In
Milieudefensie et al. v Royal Dutch Shell plc.1, the Hague Court of Appeal on 12 November 2024 allowed an appeal by Royal Dutch Shell plc (“
Shell”) against an order made in 2021 by the Hague District Court
2 that required Shell to reduce its greenhouse gas emissions across its global operations by 45% by the end of 2030 relative to 2019 levels. The Court of Appeal held that while Shell has an obligation to counter dangerous climate change, the civil court cannot mandate a specific reduction of 45% or any other percentage of CO2 emissions.
Proceedings in the Hague District Court
The environmental group Vereniging Milieudefensie (Friends of the Earth Netherlands) and several other co-plaintiffs
3 (collectively “
Milieudefensie et al.”), had alleged that Shell’s contribution to climate change violated its duty of care under Dutch law and human rights obligations. Milieudefensie et al. had sought, among others, an order that Shell, both directly and through the companies and legal entities with which it jointly forms the Shell Group
4, limit or cause to be limited the aggregate annual volume of all CO2 emissions into the atmosphere (Scope 1, 2 and 3
5) associated with the business activities and sold energy-carrying products of the Shell Group to such an extent that this volume at year-end 2030,
principally: will have reduced by at least 45%, or at least net 45%, relative to the 2019 level;
alternatively: will have reduced by at least 35%, or at least net 35%, relative to the 2019 level;
further in the alternative: will have reduced by at least 25%, or at least net 25%, relative to the 2019 level.
The Hague District Court ordered Shell, both directly and through the companies and legal entities with which it jointly forms the Shell Group, to limit or cause to be limited the aggregate annual volume of all CO2 emissions into the atmosphere (Scope 1, 2 and 3) associated with the business activities and sold energy-carrying products of the Shell Group to such an extent that this volume will have reduced by at least net 45% at year-end 2030, relative to the 2019 level.
The Hague District Court came to its decision based on the unwritten social standard of care laid down in Article 6:162 of the Dutch Civil Code as further informed by Article 2 European Convention for the Protection of Human Rights and Fundamental Freedoms (“
ECHR”) and Article 6 of the International Convention on Civil and Political Rights (“
ICCPR”) which guarantee rights to life; and Article 8 of the ECHR and Article 17 of the ICCPR which provide for the right to respect for private and family life, and the values enshrined therein. In addition, based on the UN Guiding Principles on Business and Human Rights (“
UNGP”), the responsibility for companies to respect human rights is a global standard of behaviour to which all companies are expected to adhere, wherever they operate.
Notably, it was provided that a great deal can be expected of Shell in relation to its responsibility to refrain from infringing on the human rights of others and to address negative impacts on human rights in which it plays a part. Furthermore, due to Shell’s far-reaching control over the Shell Group, Shell’s reduction obligation is an obligation of results for emissions associated with the Shell Group’s own activities (Scope 1). In relation to business relations (including end-users) of the Shell Group, the Shell Group has a significant best-efforts obligation to minimise CO2 emissions it generates. Shell was said to have control and influence over its suppliers’ Scope 2 emissions through its procurement policy. Through the energy package it produces and sells, Shell has control and influence over the Shell Group’s Scope 3 emissions released by end-users, even though it will have to take into account existing commitments. With due observance of its existing commitments, Shell is free to decide not to make new investments in exploration and fossil fuels, and to change the energy package offered by the Shell Group. Moreover, as activities of the Shell Group are covered by the EU’s Emissions Trading System
6 (“
ETS”) for Scope 1 emissions and the ETS has an indemnifying effect up to the reduction percentage it seeks to achieve, Shell does not have an additional obligation with respect to Scope 1 and 2 emissions in the EU that fall under the ETS and Scope 3 emissions of end-users in the EU.
The claims on appeal
Shell submitted ten grounds for appeal, requesting the Court of Appeal to overturn the Hague District Court’s decision and issue a provisionally enforceable ruling declaring that Milieudefensie et al. have no cause of action. Alternatively, Shell sought the dismissal of Milieudefensie et al.'s claims and an order for them to cover the legal costs of the proceedings at both trial and appellate levels, including subsequent costs and statutory interest.
Milieudefensie et al. argued that Shell violates generally accepted standards of unwritten law, as outlined in Article 6:162(2) of the Dutch Civil Code, if it fails to reduce its CO2 emissions by 45% (or at least 35% or 25%) by 2030 relative to 2019 levels. The central issue here is thus whether this general unwritten social standard of care imposes a legal obligation on Shell to achieve a specific percentage reduction in its emissions.
Climate Change and Human Rights
Milieudefensie et al. relied on Articles 2 and 8 of the ECHR where the former protects the right to life and the latter protects the right to respect for private and family life.
The Court of Appeal considered the
Urgenda judgement
7; the judgement of
Verein Klimaseniorinnen Schweiz v Switzerland8; case law outside of Europe which recognises the use of human rights to address climate change impacts
9; and reports and resolutions of the United Nations in which protection from dangerous climate change is identified as a human right
10 before concluding that
there can be no doubt that protection from dangerous climate change is a human right. The Court further held that states have an obligation to safeguard their citizens from adverse effects of dangerous climate change, with the primary responsibility resting on legislators and governments to implement measures to minimise it. However, companies like Shell may also bear a responsibility to act against dangerous climate change, particularly under the doctrine of the indirect horizontal effect of human rights, which extends certain human rights obligations to private entities.
Indirect horizontal effect of human rights
It is to be noted that generally, in Dutch law, fundamental rights have a vertical effect, i.e. they apply in the citizen-government relationship, and not a horizontal effect, which would extend their application to relationships between citizens and private companies. Be that as it may, courts may, due to their importance to society, consider fundamental rights or the values embodied in them when applying general private law principles, such as determining what constitutes proper social conduct under unwritten law, i.e. the indirect horizontal effect of fundamental rights.
The Court of Appeal considered the UNGP and the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (“
OECD Guidelines”), both of which are non-binding but had been endorsed by Shell, as well as a number of other soft law instruments such as the United Nations Global Compact. The Court concluded that while human rights (treaty) provisions are primarily directed at governments, they can influence private law relationships by giving substance to open standards, such as the social standard of care.
In this regard, the Court of Appeal determined that companies like Shell, which play a significant role in contributing to the climate problem and possess the capacity to help address it, have an obligation to limit CO2 emissions to combat dangerous climate change, even if this obligation is not explicitly laid down in (public law) regulations of the countries in which the company operate. Companies like Shell thus have their own responsibility in achieving the targets of the Paris Agreement.
Climate legislation of the European Union
The Court of Appeal also considered the extent to which a reduction obligation, as described by Milieudefensie et al., is in line with the European Union’s climate legislation. The Court noted that as a result of the European Green Deal and Fit for 55, a considerable amount of new climate change legislation within the European Union have been created and transposed, to the extent necessary, into Dutch climate legislation.
A key question was whether existing climate legislation exhaustively regulates corporate obligations to combat climate change, leaving no room for the civil court to impose additional duties for Shell to (further) reduce its CO2 emissions based on the social standard of care.
The Court of Appeal examined, among others, the EU ETS Directive, the EU ETS2 Directive, the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) and concluded that while Shell has reporting obligations pertaining to its (European) greenhouse gas emissions and must prepare a climate transition plan that is consistent with the European Union's climate objectives and includes absolute reduction targets “where appropriate”, the climate change legislation aforementioned is not based on the starting point that each individual company is subject to an absolute reduction rate set by the European Union.
In response to Shell’s contention that decisions on reducing CO2 emissions fall within the domain of the legislator and not the civil court, the Court of Appeal said that the measures taken by the legislator to reduce CO2 emissions are not exhaustive in and of themselves, and obligations arising from existing regulations to combat climate change do not preclude a duty of care based on the social standard of care on the part of individual companies to reduce their CO2 emissions.
The Court of Appeal further stated as follows:
“
That said, this existing legislation does affect Shell’s obligations under the unwritten social standard of care. For instance, it must be assumed that the fulfilment of the said duty of care takes into account obligations that companies have under that existing legislation. The district court sought to do so in respect of the EU ETS. The EU ETS2 should also be taken into account in the interpretation of a social standard of care.”
Interim review
It is clear that protection from dangerous climate change is a human right and that it is globally recognised that a state has an obligation to do its part to protect its citizens from the adverse effects of dangerous climate change. In private law relationships, human rights, including protection from dangerous climate change, can have an effect via open standards such as the social standard of care. These standards can be further defined by soft law instruments like the UNGP and the OECD Guidelines, with the content and scope varying between countries, depending on a company’s contribution to climate change and its capacity to counter climate change.
The instruments reviewed made it clear that the social standard of care implies that companies also have an obligation to contribute to the mitigation of dangerous climate change. European companies, including Shell, are subject to EU law measures. The EU legislator aims to reduce CO2 emissions within Europe by 55% by 2030 through a set of measures. These measures target both Member States and companies. However,
these measures do not impose absolute reduction targets on individual companies or industries. Shell therefore does not have an absolute reduction obligation of 45% (or any other percentage) under EU law and will not have such an obligation for the foreseeable future. In fact, the European Union incentivises large companies such as Shell to reduce emissions through price incentives. Beyond that, the companies are free to choose their own approach to reducing their emissions in the – mandatory – climate transition plan as long as it is consistent with the Paris Agreement’s climate targets.
Shell’s obligations relating to its Scope 1, 2 and 3 emissions
The Court of Appeal considered that granting an order to prevent a future violation of standards requires the existence of a threatening violation of a legal obligation. Milieudefensie et al. argued that Shell faces this risk because it may fail to reduce its emissions by at least 45% by 2030 compared to 2019 levels. Shell countered by noting its commitment to a 50% reduction by 2030 relative to 2016, a target surpassing Milieudefensie et al.'s demand. While Milieudefensie et al. claimed that Shell's history of policy changes made the target unreliable and that the target offers no guarantee of further or permanent emission reduction, the Court of Appeal considered the fact that Shell has committed to this target in its business plan and in documents filed with the Securities and Exchange Commission, in addition to outlining how it will achieve this target in its Energy Transition Progress Report 2024. Furthermore, Shell has already largely achieved this target: by the end of 2023, Shell had reduced its Scope 1 and 2 emissions by 31% compared to 2016. The Court of Appeal went on to conclude that with regard to Scope 1 and 2, an impending violation of a legal obligation had therefore not been established. Thus, to that extent, the claim of Milieudefensie et al. cannot be granted.
In relation to Scope 3 emissions, the following were considered by the Court of Appeal: (a) whether Shell can be held to the consensus existing within climate science on a 45% reduction standard (or any other percentage); (b) whether a sectoral standard for oil and gas can be established on the basis of scientific consensus; and (c) the examination of Shell’s defence that a Scope 3 reduction order will not have the effect desired by Milieudefensie et al.
| (a) |
Whether Shell can be held to the consensus existing within climate science on a 45% reduction standard (or any other percentage). |
Milieudefensie et al. essentially is seeking an order that Shell reduces its CO2 emissions to such an extent that by the end of 2030 they will have been reduced by 45%, or at least by a net 45%, relative to 2019. In the alternative, Milieudefensie et al. claimed that Shell’s CO2 emissions will have been reduced by 35% and 25% by the end of 2030 relying on, among others, IPCC reports, EIA reports, the report “Best practices in Scope 3 greenhouse gas management” of the “Science Based Targets initiative” and the Race to Zero initiative for the percentages.
The Court acknowledged a global scientific consensus that reduction pathways must be chosen where CO2 emissions must be reduced by a net 45% by 2030 and 100% by 2050 to limit global warming to 1.5°C. However, it clarified that these reduction pathways involve a global reduction which amounts to a net 45%, requiring varying contributions across sectors and countries. Shell’s Scope 3 emissions span multiple sectors, such as transport and buildings, where alternatives to fossil fuels are more difficult to realise and where that process takes longer, account for a significant proportion of Shell’s Scope 3 emissions. Thus, applying a general percentage for the reduction of Shell’s Scope 3 emissions therefore ignores the different reduction pathways for the individual sectors that belong to Shell’s customer base.
The Court of Appeal recognised that as a major oil company, Shell has a special responsibility. Companies, and thus Shell too, must make an appropriate contribution to preventing dangerous climate change.
Milieudefensie et al. contended that Shell is a major player in the oil and gas market and can therefore be expected to make a special effort. The Court had included the fact that Shell is a major player in its decision that there is a legal obligation for Shell to reduce its emissions. However, given that there are different reduction pathways for different sectors in different countries, Shell thus cannot be held to the average global reduction rate, and the standard is too general to infer that Shell has a 45% reduction obligation.
In short, Shell cannot be bound by a 45% reduction standard (or any other percentage) agreed by climate science because this percentage does not apply to every country and every business sector individually.
| (b) |
Whether a sectoral standard for oil and gas can be established on the basis of scientific consensus. |
While parties have referred to reports that address the question of what reductions in oil and gas are necessary to meet the goals of the Paris Agreement (such as the 2021 IEA report “Net Zero by 2050, A roadmap for the Global Energy Sector” and its 2023 update; UNEP’s Production Gap Report 2021; International Institute for Sustainable Development’s June 2022 report “Lighting the path: what IPCC energy pathways tell us about Paris-aligned policies and investments”, where some of the reports are based on models known as integrated assessment models (“
IAMs”)) and based on comments of experts on the value of the IAMs for establishing a sectoral reduction obligation, the Court of Appeal answered in the negative the question whether a sectoral standard for oil and gas can be established on the basis of scientific consensus.
The Court was of the opinion that no sufficiently unequivocal conclusion can be drawn from all the sources referred to regarding the required reduction in emissions from the combustion of oil and gas on which to base an order by the civil courts against a specific company. This entails that based on the available climate science, it cannot be said that a 45% reduction obligation (or any other percentage) applies to Shell in respect of Scope 3 emissions. The available figures do not provide the Court with sufficient support to oblige Shell to reduce its CO2 emissions by a certain percentage in 2030, as claimed by Milieudefensie et al. Thus, the claims of Milieudefensie et al. regarding Scope 3 were dismissed.
| (c) |
Examination of Shell’s defence that a Scope 3 reduction order will not have the effect desired by Milieudefensie et al. |
Shell argued, on the one hand, that it has only a limited influence on the factors on the demand side. On the other hand, on the supply side, a reduction in Shell’s fossil fuel sales will result in those fossil fuels being sold by another supplier, according to Shell, and thus, would not lead to a reduction in total CO2 emissions.
The Court of Appeal observed that while Shell can meet the obligation to reduce its Scope 3 emissions by a certain percentage by limiting the resale of fossil fuels purchased by Shell from third parties, it has not been established that downsizing the resale activities of Shell Trading will lead to a reduction of CO2 emissions. Thus, it could not be established that an obligation on Shell to reduce its Scope 3 emissions by a certain percentage is effective, so that, at any rate, Milieudefensie et al. have no interest in their Scope 3 claim.
Conclusion
Following the above findings, the Court of Appeal allowed Shell’s appeal against the Hague District Court’s judgment and dismissed the claims of Milieudefensie et al. The Court further order Milieudefensie et al. to bear the costs of the appeal proceedings.
The Significance of the Court of Appeal’s Decision
The Court of Appeal decision is significant as it provides that under Dutch law, companies have the obligation (and in the case of Shell a special duty) to make an appropriate contribution to the mitigation of dangerous climate change. Furthermore, companies are to comply with the social standard of care by making an appropriate contribution to achieve the emissions reduction goals under the Paris Agreement. However the Court held that under EU law, companies in the EU do not have an absolute reduction target of 45% (or other percentage) in the present and the foreseeable future, and are free to choose their own approach to reducing their emissions as long as it is consistent with the Paris Agreement’s climate targets.
While this decision by the Court of Appeal of the Hague is not binding on Malaysian Courts, the Malaysian Courts may take a similar approach in finding that companies in Malaysia have a “social standard of care” to reduce emissions to mitigate dangerous climate change – an occurrence that is rapidly taking place worldwide and requires the collective effort of all stakeholders – especially corporate players in the energy sector - to successfully tackle the ever-growing issue.
In Malaysia, as of the point of writing, there has yet to be any federal law on climate change. From the Consultation Paper on the proposed Climate Change Bill issued by the Ministry of Natural Resources and Environmental Sustainability on 4 October 2024
11, the incoming Climate Change Bill will encompass provisions on setting the National Targets for Greenhouse Gas Emissions Reduction, establishment and regulation of emission reductions mechanisms, reporting obligations of entities to the Regulatory Entity
12 on greenhouse gas emissions (including facilities (as applicable)), and offences and penalties.
Furthermore, Malaysia is set to implement the National Sustainability Reporting Framework
13 (“
NSRF”) which addresses the use of IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board, where the baseline sustainability disclosure standards applied will be IFRS S1 (
General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (
Climate-related Disclosures). The NSRF will be implemented in phases starting from 1 January 2025 for main market listed issuers with market capitalisation of RM 2 billion and above (Group 1), while implementation of the NSRF for main market listed issuers (other than listed issuers in Group 1) (Group 2); and for ACE Market listed issuers and non-listed companies with annual revenue of RM 2 billion and above (Group 3) is set to start from 1 January of 2026 and 2027 respectively.
Case Note by To’ Puan Janet Looi (Partner) and Siti Ayenaa Binti Mohd Anis (Associate) of the Corporate Practice of Skrine.