In a decision that echoes across global boardrooms, the Court of Appeal of The Hague delivered its much-anticipated ruling in the Shell case on November 12, 2024. This case, important to the future of ESG (Environmental, Social, and Governance) litigation, highlights the growing link between climate responsibilities and corporate accountability. 

In 2021, Friends of the Earth and other environmental groups initiated a lawsuit, demanding Shell align its operations with the Paris Agreement's climate objectives. The first-instance court's 2021 ruling, which mandated a 45% CO2 emissions reduction by 2030, signaled a new era of corporate climate accountability. However, in the decision of the appeal court, while the high court confirmed that Shell has a duty of care to limit greenhouse gas (GHG) emissions under Dutch tort law and human rights rules, it stopped short of enforcing a specific 45% reduction target by 2030. For companies, this ruling shows the challenges of balancing new regulatory requirements with ambitious climate goals, especially given new EU rules like the Corporate Sustainability Due Diligence Directive (CSDDD).

For companies, the Shell ruling is a clear reminder that strong ESG strategies, realistic climate targets, and proactive work on new regulations are essential to reducing legal risks. This article examines the Shell v Friends of the Earth case's impact for ESG practices. In this article, we will explore how the case influences corporate sustainability strategies, regulatory approaches, and investor expectations in the context of climate action. 

This article is written by Sefa Geçikli ([email protected]), Kirill van der Velde ([email protected]). Sefa and Kirill are part of RSM Netherlands Business Consulting Services with a specific focus on Sustainability and Strategy.

Recap of the November 12th ruling and its outcome

The Hague Court of Appeal ruled that Shell is obliged to reduce its CO₂ emissions but did not specify the percentage reduction required. The court rejected the claims of Friends of the Earth which had sought a 45% reduction by 2030. The court found that there is no scientific consensus on the specific reduction percentage for individual companies like Shell. Additionally, it noted that Shell is already working to reduce its own emissions and that imposing a specific reduction target for emissions from Shell's customers (scope 3 emissions) would be ineffective. However, the court did confirm that Shell has a social standard of care to address climate change. 

In the context of the court ruling, the term "social standard of care" or “duty of care” implies that Shell has a broader responsibility to society to address climate change, beyond just legal obligations. This encompasses ethical and social expectations regarding their environmental impact.

  • What was upheld: The court affirmed that Shell has an active duty of care to the people and environment of the Netherlands. This means Shell is legally obligated to take measures to protect both public health and the environment. The ruling emphasizes that Shell must prioritize the well-being of the community and the natural surroundings in its operations, ensuring that its activities do not harm the environment or the health of the Dutch population. The court’s acknowledgment of Shell’s duty of care builds on Dutch tort law (Article 6:162 of the Dutch Civil Code) and human rights principles, which require companies to mitigate harm caused by their activities. Shell’s Scope 1 and 2 emissions—those from its own operations—fall under a “result obligation,” meaning Shell must actively reduce them.
  • What was overturned: The court rejected Friends of the Earth (Milieudefensie)’s demand for Shell to cut its emissions by 45% by 2030, citing a lack of scientific consensus on specific targets for individual companies and the absence of a legal framework to enforce such a mandate. The judges determined that while reducing emissions remains crucial, the 45% target was not substantiated by current laws or regulations, rendering it unenforceable. The court also noted that Shell is already taking steps to reduce its Scope 1 and 2 emissions, considering these efforts sufficient to meet its duty of care. For Scope 3 emissions, the court sided with Shell’s position that ceasing fossil fuel trading would not effectively lower global GHG emissions, as other suppliers would likely meet the demand. 

The concept of “Duty of care” and how it relates to ESG

The concept of "duty of care" in ESG frameworks refers to companies' legal and ethical obligation to act in the best interests of their stakeholders, including employees, customers, communities, and the environment. This duty requires companies to proactively identify, assess, and manage risks that their operations might pose to these stakeholders. In the context of ESG, the standard of care extends beyond mere compliance with laws and regulations; it encompasses a commitment to sustainable and responsible business practices that safeguard the well-being of people and the planet.

Based on this duty, companies are expected to go beyond simply being transparent about their performance. Transparency involves disclosing information about a company's activities, impacts, and performance metrics. However, the standard of care demands that companies take concrete actions to mitigate negative impacts and enhance positive outcomes. This means actively reducing environmental harm, improving social conditions, and ensuring good governance practices. Companies must demonstrate accountability and responsibility by implementing effective strategies and measures that address ESG issues, rather than just reporting on them. This proactive approach is essential for building trust with stakeholders and achieving long-term sustainability.

Duty of care and ESG Regulatory Framework (CSRD, EU Taxonomy and CSDDD)

  • CSRD

The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation requiring large companies to provide detailed and transparent reports on their sustainability performance. Beyond reporting, the CSRD expects businesses to actively mitigate risks and enhance positive environmental and social outcomes. In the Shell case, the court stressed the need for companies to demonstrate tangible efforts to address climate harm. Similarly, the CSRD holds companies accountable by requiring verifiable evidence of their climate-related actions. By disclosing their efforts to minimize environmental impacts through CSRD reports, companies align with the broader "duty of care" principle, showcasing how they manage their environmental and social responsibilities transparently and accountable.. 

  • EU Taxonomy

The standard of care principle also extends to the EU Taxonomy regulation, which provides a classification system for environmentally sustainable economic activities. Companies are expected to align their operations with the criteria set out in the EU Taxonomy to demonstrate their commitment to sustainability. This alignment involves ensuring that their activities contribute to at least one of the six environmental objectives defined by the regulation, such as climate change mitigation or the sustainable use of water resources. By adhering to these criteria, companies show that they are taking their standard of care seriously and are actively working to minimize their environmental impact. In the context of Shell’s duty of care, the taxonomy provides a structured way for companies to demonstrate compliance with their environmental responsibilities and align their operations with EU-defined climate objectives. This reinforces the court’s call for tangible efforts to meet sustainability standards without prescribing overly rigid targets like the 45% reduction mandate.

  • CSDDD

The CSDDD explicitly codifies a duty of care for companies, requiring them to identify, prevent, and mitigate adverse environmental and human rights impacts throughout their operations and supply chains. The Shell ruling, which upheld the company’s broader duty of care but rejected specific reduction targets, resonates with the CSDDD’s framework. It suggests that while companies must address their climate impacts proactively (e.g., Scope 1, 2, and 3 emissions), their obligations should be guided by a harmonized legislative framework like the CSDDD, rather than arbitrary or unsupported targets.

Forward Thinking

Whilst the court case did not meet the hopes of Friends of the Earth , it has set a precedent that companies have a standard of care and that they can be held accountable for their sustainability (in-)action. This ruling underscores the importance of corporate responsibility in addressing environmental and social impacts. It is essential that transparency on the CSRD and EU Taxonomy is created, providing stakeholders with clear and comprehensive information about companies' sustainability efforts. However, it is crucial that companies continue to build on this information, ensuring they meet their standard of care. Doing so can demonstrate their commitment to sustainable practices and contribute to a more resilient and equitable future.

RSM is a thought leader in the field of Sustainability consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.