The "Shell ruling" - need for action also for SMEs

Awareness of the dangers of climate change is increasing constantly. This new public sentiment entails responsibility of business enterprises. Courts will no longer reject claims on the basis that an individual polluting enterprise had not caused climate-related damages.  In the following, Kunz partner Hermann Knott discusses two spectacular recent court decisions.

A. What are the issues? The risks for business

We all know about the dramatic consequences of climate change. But has climate change, i.e. global warming due to human intervention, caused actual or imminent damage to individuals or groups of affected parties with the same interests? If so, large emitters of Greenhouse Gases (GHGs) will be the first ones threatened with claims seeking damages or related relief. For smaller and medium-sized enterprises (SMEs), however, concrete risks also arise: Based on the causal link between global warming and corporate emissions, legislators will feel justified in providing for corporate liability if they fail to meet target data for reducing emissions. Preventive action and compliance with regulatory requirements are thus central to shaping the future of business activities. This cannot be started soon enough.

In the following, we will discuss two spectacular decisions that affirm the trend toward corporate liability for damages resulting from the emission of GHGs. The first case concerns the duty to reduce emissions, the second liability for nuisance.

B. Ordering Shell to increase its own emissions targets

1. The effects of the ruling

At the end of May, the District Court of The Hague ordered Shell to set more far-reaching corporate targets for reducing its GHG emissions. The Court ruled that the targets set so far were insufficient and unclear. This is a very early first court decision imposing preventive climate protection measures on a business entity. The impact of this ruling on small and medium-sized companies is enormous: it affirms in principle the causal link between human intervention and global warming. The results of scientific investigations presented in the IPCC (Intergovernmental Panel on Climate Change) Special Report from 2018 on climate change and land systems have contributed to this result in particular. On this basis, it is much easier to justify the responsibility of companies causing emissions for redress of measures causing climate damages: In the case of large companies, direct responsibility can be considered, while in the case of SMEs, it is through the implementation of the caps on emissions set, for example, for Germany in the Climate Protection Act passed by the German government. Up to now, companies have felt the impact of climate protection mainly through price increases for fossil energies and Co2 certificates bought under the European Trading System. In the future, SMEs are likely to face penalties and claims for damages.  

2. The decision of the District Court of The Hague

Responsibility for climate protection is commonly assigned primarily to international organizations and government institutions. In mid-December 2020, the EU raised the target for reducing GHG emissions by 2030 from 40% to 55% relative to 1990 levels. Indirectly, businesses and citizens contribute by changing their behavior or paying higher prices for energy. These funds can then flow as investments in climate-friendly products and solutions (such as electric cars or renewable energy sources).

Even more directly affected by climate protection measures are the large multinational energy companies. Their own emissions together with those of their suppliers (e.g., of electricity) and customers (for Shell, for example, the consumers at the gas station) are attributed in their entirety to the company, as so-called Scope 1, 2 and 3 emissions. The largest share of emissions, for Shell ca. 85%, comes from the consumption of customers buying gasoline at the gas stations. Accordingly, the greatest need for action protecting the climate, exists for companies in the exploration as well as the processing of fossil energy sources.

Their climate targets, which are laid down in the respective company policies, are particularly monitored. The District Court of The Hague (Hoge Raad, judgment of May 26, 2021, Case No. C/09/57 1932/HA ZA 19-379 (English version)) has ordered Royal Dutch Shell to reduce the volume of its GHG emissions in its corporate targets to a greater extent and to make them clearer than previously envisaged. Instead of Shell's self-imposed 20% reduction in GHG pollution by 2030, it must achieve a 45% reduction. The reference figure here is the 2019 level, and these figures include emissions at all stages of the supply chain. According to the results of scientific research, only these numbers will allow global warming to be limited to 1.5 degrees compared with pre-industrial level.

Shell is the ninth largest emitter of GHGs in the world. Shell's pollution accounts for 1% of all greenhouse gas emissions worldwide. In 2019, the Supreme Court of the Netherlands had ordered the Dutch government, following a lawsuit filed by the Urgenda Foundation, to implement a net reduction of 25% in the emission of GHGs by the end of 2020 in order to protect the climate. According to statistics, the government has largely succeeded in doing so. The judgment was based on a tort committed by the government, i.e., on a private-law basis. The Hoge Raad also affirmed the same legal basis against Shell: According to the laws of the Netherlands, a tort, among other things, is the violation of an 'unwritten regulation concerning appropriate social behavior'. The court derives a violation of this provision from the lack of respect for Art. 2 (right to life) and 8 (respect for private and family life) of the European Convention on Human Rights and Art. 7 and 17 of the International Covenant on Civil and Political Rights (UN Covenant). These provisions are considered to have been violated because of Shell's insufficient measures to reduce the emission of GHGs, compared to the above-mentioned results of scientific research, to the detriment of the residents of the Netherlands represented by the plaintiff associations.

The court sees the climate protection measures imposed on Shell as neither too burdensome nor disproportionate. Effective climate protection outweighs Shell's commercial interests. If the initiatives required according to scientific findings to implement climate protection are not carried out, the consequences are incalculable. The court also declined to accept another objection: the court only allowed the claims to be pursued as a class action by those associations representing the interests of Dutch residents. Does this mean that all emissions attributable to Shell worldwide (in approx. 160 countries) really have to be taken into account in order to protect this group? The Hoge Raad says 'yes' because climate protection can only be effectively implemented globally.  

3. Reactions from Shell

The decision is of political significance - an appeal - however justified on substantive grounds - would portray Shell as an opponent of climate protection. Accordingly, Shell has reacted by stating that the decision means 'not a change, but an acceleration' of its own climate change strategy. The sale of fossil fuels cannot be phased out overnight, the statement continued. Therefore, Shell is also focusing on reducing the carbon intensity of its products.

For the consulting lawyer, these circumstances show how important it is to include the goals of all affected stakeholders in the outcome of the advice regarding their clients’ climate change strategies, be it in climate change litigation or in another context. 

C. Peruvian mountain guide sues RWE, the largest emitter of GHGs in Europe

For liability for torts under German law, provisions in special laws must be taken into account, e.g. the Federal Emission Protection Act or the Clean Water Act. The violation of these laws are considered an equivalent to a tort. Furthermore, in this context, nuisance with relation to property is an important reason for the liability of companies. Such liability does not presuppose any fault on the part of the person causing the disturbance. Nuisance is the basis of the lawsuit filed by the Peruvian mountain guide Saúl Luciano Lliuya against RWE, the German energy company which is the largest polluter of GHGs in Europe. The claims is supported by environmental organizations based in Germany. Lliuya is the owner of a house in the town of Huaraz. Above the town lies the Palcacocha glacial lake. The meltwater of the Palcaraju glacier flows into the lake. The water level of this lagoon has increased rapidly, especially since 2003, as a result of the strong increase in glacier melt.  The significantly increased volume of meltwater brings with it the risk of rupture of the glacial lake's perimeter. This danger, known in research by the acronym GLOF (Glacier Lake Outburst Flooding), would destroy the house on the mountain guide's property. Lliuya requires RWE to pay EUR 17,000, which is the portion of the total cost of securing the glacial lake that corresponds to 0.47% of RWE's emissions as a percentage of the global total.

The Essen Regional Court had dismissed the claim as inconclusive for lack of causality of RWE's emissions in classic legal methodology: The house is endangered even if one ignores RWE's emissions. The Higher Regional Court, for its part, considers the claim to be conclusive on the basis of RWE's alleged contribution to causation. In November 2017 the court issued an order requiring the production of evidence on the occurrence of a higher density of greenhouse gases in the atmosphere due to Co2 emissions such as those of RWE, as well as on the resulting reduction in heat radiation. The evidence shall be produced by expert opinions. Furthermore, the collection of evidence extends to the effects of these global phenomena on the conditions at the Palcaraju glacier. At first glance, it seems difficult to provide evidence on these evidentiary topics. This is especially true of the two issues related to global climate change. However, in these areas, research has made important new discoveries since the evidence decision. In this respect, particular reference should be made to the above-mentioned special report of the Intergovernmental Panel on Climate Change (IPCC) from 2018.  In future proceedings these findings are likely to significantly facilitate when pursuing claims based on climate change.

D. Trends in the Jurisprudence of the U.S. Courts

The U.S. is known for its high liability risks for companies doing business there. Any discussion of disputes relating to climate change should therefore always take into account the legal situation faced in the U.S. by export-oriented companies. In this respect, there are tendencies in case law to make it easier to prove that damage was caused by climate change or failure of industrial enterprises (particularly heavy industry) to take countermeasures. In the U.S., plaintiffs of climate litigation cases are primarily municipalities and public interest groups filing lawsuits against industrial polluters. Consumer lawsuits, for example because of businesses advertising for the consumption of fossil energies (as was the case in the lawsuits against the tobacco companies) are not (yet) the focus.

E. What to do next?

Climate protection has long since found its way into the boardrooms of companies of all sizes and in all industries. At ExxonMobile, a hedge fund acting as a shareholder activist recently secured three seats on the 12-member board of directors despite having a very small stake in the company. At Chevron's annual meeting, shareholders voted to sharply reduce the scope-3 emissions target. Transitioning to renewable energy supplies, environmentally sound corporate operations and waste and water disposal and recycling systems, as well as building or renovating properties according to green building engineering concepts are important components of corporate governance and strategy which are in line with ESG-related corporate governance principles based on sustainability. These principles take into account environmental and social benchmarks when managing a business’s operations. In addition, as a result of the energy transition and the boom in environmentally related technologies, numerous M&A transactions are taking place covering plant equipment or entire business units. Differences between parties involving expected high amounts in dispute are already underway or can be foreseen.

Kunz Attorneys at Law with its experienced specialists from the competence group 'Environment, Climate and Energy' is ready to advise you at any time and in all issues relevant to your business activities. The expertise in this team and in cooperation with lawyers from other specialist groups at our firm is comprehensive. It ranges from advice in the context of project planning, public law issues (awarding of contracts, permits, prohibition orders) and project-related contracts to comprehensive support in M&A transactions or joint ventures (due diligence, structuring and contracts) and the conduct of proceedings before public bodies, ordinary courts or arbitration tribunals.

Cologne, 11 June 2021

Dr. Hermann Knott, LL.M (UPenn)
Rechtsanwalt, Attorney-at-Law (New York)
Antoniterstraße 14 – 16
50667 Cologne, Germany
o +49  221 921 801 587
c +49 151 576 28 456