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Two Steps Forward

Shell and the new era of climate risk

Climate risk scale

GreenBiz photocollage

Over the past few years, the term "climate risk" has risen to the fore, taking up residency inside the world's biggest banks and investors. Today, it is part of many companies’ toolkit as they seek to understand the impacts of climate change on their business and society.

The United Nations Framework Convention on Climate Change — the folks who organize the annual COP events — defines “climate-related risks” as those:

…created by a range of hazards. Some are slow in their onset (such as changes in temperature and precipitation leading to droughts, or agricultural losses), while others happen more suddenly (such as tropical storms and floods).

It’s time to update that definition to include sudden, dramatic swings among judges and juries.

That's one takeaway from the landmark ruling last week by a three-judge panel in the Netherlands ordering Royal Dutch Shell to reduce its greenhouse gas emissions by 45 percent compared to 2019 levels by the end of 2030. It’s a goal that moves the oil company further, faster than it previously had deemed prudent or possible.

The implications of this court-ordered corporate climate goal go well beyond the energy sector. As Scientific American noted: "For the first time in history, a court … ordered a private company, rather than a government, to curb its planet-warming pollution."

The landmark decision suggests that the fate of the world’s largest polluters no longer may be in the hands of their executives, board or investors. Rather, it may be in the hands of activists, litigants and their judicial allies.

At one level, the Dutch court decision was just another body blow to Big Oil. And while last week’s shareholder actions against ExxonMobil and Chevron received much of the attention — and celebration by climate activists — the Shell case could carry far more weight. At minimum, it serves as a five-alarm warning to companies both inside and outside the fossil-fuel industry that their net-zero-by-mid-century decarbonization commitments simply may not be enough.

To recap: Shell had been sued by seven environmental groups, including Greenpeace and Friends of the Earth Netherlands, along with 17,000 Dutch citizens named as co-plaintiffs. Together, they argued that the company had violated human rights by extracting fossil fuels and that despite the company’s commitment to achieve net-zero emissions by 2050, it nonetheless was undermining the Paris Agreement’s goal to limit temperature rises to less than 1.5 degrees Celsius.

Duty calls

At issue is a legal concept called "duty of care." According to Investopedia, the term refers to:

a fiduciary responsibility held by company directors which requires them to live up to a certain standard of care. This duty — which is both ethical and legal — requires them to make decisions in good faith and in a reasonably prudent manner.

The Dutch court ruled that Shell had violated its duty of care, given that climate change has consequences for human rights and the right to life, and that those interests trump corporate profits. "The court finds that the consequences for severe climate change are more important than Shell's interests," it noted.

The ruling stated that Shell is responsible for its own emissions as well as those of its suppliers and customers — Scope 3 in sustainability lingo — which comprised nearly 95 percent of the company’s total carbon footprint in 2020. That’s huge, in and of itself. It means that the greenhouse gas emissions for which companies are responsible don’t end at the factory gate.

While the verdict is legally binding only in the Netherlands, it is being scrutinized as a new area of litigation and may guide deliberations by judges elsewhere. Shell vowed to appeal, which could take years. Still, the ruling is immediately enforceable.

All of this took place just days after a series of other landmark events, including the International Energy Agency’s finding that to meet the goals of the 2015 Paris agreement, investors must stop funding new oil, gas and coal projects — immediately. It’s unclear whether and how that conclusion may have factored into the Dutch court decision.

Flashing red lights

The implications? You needn’t be a legal eagle to see the looming potential. Fossil-fuel companies are likely seeing flashing red lights about now. Meanwhile, emissions-heavy sectors — aviation, cement, chemicals, mining, steel and others — soon could find themselves similarly staring down the barrel of legal decisions that force them to accelerate their decarbonization goals well beyond the net-zero targets they’ve already set. Already, lawyers, investors and others are viewing the Shell verdict as the opening salvo of what could be an onslaught of litigation focusing on companies’ duty of care as it relates to climate change and human rights.

A quick data point: According to the U.S. Climate Change Litigation database, which tracks climate-related litigation and administrative proceedings, there already are nearly 1,400 cases pending in the United States alone, plus more than 400 non-U.S. cases.

Most of those cases aren’t against companies, but some are, citing everything from alleged misrepresentations about a company's use of the proxy costs of carbon (ExxonMobil) to a state lawsuit holding fossil fuel companies liable for causing climate change impacts that adversely jeopardize the state’s facilities, real property and other assets (Chevron, in Rhode Island).

Even if states do nothing or only a little, companies have the responsibility to respect human rights.

By the way, the Shell case wasn’t the only landmark climate decision last week. In Australia, a federal court ruled that the government must ensure children aren’t adversely affected by any decisions to approve coal projects. The court found that the environment minister has a duty of care to avoid actions that would cause future harm to younger people. The lawsuit had been brought by eight teenagers along with an octogenarian nun.

That’s hardly the only intergenerational lawsuit claiming that climate change is stealing the future of young people and the unborn. Will those cases be energized by these recent rulings? And it’s not just climate. Water scarcity, ecosystem collapse, sea-level rise and many other climate-related calamities could become the basis for mounting "duty of care" human rights litigation, even if a company is hewing to the law of the land.

As one Dutch judge said in explaining the Shell decision: "Companies have an independent responsibility, aside from what states do. Even if states do nothing or only a little, companies have the responsibility to respect human rights."

Investors are taking note. As they see the writing on the courtroom wall, and the resulting financial liability facing companies, they no doubt will be picking up the pace of their own shareholder activism. If there was any question that climate change should be treated as a major financial risk, those questions should be laid to rest.

After all, as the Dutch court case made clear, society’s expectations of companies are rising even faster than global temperatures. And the notion that companies may be responsible not just for their own operations but also for customers’ use of their products represents a new legal standard, one that no doubt will embolden both activists and investors and could amp up pressure on companies to increase their decarbonization ambitions.

It’s yet another watershed moment for business and climate, one that will likely reverberate for years.

I invite you to follow me on Twitter, subscribe to my Monday morning newsletter, GreenBuzz, from which this was reprinted, and listen to GreenBiz 350, my weekly podcast, co-hosted with Heather Clancy.

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