What do the Dutch court ruling on Shell and shareholder moves at Chevron and Exxon mean for oil giants in the era of climate action?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: James Bacchus, Distinguished University Professor of Global Affairs and Director of the Center for Global Economic and Environmental Governance, University of Central Florida

On May 26, three of the largest oil companies in the world were given the same message on the same day – reduce carbon emissions much more, and much more quickly, to combat climate change, or prepare to be compelled to do so. The sequel to this blunt message will likely be intensifying pressures for significantly more ambitious climate actions by the fossil fuel industry in corporate board rooms and in legal court rooms worldwide.

In the United States, three climate-minded activists were elected to the board of Exxon Mobil. A shareholder revolt led by a small hedge fund sparked these elections, which can be counted on to inspire similar shareholder insurgencies elsewhere.

Also in the United States, the shareholders of Chevron approved a pathbreaking proposal to cut carbon emissions from the use of the company’s products by its customers – emissions that are not tied directly to the company’s fuel production. This approval signals that more shareholders will be taking more such actions to ensure that fossil fuel companies commit to actions to reduce the emissions from the full lifecycle of their products.

On the same day, in a case brought by the Dutch chapter of the Friends of the Earth, the district court in the Hague ordered Europe’s largest oil company, Royal Dutch Shell, to reduce its carbon emissions by net 45% by 2030 compared with 2019 levels. This landmark legal ruling will undoubtedly lead to a surge in similar legal actions against fossil fuel companies and fossil fuel-reliant companies worldwide.

Seen together, these three actions herald a societal push, separate and apart from governmental mandates or regulations, asking the fossil fuel industry to be increasingly accountable for all its greenhouse gas emissions. Climate protests will continue in the streets; but, while governments continue to slowly ramp up ambitious climate actions, it appears likely that these societal protests will also increasingly move inside the boardroom and courtroom to impose more pressure for climate accountability on the fossil fuel industry.

The most pressure is likely to come from the courts.

The Royal Dutch Shell case is the first case in which a court has confirmed a duty of care for corporations in guarding against the harm and the risks of harm caused by climate change. The court derived this obligation from an unwritten duty of care in the Dutch civil code. It gave substance to this duty from sources ranging from articles in the European Convention on Human Rights, to international climate accords and scientific reports, to guidelines for business protection of human rights agreed by the United Nations and the OECD.

The ruling is subject to change upon a promised appeal. Yet, in the scope and the turn of its novel legal reasoning, it sets out a template for global emulation. Several aspects of the ruling warrant emphasis in anticipating the likely flurry of upcoming legal actions against the fossil fuel industry in courts throughout the world.

Especially noteworthy is the unprecedented expansion in the Royal Dutch Shell ruling of the previous landmark ruling by the Supreme Court of the Netherlands in 2019 in the ‘Urgenta’ case, which was brought by climate activists against the Dutch government. In that case, the court ruled that the Dutch government had a duty to mitigate the impacts of climate change and ordered it to cut emissions even more than it had planned – which the government then did by cutting capacity in its remaining coal-fired power plants. In this new case, the Dutch court has extended this duty of care for the first time to private corporations.

The court was clear in stating that the harms from climate change are violations of human rights.

What is more, the ruling defines this duty of care to require the respect by corporations of human rights. Independent of, and irrespective of, any state human rights obligations, corporations must – under this Dutch ruling – actively prevent, mitigate, and remedy any violations of human rights. And the court was clear in stating that the harms from climate change are violations of human rights. Thus, the recent shift in climate cases toward legal claims founded on human rights can be expected to become even more pronounced.

Significant also is the fact that the Dutch district court did not find that Royal Dutch Shell had done anything unlawful; instead, it found that the company had not done enough to fulfill its duty to prevent and diminish climate harms. Unlike some other fossil fuel companies, Royal Dutch Shell has a clear emissions reduction plan in place, recognized as bolder than many in the sector. The Dutch district court, however, criticized the actions taken by the company to date as “intangible, undefined and non-binding,” and pointedly observed that “emissions reduction targets for 2030 are lacking completely” in the company’s current plan. The court concluded that, although Royal Dutch Shell is not currently in breach of its reduction obligation, its lack of action suggests an “imminent violation”.

Royal Dutch Shell is oft cited as one of the foremost companies to confront climate change in the fossil fuel industry. Therefore, this Dutch ruling does not auger well for other fossil fuel companies that have vague emissions reduction plans – or no plans at all. To ward off climate litigation, or to keep from losing it, the fossil fuel industry would be well advised to heighten its current ambitions for emissions cuts and sharpen the precision of its plans for making those cuts. In particular, other European oil and gas majors, who have emissions targets similar to those of Royal Dutch Shell, should take note.

What’s the World Economic Forum doing about the transition to clean energy?

Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.

Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.

To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.

Is your organisation interested in working with the World Economic Forum? Find out more here.

Yet another key aspect of the Dutch ruling is that it applies not only to the direct emissions by Royal Dutch Shell, but also to the indirect “scope 3” emissions from both upstream suppliers and downstream consumers of the company’s products and services. Ninety percent of the emissions of the fossil fuel industry are from these indirect impacts along the entirety of the supply chain. Fossil fuel companies have often debated how accountable they can be for the emissions resulting from the use of the products they make. The Dutch ruling suggests they will find it harder to do so in future climate cases.

At present, there are about 1,800 lawsuits relating to climate change before courts around the world. There will now be many more. Where these new cases are against the fossil fuel industry, they will build on the Dutch court ruling. Where they are against governments, they may also heavily impact the fossil fuel industry. Friends of the Earth has announced a new case against the United Kingdom that challenges government spending on North Sea oil and gas exploration, which has the effect of providing billions of pounds of governmental subsidies for fossil fuel companies.

Many of the major fossil fuel companies have contemplated their long-term transformation from oil and gas companies into energy companies that rely more and more on an increasing portfolio of wind, solar, carbon capture technologies and other renewable energy products. This transition may require further acceleration with clearer short-term targets, despite the potential for some shareholder reservations. These recent events may also encourage fossil fuel companies to engage in wider partnerships to promote industry sector decarbonization jointly, and to support governmental actions on carbon pricing to enable the flourishing of market-based solutions to climate change. Without such responses, they may soon face more daunting challenges from the courts and from their own shareholders.

James Bacchus is a guest on a forthcoming episode of Radio Davos, subscribe wherever you get your podcasts or click here.