Both True: Shell’s Legal Blow—A Signal to Stop Addressing Climate?

Shell is one of the most progressive oil and gas majors in the world, with an unparalleled level of climate analysis, commitment, and detail in their strategic planning. Yet to the shock of many, Shell was recently hit with a devastating legal blow that will make many oil and gas leaders question the very nature and effectiveness of climate stewardship by any oil and gas company — asking, Why should we bother?

In a May 2021 ruling from the Hague District Court in the Netherlands, Royal Dutch Shell was found partially responsible for climate change and was ordered to reduce their entire net emissions (from production and operations through customer consumption) by 45% by 2030.

This court decision has a swath of environmental groups enthusiastic about what the future of climate activism may hold and a host of energy executives shifting in their chairs, wondering if the public pressures on climate they face have truly reached the pragmatic jurisdiction of the courtroom. A case like this, if upheld, sets a disturbing legal precedent for unfettered accusations of climate accountability.

There is of course a lot to question about this ruling, especially if and how its implications are actually aligned with the climate ambitions of its proponents. We know that the decision:

  • Does not address the established and ongoing demand for fossil fuels globally, nor the benefits of affordable and reliable energy.
  • Will likely push petroleum production into less progressive countries with fewer environmentally-savvy companies, resulting in more climate harm.

While it may be easy to initially cast off this ruling as arbitrary, capricious, and politically driven, the question remains: What does this decision mean for oil and gas leaders in North America?

Despite its European location and flaws, the Shell Dutch decision creates ripple effects for your social risk and energy leadership. Game-changing leaders in the United States have room to maneuver — but they must pay attention and respond.

Both of these things are true

  • The “pro-climate” decision of the Dutch Court may do nothing for the climate at large — and could even stifle the ability of Shell to help decarbonize the communities they serve.
  • Investors and other stakeholders in North American oil and gas companies will be looking at your company and asking, Are they doing enough?

The situation

Shell’s proactive climate-action track record. Shell has a deep track record in addressing climate concerns. Since the 1970s, Shell has developed and analyzed a variety of scenarios to examine the potential pathways and impacts of a changing energy system. They have worked to expand the company’s thinking and decision-making around the challenging uncertainties behind the energy transition. In their latest climate commitment, Shell set out a target and strategy to become a net-zero emissions energy business by 2050, a goal which includes emissions reductions across the entire lifecycle of their supply chain (from fuel production through customer end-use). This commitment incorporates plans to spend $5-6 billion annually in the “growth pillar” of their business, including the marketing of low-carbon fuels and expanding decarbonization solutions. In April, Shell released their 2021 Transition Strategy, which carefully detailed the roadmap to achieve their net-zero targets and placed this transition plan up for investor advisory vote at their 2021 annual meeting. The strategy received majority support from Shell’s shareholders.

The Dutch court case. In 2018, Milieudenfensie — the Netherlands chapter of Friends of the Earth — issued a letter to Shell, outlining the company’s legal obligations in relation to climate change, arguing Shell’s existing policies did not conform with those obligations, and demanding the company cease relevant unlawful conduct by aligning its activities with the goals set forth in the Paris Agreement. After Shell responded on the grounds that these claims lacked merit, Milieudenfensie — along with 17,200 co-claimants and six other organizations — moved forward with their case, filing in the District Court of the Hague, and Shell was issued a summons in April 2019. In May 2021 — as mentioned previously — the Hague District Court ruled in favor of the plaintiff, ordering Shell to reduce its net carbon emissions across all activities (from operations through customer end-use) by 45% by 2030, from 2019 baseline levels.

Shell’s response. What happened next exemplifies game-changing leadership.Despite being dealt a massive blow that may well result in material impacts to their operations and investments, Shell effectively took stock of their position, listened to the signals being delivered, and voiced a response that is engaged and appropriately bold. Shell does intend to appeal the decision, yet the details of the judgement were not central to their response. Instead, Shell embraced the opportunity to share the aspirations of the public (Gamechanger 2), focusing on the actionable steps being taken to accelerate the pace of their net-zero trajectory, stating that “urgent action is needed on climate change.”

Then, in a thoughtfully penned letter to the public, Shell’s CEO Ben van Beurden demonstrated civic leadership (Gamechanger 3), outlining how he believes the company should rise to the challenge presented to them: “If we look beyond this court case, it’s clear we all have the same goal. … We all know we must urgently tackle climate change and achieve the goal of the Paris Agreement. … The court ruling has not changed the fact that Shell is more determined than ever to play its part and lead in this global challenge.”

Disruptor 2 in all its glory. 2021 has clearly ushered in the acceleration of Disruptor 2 — activism affecting mainstream business risk. The Shell case clearly illustrates that (1) the realities of global energy demand and (2) the negative effects overzealous climate action has on transferring petroleum production onto less environmentally prone actors do not and will not mitigate the social risks companies now face.  As this landmark ruling reverberates across the globe, we can expect similar legal efforts.

Seize the day

Most North American oil and gas companies will not be targeted with such a lawsuit. Nevertheless, game-changing leaders are taking note of the coalescing regulatory, investor, public, and now legal pressures for robust, target-driven climate action. Stakeholders (including investors) will roll this legal decision up into their basket of climate expectations and conclude that even if you’re doing a lot, it probably isn’t enough. Game-changing leaders are bringing these considerations to their executive teams and boards:

  • Category 5 business risk. I have often recommended viewing social risks as a “hurricane off the coast” and the Dutch legal decision is no exception.This risk framework is familiar and calms our instinctive drive for partisan positioning. The Dutch case creates an indirect business risk because, like large divest-from-fossil-fuel decisions, it normalizes the growing expectations that oil and gas companies lead in addressing climate, in a really big way. The storm is coming for you — so like it or not, you’re leading the response. Game-changing company leaders will build decarbonization leadership into their enterprise risk management.
  • The storm tracker. The Shell case has garnered an incredible amount of public attention. Activists had a red-letter day and the red flag for oil and gas leaders is clear: These developments cannot be avoided simply because they (1) seem so extreme and, (2) evolve untethered to true climate action. Analyze these developments with your management team to ask how they may influence your key stakeholders such as regulators, investors, communities, and employees.
  • The need to accelerate ESG and decarbonization action. Distilled down, all signs point to increasing board, investor, and regulatory scrutiny over companies’ commitments and approaches to combating climate change. There is no time like now to deepen the details within your ESG and decarbonization strategies, putting pen to paper on how you will lead into the energy future.

We help our clients proactively chart and assess their unique drivers, risks, and opportunities as the conversation around climate and energy intensifies. This approach allows oil and gas companies to prioritize the right actions at the right pace, while future-proofing their businesses against rising social risk. Reach out to schedule to plan your road mapping exercise today.

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