As one of the largest fossil fuel giants, it is unsurprising that Shell has been the defendant in several of the landmark climate change lawsuits of recent years. High-profile actions have been attempted in several jurisdictions, with ClientEarth notably failing to gain permission to proceed with a derivative claim for breach of directors’ duties in England and Wales.

In Milieudefensie et al. vs Royal Dutch Shell plc, the Hague Court of Appeal in the Netherlands has overturned a landmark order imposing an obligation on the Shell group to reduce its own, third-party suppliers and end-users carbon dioxide emissions by 45% by 2030 relative to 2019 levels (the “absolute reduction obligation”).

In this article, partner Elaina Bailes and paralegal Jenny Leppard discuss what the judgment may mean for future climate litigation against corporates and considerations for directors in discharging their directors’ duties when making climate policies.

Climate change litigation against corporates: an uphill struggle

Climate change litigation is often targeted at two main groups of defendants:

1. governments, with a view to changing climate policies at an (inter)national level and
2. corporates, especially “big polluters”, ie companies in high emissions industries such as oil and gas, with a view to influencing their corporate environmental policies to reduce emissions.

The difficulty from a legal perspective with claims that try to direct such corporate policies is that they engage with company law principles of law and regulation. Although these regimes are different in every jurisdiction, high importance is generally placed on the directors’ discretion to make decisions and act in the company’s best interests. Claimants have, therefore, had limited success in asking courts to interfere with board decisions on climate policy where there are good commercial reasons for a board to approve a policy that has negative environmental consequences.

The main recent exception to this trend was the 2021 ruling by the District Court of the Hague in the case Milieudefensie et al. vs Royal Dutch Shell plc. The first instance decision was seen as a significant victory for climate activists as it extended the duty of care under Dutch law previously imposed on governments in relation to climate change to private companies. It was the first time a court had made such a ruling on a company’s climate strategy.

So-called “corporate framework” cases have increased in popularity, and according to Grantham Institute research, there are more than 20 such cases on foot around the world. Since then, there has been mixed success across the globe for claimants bringing similar claims. In early 2024, the New Zealand Supreme Court accepted in the case of Smith v Fonterra that there could, at least in principle, be a novel climate-related duty of care under New Zealand tort law that requires companies to rapidly reduce emissions. In contrast, the English Court in Client Earth v Shell in 2023 rejected the claimant’s attempt to bring a claim that the directors were in breach of their duties to act to promote the success of the company for the benefit of all shareholders.

What are the key takeaways from the Milieudefensie v Shell decision?

A right to protection from the effects of climate change and a duty of care to mitigate the effects of climate change by reducing carbon dioxide emissions

The court of appeal confirmed that a right to protection from climate change is contained in Article 2 (a right to life) and Article 8 (a right to respect for private and family life) of the European Convention of Human Rights. Although it is primarily up to governments to take measures to minimise climate change, companies may also have a responsibility to do so through the indirect horizontal effect of human rights, which impact private law relationships by “giving substance to open standards, such as the social standard of care”.

The court of appeal affirmed the lower court’s findings that an unwritten social standard of care is laid down in Dutch law comprising human rights and legally non-binding regulations and guidelines. This imposes on companies an obligation to mitigate the effects of climate change by reducing their carbon emissions. When determining whether Shell had breached this social standard of care, the court considered the severity of the threat of climate change and Shell’s contribution to its creation, as well as Shell’s capacity to combat climate change.

Due to Shell’s longstanding and prominent position in the fossil fuel market, the court found that it has a “special responsibility” in mitigating the effects of climate change.

There is no requirement to reduce emissions by a set percentage

Existing EU climate legislation, including the EU Emissions Trading Systems, Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, impose various measures and obligations to mitigate climate change, including emissions caps and reporting obligations. However, they do not subject individual companies to an absolute reduction obligation. Therefore, the court found that under EU law, Shell is not required to reduce its emissions by a set percentage and will not be required to do so for the foreseeable future. The court of appeal found that companies are free to choose their own approach to reducing emissions as long as it is in line with the legally binding Paris Agreement’s climate targets.

Furthermore, the court found that a general scientific consensus of an average global reduction standard of 45% could not impose a general binding standard on Shell to reduce emissions by 45%. Such a standard does not consider the particularities of different countries and sectors for which there are differing needs and capabilities to reduce carbon emissions.

A social standard of care requiring measures to reduce demand and limit supply for fossil fuels

The court also identified that the social standard of care requires producers of fossil fuels to take measures to reduce the demand for and limit the supply of fossil fuels. The court said it is reasonable to expect oil and gas companies to take into account the negative consequences of the energy transition when investing in new oil and gas fields, as these investments will expand the supply of fossil fuels. The court noted that Shell’s planned investment in new oil and gas fields may be at odds with this obligation. However, this was not an issue the court was required to review in order to answer whether an absolute reduction obligation could be imposed on Shell.

What does the decision mean for the future of activist climate litigation and for boards?

On the one hand, the decision limits how activists can use the courts to impose and influence corporate climate strategies and policies, with the court confirming it is up to the company how it mitigates the effect of climate change. It is clear, therefore, that there is still wide scope of discretion in board decision-making: ultimately, the board is there to run a company and promote its success.

However, the confirmation of a duty of care under Dutch law for companies to mitigate the effects of climate change and reduce their carbon dioxide emissions is significant for any company operating within Europe. It further confirms the judicial standpoint that under EU law, protection from climate change is a human right that could be imposed on private companies through an unwritten social standard, ie going beyond what is prescribed by current climate laws. This contrasts quite heavily with the approach taken by English courts, where claimants have tried to use existing legal duties to argue that they extend to climate considerations (such as in the Client Earth v Shell case). The decision is of particular note for companies in high-emission industries that may need to consider their special responsibilities.

It is clear that in decision-making processes, directors should think about the potential environmental impact of their policies to avoid litigation risk down the line.