With climate action frustratingly slow, the legal profession is being called in to accelerate the pace of change.
In a landmark legal ruling, a court in the Netherlands has ordered Royal Dutch Shell to move faster to bring its emissions trajectory into line with the Paris Agreement, a legally binding international treaty on climate change. The judge ruled that action is necessary to avoid Shell breaching its duty to prevent harm and respect human rights. While the company will appeal, environmental lawyers and campaigners believe the decision could open the floodgates for similar action against other major corporate emitters of greenhouse gases, such as carbon dioxide, that overwhelming majority of scientists believe are causing climate change.
In this Q&A, Thomas Tayler, a trained lawyer and senior manager at Aviva Investors’ Sustainable Finance Centre, looks at the judgment and the implications for oil majors and investors holding carbon-heavy assets.
What is the significance of the judgment against Royal Dutch Shell?
It’s the first time a private company has been ordered by a court to cut greenhouse gases. Previously, legal action in this area required governments – most notably the government of the Netherlands – to meet emissions targets.
Litigation is contributing to the transition to a low-carbon economy
Litigation is contributing to the transition to a low-carbon economy, encouraging governments and companies to go further and respond to society’s need to tackle climate change. It is part of a wider pattern, in which we have seen more climate cases being brought to the courts.
It has taken a long time to reach the point where a court has ruled against a major oil and gas company. Were there any specific factors that made it possible?
The judge used principles from conventions on human rights and the global norms around them in an elegant way. Article Two of the European Convention on Human Rights (the right to life) and Article Eight (the right to private and family life) were the pertinent ones.
The judge said that the need to reduce emissions trumped the potential impact on Shell’s commercial prospects
She did not consider the impact of Shell’s actions across the whole world, but solely in Holland, considering how global warming is affecting citizens there. But it affects everyone, because of the global nature of the problem.
Critically, the judge said that although implementing the court’s decision could affect Shell’s commercial prospects, the need to reduce emissions trumped that. This is an incredibly important conclusion and one that others will undoubtedly want to use as a precedent in future actions.
So, investors need to think differently about litigation risk?
A private company has been told by the court that its plans to reduce greenhouse-gas emissions are not good enough. Hopefully this will help companies realise they need to make changes consistent with where society needs to get to.
Does this mean some companies could suffer financial losses as a result of this ruling?
The big oil companies need to start cutting production, and that means they may have to write off some of their investments. The International Energy Agency, an inter-governmental organisation, has stated there is no need for new oil or gas exploration, yet most major energy firms, with perhaps the exception of BP, assumed they could keep finding new reserves and keep pumping oil and gas.
Can legal action play a role in carbon offsetting, where companies invest money in initiatives such as tree planting that can help to remove carbon from the atmosphere?
Ensuring that the offsetting system works as intended is something we need to focus on
Yes, legal action could be useful to prevent people from gaming the system. You may have a forest with a fence around it, but it might have been ‘sold’ six times to different parties. So, ensuring that the offsetting system works as intended is something we need to focus on.
Three points to remember
- The landmark legal ruling by a court in the Netherlands ordering Royal Dutch Shell to cut emissions of the harmful greenhouse gases believed to cause climate change could pave the way for legal action against other businesses.
- The judge’s ruling that the need to cut emissions overrode Shell’s commercial interests could be used as a precedent in future actions.
- The ruling has important implications for investors because they need to be aware of the potential financial losses that could be suffered by other companies that emit greenhouse gases.