The Shell case and its potential implications for corporate due diligence

Corporate Sustainabilty Due Diligence

In our fifth blog post on Directive (EU) 2024/1760 relating to corporate sustainability due diligence ("CS3D"), we reflect on the recent Dutch judgment in the "Shell Case" and the duty of care and diligence in relation to the dangers posed to human rights by climate change.

We request the reader to excuse the change to the programming of the topics dealt by in this blog as we originally intended, as anticipated in our last post, to discuss the termination and remediation obligations outlined in the CS3D. However, the interest generated by the publication of the Shell Case judgment by the Court of Appeal just a few days ago has warranted this change of topic.

Access the previous publications in this series of posts here:

Post | The CS3D in perspective

Post | Who does the CS3D affect?

Post | Legal interests protected by the CS3D

Post | Risk-based approach to due diligence

Background: The Shell Case and climate change due diligence

The case known as the "Shell Case" is an example of the extension of corporate due diligence to climate change risks and their adverse effects on human rights. In 2019, environmental organization Milieudefensie—Friends of the Earth Netherlands and other organizations filed a lawsuit requesting the civil judge of The Hague to order Shell to comply with its duty of due diligence to prevent damage associated with its contribution to global warming. 

On May 26, 2021, the District Court of The Hague ruled in favor of the claimant and imposed an obligation on the parent company of the oil group Shell to prevent and mitigate the risks that its emissions pose to human rights. Specifically, it imposed the obligation on the Shell group —directly or through its constituent companies and entities— to reduce by 45 % by 2030 Scope 1, 2 and 3 emissions arising from its operations and along its entire value chain, compared to 2019. The district court in The Hague construed the duty of care established by domestic civil liability rules (Section 162 of Book 6 of the Dutch Civil Code) in the light of the United Nations Guiding Principles on Business and Human Rights ("UNGPs") and the OECD Guidelines as an unwritten social norm in the context of the climate emergency.

The Decision of the Court of Appeal of November 12, 2024: annulment of the decision of the first-instance court

The Dutch Court of Appeal's decision examines Shell's duty to contribute to the prevention of the adverse impacts of climate change and its obligations to reduce Scope 1, 2, and 3 emissions. In relation to Scope 1 and 2 emissions, the court concluded that there is no imminent breach of a legal obligation, as Shell has set reduction targets in excess of the 45% requested by the claimants and has in recent years made satisfactory progress in reducing its Scope 1 and 2 emissions by 31% compared to 2016.

In relation to Scope 3 emissions, the Court concludes that, although Shell may have the obligation to reduce these emissions, it cannot be obliged to reduce them by a standard of 45% (or any other specific percentage), because there is no scientific consensus on a specific percentage for the oil and gas sector. Furthermore, it does not consider that it has been demonstrated that the reduction in Shell's resale activities necessarily leads to a reduction in CO2 emissions. 

What this sentence tells us beyond its ruling

Beyond the ruling in favor of Shell, it would be useful to briefly and nonexhaustively highlight some specific issues contained in the appeal judgment. These issues relate to the role of corporate due diligence in preventing adverse effects on human rights resulting from the risks of climate change:

• The Court of Appeal reaffirms that protection against climate change is a globally recognized human right. It also notes that the protection under articles 2 and 8 of the European Convention on Human Rights (ECHR)  "not only applies to specific individuals but also to society or the population as a whole," especially in contexts of environmental hazards (section 7.7 of the judgment). Therefore, although it is primarily up to legislators and governments to take measures to minimize dangerous climate change,  "companies, including  Shell, may also have a responsibility to take measures to counter the dangerous climate change" (section 7.17).
• This points to the doctrine known as the "indirect horizontal effect of human rights" (section 7.17): the application or influence of human rights or, as the judgment puts it, the values they enshrine, in private disputes between a company and an individual governed by private law, which differs from the classical vertical effect in cases of disputes between the state and a citizen. The corporate duty to respect human rights is particularly relevant for companies whose activities have a significant impact on climate change. This is true even though the responsibility may not strictly derive from the specific regulations of the states in which they operate but rather from open standards of conduct "defined through soft law such as the UNGP and the OECD guidelines" (section 7.55).
• The transition to legal obligations, under EU directives such as CSRD and CS3D, directed at companies to align their business model and strategy with the transition to a sustainable economy and the limiting of global warming to 1.5°C—reinforces this corporate responsibility. However, these standards do not impose absolute reduction obligations, instead they allow companies to choose their own mechanisms and strategies as long as they are consistent with the climate targets of the Paris Agreement (sections 7.56 and 7.63).
• However, the judgment warned, in the form of obiter dicta, that the investment in, and opening of, new lines for extracting and exploiting fossil fuels could be difficult to justify against the standard of conduct required by these European rules (section 7.59). 

Three final reflections  

• The judgment confirms that companies have the freedom to choose how to address the reduction of their emissions as part of a climate transition plan as long as their approach is consistent with the targets set in the Paris Agreement.
• It also reaffirms protection against climate change as a universally recognized human right incumbent on states and their lawmakers, although it also establishes a qualified duty of respect for companies that have contributed or continue to contribute to climate change.
• The CS3D does not expressly include the Paris Agreement within the scope of the due diligence obligation, but opts instead to impose a separate obligation to establish and implement a climate transition plan (article 22). However, it remains to be seen to what extent it will be interpreted that due diligence can also be extended to the most dangerous adverse effects on human rights stemming from contributions to climate change, based on their interrelationship. The progressive implementation of the CSRD, CS3D and other legislation governing decarbonization could signal movement in this direction.

In our next post, we will talk, this time, about the duty to bring to an end and remediate the adverse effects on human rights and the environment beyond financial compensation.