Climate change: Shell acquitted, but emissions must be reduced

The AIA Court of Appeal decision of 12 November 2024 overturned the District Court's first ruling of 26 May 2021, which had ordered  Royal Dutch Shell to reduce carbon dioxide emissions by 45% from both its own business operations and the use of its products (GHG Protocol scope 1 & 2 emissions and scope 3 emissions) by 2030 compared to 2019 emissions.

The ruling is based on non-contractual liability (Art. 162 of Book VI of the Dutch Civil Code) and in particular on a violation of the principle of ‘socially correct behaviour’, which can be deduced from the principles of international law for the protection of human rights (UNGP, ECHR, ICCPR, as well as the Paris Agreement).

The Court of Appeal partly confirmed the principles already upheld at first instance:

1. protection against the effects of climate change is a part of human rights, protection  is the responsibility of states, but would also be the responsibility of companies;
2. in particular, companies have a duty to behave in a socially correct manner (social standard of care): companies like Shell, contribute significantly to the climate issue and have an obligation to limit CO2 emissions   to mitigate their harmful effects, even in the absence of specific legal territorial provisions of the country wherein the company operates.

For the rest, the AIA Court of Appeal held differently from the District Court, concluding that:

1. neither the principle of ‘good social behaviour’ in Dutch domestic law, nor European legislation provides for an absolute obligation to reduce emissions to the percentage of 45% ,or any other percentage;
2. more specifically, with regard to scope 1 and 2 emissions, no evidence has been cited that the actions taken by Shell to reduce emissions are in fact insufficient and likely to result in a breach of legal obligations;
3. With regard to scope 3 emissions, in the absence of regulatory provisions on sound emission reduction percentages applicable to companies, and despite the general consensus of the scientific community on a 45% reduction measure for 2030, compared to the year 2019, such percentage may not be applied indiscriminately to any country and any type of company, and in particular  Shell; nor is it possible to ascertain the actual effectiveness  of an obligation on Shell to reduce its scope 3 emissions by 45%.

The ruling of the Dutch appeal judges reflects   a number of profiles in the area of corporate liability towards third parties and directors responsible for  companies and shareholders and any   breach of due diligence obligations. It comes to the fore when an energy transition strategy consistent with the Paris Agreement is not implemented and their actions and decisions are not suitable to promote the sustainable success of the company in the interest of all stakeholders and for the maintenance of high reputational standards.

Hand in glove are the consequent and crucial implications regarding the discretionary power of directors to decide on the corporate interest, as well as the scope of judicial review of the consistency of companies' business plans with climate change mitigation requirements.This  is particularly the case here, where there are no violations of specific legal provisions and yet there is a general obligation to lead sustainable management of companies - in particular those obliged to non-financial reporting - an obligation that could be derived, inter alia, from Legislative Decree No. 254/216 and the Taxonomy Regulation, as well as, for Italy, from constitutional principles, along  with soft law disciplines (in particular the Corporate Governance Code).

Even beyond..

The prospects for development in this field and investigation appear destined to be expanded further  when it comes to companies that have ‘only’ adopted values and goals in their strategic plans or have merely incorporated such into their corporate purpose.

Alongside breaking new ground  in business judgement rules, perhaps bounding towards a possible sustainability judgement rule?

Bylined article originally published by Dirittobancario.it