principle is rooted in Articles 2 and 8 of the European Convention on Human Rights (ECHR), which protects the right to life and the right to respect for private and family life, respectively. The court referred to the Urgenda judgment and other international case-law to underscore that states have a positive obligation to protect their citizens from the adverse effects of climate change. This obligation extends to companies like Shell, which have a significant impact on global emissions.
    
2. Indirect horizontal effect of human rights: The court discussed the indirect horizontal effect of human rights, which allows fundamental rights to influence civil law relationships. This means that companies must consider human rights when conducting their business. The court highlighted the UN Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises, both of which Shell has endorsed. These guidelines emphasize that companies should not infringe on human rights and must address the adverse impact of their practices.
    
3. EU climate legislation: The court examined existing EU climate legislation, including the EU Emissions Trading System (EU ETS), the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD). These regulations impose various obligations on companies to reduce their greenhouse gas emissions and align their business models with the goals of the Paris Agreement. The court noted, however, that these regulations do not impose specific reduction targets on individual companies, leaving room for interpretation and additional obligations under the social standard of care.
    
4. Interim review: In its interim review, the court concluded that while European regulations incentivize companies to reduce emissions, they do not exhaustively define the obligations of companies like Shell. The court emphasized that companies have a social duty of care to reduce their emissions beyond what is mandated by existing regulations. This duty of care is informed by the significant role that companies like Shell play in contributing to climate change and their capacity to mitigate its effects.
    
5. New investments in oil and gas: One of the most critical aspects of the court's judgment was its consideration of Shell's planned investments in new oil and gas fields. The court acknowledged that such investments could be at odds with the goals of the Paris Agreement, which aims to limit global warming to well below 2°C. The court referenced reports from the United Nations Environment Programme (UNEP) and the International Energy Agency (IEA), which suggest that large-scale investments in new fossil fuel infrastructure are incompatible with achieving net-zero emissions by 2050. The court, however, did not rule on this issue because it was not part of the specific claims brought by Milieudefensie et al.
    
6. Shell's obligations regarding Scope 1 and 2 emissions: The court found that Shell's current targets for reducing its direct (scope 1) and indirect (scope 2) emissions are aligned with climate objectives. Shell has committed to reducing these emissions by 50% by 2030 relative to 2016 levels, which exceeds the 45% reduction target sought by Milieudefensie et al. As a result, the court concluded that there was no impending violation of a legal obligation regarding scope 1 and 2 emissions.
    
7. Shell's obligations regarding Scope 3 emissions: Scope 3 emissions, which account for approximately 90% of Shell's total emissions, were a central focus of the court's judgment. These emissions result from the use of Shell's products by end-users. The court acknowledged that companies have a responsibility to reduce their scope 3 emissions, but it found that the 45% reduction target proposed by Milieudefensie et al. was too generic. The court noted that there is no scientific or political consensus on a specific reduction percentage for the energy sector, and it questioned the effectiveness of such a target given the potential for other companies to fill the gap left by Shell.

Implications for the future

The Court of Appeal's ruling in Milieudefensie v. Shell sets a precedent for corporate responsibility in addressing climate change. While the court did not impose specific reduction targets on Shell, it affirmed that companies have a duty of care to align their business models with the goals of the Paris Agreement. This ruling underscores the importance of integrating climate considerations into corporate strategies and highlights the potential legal risks for companies that fail to do so.

Moreover, the court's acknowledgment that new investments in fossil fuels may be incompatible with climate objectives signals a shift towards greater scrutiny of corporate actions that contribute to climate change. Companies should be prepared for increased regulatory and legal pressures to reduce their emissions and transition to sustainable business practices.

In conclusion, the Court of Appeal's decision in Milieudefensie v. Shell is a landmark ruling that reinforces the legal obligations of companies to mitigate climate change. It serves as a reminder that businesses must take proactive steps to reduce their greenhouse gas emissions and align their operations with global climate goals. As new legislation such as the CSRD and CSDDD comes into effect, the expectations and requirements for corporate climate action will only intensify, making it imperative for companies to stay ahead of the curve. In this respect, it is important to note that the CSDDD introduces a statutory obligation for large companies to develop and implement a comprehensive transition plan for climate change mitigation. Therefore, large companies will face an enforceable obligation under the CSDDD to adopt and put into effect a credible emission-reduction strategy.

Guidance for companies

Companies should use this judgment as guidance to review their internal policies and align these policies with their corporate duties. 

For further assistance on ESG and risk management, contact your CMS client partner or these CMS experts.