Royal Dutch asked to come out of its environmental Shell

Tue 01 Jun 2021

Yesterday was a big day for the oil and gas sector as one of its biggest players, Royal Dutch Shell, received the verdict on a landmark hearing to speed up its cuts to greenhouse gas emissions. In the world of responsible investments, this was a historic development. A panel of judges in a lower court in The Hague ruled that Shell’s policies on the matter were too vague. The multinational oil and gas company was subsequently ordered to reduce its CO2 emissions by 45% and was told that the reduction must happen by 2030.

So, what was this lawsuit all about?

Filed by seven activist groups including Greenpeace and Friends of the Earth Netherlands, the lawsuit marks one of the first in which environmental groups turned to the courts to try and force a major energy firm to change its ways. The lawsuit was filed in April 2019 on behalf of more than 17,000 Dutch citizens who said that Shell is threatening human rights as it continues to invest billions in the production of fossil fuels. The case is unique in that no compensation was demanded from the company. Instead, for the first time in history, Shell was asked to issue a policy change and cut its carbon emissions by 45% by 2030, a much steeper reduction than the company’s current goal of reducing the carbon intensity of the products it sells by 20% over the next decade.

And why Shell?

Shell was the seventh biggest contributor to the climate crisis from 1965 to 2018, according to the Carbon Majors database. It was also claimed that Shell was breaching article 6:162 of the Dutch civil code and violating articles 2 and 8 of the European convention on human rights – the right to life and the right to family life – by causing a danger to others when alternative measures could be taken. During the hearing it was mentioned that Shell’s activities and products are responsible for about 1% of global emissions every year but the company is investing billions more in oil and gas. The ruling could set a precedent for similar cases against the world’s biggest corporate polluters. While this may seem like an attack on the big players, it is an obvious starting point. After all, it is the big players that can set an example, use their resources to minimise their overall environmental impact.

What does this mean for investors?

This verdict is not all bad news for companies like Shell. If anything, it gives them further impetus to invest in alternative energy projects. By making a commitment to cut its carbon emissions as requested, Shell could signal to investors that it is actively seeking to make a positive environmental contribution. Shell is among a number of European oil & gas groups that have been making considerable investments in renewable energy projects, taking major positions in areas including offshore wind, green hydrogen and energy storage. As recently as this week Shell was involved in a $2.5bn deal to supply and store solar power in Australia. In order to keep the world on a path to net zero, we need to see more companies investing in cleaner energy projects and reducing, if not halting, any further investments in fossil fuel projects.

Surprisingly, post the verdict against Shell, markets demonstrated negligible reaction to the news. This could be due to the fact that there were no monetary fines levied on Shell and that Shell is expected to appeal the decision in a higher court. But it is worth noting that the possibility of increasing litigation, legislation, and regulation will have an impact on the way investors view the oil and gas sector. Sustainability-related litigation against fossil fuel companies have gained momentum in recent years. Until recently cases tended to be focused on liability suits, with corporations asked to pay damages for past behaviour. But this case against Shell is among a growing number of human rights-based cases, which aim to radically change a company’s strategy and potentially disrupt its business model. This verdict is a clear signal to the fossil fuel industry; its role in the transition to cleaner energy is imperative.