Blog: Friday, 4 June 2021
Wednesday 26 May 2021 will go down in history as ‘Black Wednesday’ for the oil and gas industry, says Professor Cees van Dam from Rotterdam School of Management, Erasmus University (RSM). On that day, Exxon shareholders, including BlackRock and Vanguard, voted to unseat two board members and replace them by candidates put forward by Engine No 1, a tiny activist hedge fund, to take climate change more seriously in its business strategy.
On the same day, 61% of Chevron investors voted in favour of a climate resolution from campaign group Follow This, to force the company to reduce its emissions. At the Shell shareholder meeting a week earlier, 30% of the Shell investors voted in favour of the Follow This resolution, with pension fund ABP abstaining.
Also on 26 May, the District Court in The Hague ordered Royal Dutch Shell to reduce its CO2 emissions by at least 45% at the end of 2030, as compared to 2019 levels. It was a world’s first that a court ordered a major oil company to reduce its CO2 emissions. Nonetheless, this decision seamlessly fits into a trend in which combating climate change is pushed to the top of the strategic agenda of the oil and gas industry, according to Van Dam, professor of international business and human rights. Read his views in this blog.
Investors are keen to put up the pressure because their money is at stake. Board members see the problem too but feel that pushing harder will threaten the profitability of the company (and their bonuses). Governments fail to impose regulations for business because it will deprive them from their short-term political gains. And here the court steps in to protect the rights to life and private life of the people living in the Netherlands.
The court’s decision was based on a key provision in the Dutch Civil Code (art. 6:162). It requires everyone societal actor not to negligently (unlawfully) cause harm to other actors. It is probably the oldest legal rule to regulate societal behaviour. It goes back to Roman times and is known to most legal systems.
The legislator has left the interpretation of this general rule to the courts because it would be impossible for a legislator to make specific rules that would do justice to the variety of cases that courts have to decide. Cases may range from a farmer suffering harm because of a defective disinfectant, a cyclist suffering harm because a pedestrian suddenly crossed the street, to a resident suffering harm because of pollution caused by a company.
If the court concludes that someone has acted negligently (unlawful), the victim is entitled to financial compensation. But, if the behaviour is ongoing, they can also ask the court to order the offender to stop his negligent behaviour. This was what NGO Milieudefensie and other NGOs asked the court: to order Shell to reduce its CO2 emissions, to protect people’s life and health.
The challenge for the court was to find the standard against which Shell’s emissions conduct could be judged. For day-to-day situations the courts have built a body of case law, but the Shell case was a first.
The standard of care is a societal norm, not a moral norm. Courts therefore look at developments in society as to what is acceptable societal behaviour. This exercise is not factual (what does the average company do?) but normative (what do we require a company to do?) And this norm develops with time, depending on factual changes in society and societal opinions.
To get to the standard of care for Shell, the court used a number of building blocks. First, it referred to the United Nations Guiding Principles (UNGPs), that businesses have a responsibility to respect human rights. The court held that the UNGPs are authoritative, widely supported and reflect current insights: the responsibility to respect human rights is a global standard of expected conduct for all business enterprises wherever they operate.
Second, the court referred to the Dutch Supreme Court’s decision in Urgenda, in which it held that the articles 2 and 8 ECHR (the rights to life and private life) protect against climate change (ordering the State to reduce CO2 emissions in the Netherlands with 25% by the end of 2020). This was based on the broad consensus that climate change is directly affecting people’s health and threatening people’s lives.
Third, from the Oxford University Net Zero Network the court concluded that, although there were nuances, it was internationally endorsed that companies bear responsibilities for emissions of the end users (Scope 3).
These three building blocks taken together meant that Shell owed a duty of care to reduce the CO2 emissions of the Shell group and to some extent those of its suppliers and customers in order to respect the rights to health and to life. Such a duty of care is uncontroversial, and Shell’s recent strategies are in line with this.
The key point for the court’s decision was how fast emissions should be reduced. Here, the court referred to the IPCC reduction paths. The IPCC is a scientific and intergovernmental organisation. From its publications, the court derived a widely endorsed consensus that in order to limit global warming to 1.5°C, reduction pathways that reduce CO2 emissions by net 45% in 2030, relative to 2010 levels, and by net 100% in 2050, should be chosen.
The court concluded that Royal Dutch Shell (RDS) is obliged to reduce the Shell group’s CO2 emissions by net 45% at the end of 2030 (relative to 2019). It is up to RDS to choose how to get there, taking account of its current obligations. The reduction obligation is an obligation of result for the Shell group activities, and a significant best-efforts obligation for the activities of its business relations (suppliers and customers). RDS may be expected to take the necessary steps to remove the serious risks ensuing from the CO2 emissions generated by them, and to use its influence to limit any lasting consequences as much as possible.
The case is an example of public interest litigation that has gained popularity over the past decades. On climate change, cases against governments and governmental bodies are soaring, whereas cases against companies have only just taken off. The Shell-case is a first of its kind and is expected to be followed by many more against high emission industries, including steel, shipping and airlines.
Obviously, the court’s decision did not only cause cheers and joy but also raised some eyebrows. One point of criticism was that the court ignored the shareholder meeting as a decision-making body. This remarkable argument overlooks the rule of law, which means that every actor in society is bound by the law, including the company’s shareholders and its board. Art. 6:162 applies to everyone, from citizen to multinational company.
A more fundamental question was: should such a decision be left to the courts or is this a task for the legislator and politics? The starting point is that it is the task of a court to set the standard of care when it is asked to do so. And in controversial and sensitive matters, its decision should be subject to a public debate. If the legislator feels that a court decision is wrong, it may even step in by issuing legislation. The problem is, however, that politicians rather make judges scapegoats than take appropriate action themselves. The courts only step into the vacuum created by the legislator.
In addition, human rights are indispensable instruments in a democratic society to counterbalance the executive and legislative powers. By framing the standard of care as one that protects human rights, the court has given its ruling constitutional value. The legislator would therefore be wise to respect the outcome of the judicial process, as the case will ultimately be decided by the Dutch Supreme Court.
With the verdict in the climate case, RDS suffered its third disastrous legal defeat in less than four months’ time. One in London and two in The Hague. These defeats mark the end of an era in which Shell seemed to be able to get away with its lack of (legal) responsibility. If things went wrong, Shell continuously put the blame on others (residents, subsidiaries, governments), at the same time priding itself in its ‘responsible’ business conduct. The King of Oil could do no wrong.
In the British Shell Nigeria cases, it argued that it had no control over its subsidiaries' operations, that it was a powerless parent, while in fact it exercised strict operational control on a daily and detailed basis.
In the Dutch Shell Nigeria cases, it argued that the oil leakages were caused by sabotage, ignoring the fact that it had contributed to this culture of sabotage by poor maintenance, turning an increasingly polluted area into a fertile ground for criminality (recently it was revealed that Shell staff was actively involved in sabotaging oil pipelines).
In the Dutch climate case, it argued it had to wait for climate legislation by the government, ignoring its own responsibility under art. 6:162 Civil Code.
Whereas companies from many sectors participate in the Dutch Responsible Business Conduct Agreements, the Dutch oil and gas industry, in which Shell is the major player, wrongfully argued that it did not need an agreement because it already adhered to the OECD Guidelines.
These ‘blaming others’-defences were the results of a corporate policy under failing legal and managerial leadership. As recently as December 2020, the company was hit by the departure of several of its clean energy executives amid a split over how far and fast the oil giant should shift towards greener fuels. This failing leadership will now cost the company many times more than if it had taken an active or proactive approach ten years ago and had developed and implemented an adequate human rights and climate policy.
26 May was not only Black Wednesday, it was also the first day of the RSM conference Driving Systems Change. One of the observations discussed was that ‘cherry picking’ practices imply that companies are not yet able to effectively engage in the more transformational part of the UN’s Sustainable Development Goals (SDGs) agenda.
Even the court in The Hague had something to say about this. RDS had argued that it was committed to SDG 7 (Ensure access to affordable, reliable, sustainable and modern energy for all). But the court considered that this SDG does not affect the objectives of the Paris Agreement. This also follows from SDG 13 (Take urgent action to combat climate change and its impacts) and recital 8 of the Paris Agreement, which emphasize the intrinsic link between tackling dangerous climate change, equitable access to sustainable development and eradicating poverty. The court concluded that the SDGs cannot therefore constitute a reason for RDS not to comply with its reduction obligation. It is not either SDG 7 or SDG 13, but both.
Finally, the court’s target for Shell to be reached in 2030 fits neatly into the UN’s Decade of Action to raise awareness that stepping-up the SDG-pact is badly needed. Universities are instrumental for that. Law schools need to train lawyers to support and lead this change, rather than halt or undermine it. And business schools can develop tools to help corporations to get engaged in the SDG agenda and to trigger systemic change in the coming 10 years. The court in The Hague probably couldn’t agree more.
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