What does the Shell climate judgment mean for US directors?

Week of 2 August 2021

What does the Shell climate judgment mean for US directors?

Our key takeaway: “Climate litigation is dynamic and standards of liability are evolving.”  Growing facts and shifting societal norms on climate litigation will increasingly have U.S. directors on their toes.

In May 2021, the Hague District Court in the case of Milieudefensie and Ors. v Royal Dutch Shell plc required Shell to reduce its CO2 emissions by 45% by 2030 (relative to 2019) across scopes 1, 2 and 3, arguing that increased emissions posed harm to Dutch citizens. The judgment was striking because it used tort law to significantly influence a company’s action on climate change. The authors of a blog for the Harvard Law School Forum on Corporate Governance (Alex Cooper, Cynthia Williams, Ellie Mulholland, Robert Eccles, Sarah Barker) argue that this case has ripple effects for company directors and investors in the U.S.:

    • “Climate litigation is dynamic and standards of liability are evolving.” The authors highlight that “[w]here a court might not have intervened five years ago, courts are showing an increasing willingness to rule in favor of outcomes that lead to greater climate action. Whether due to advances in climate science, the growing weight of evidence of the economic and human rights impacts of climate change and the net zero transition, shifting societal norms on the imperative and urgency of climate action, or a combination of these factors—courts are responding.” The authors points to a series of landmark judgments in the past 12 months, as well as the fact that climate change is “acknowledged as an existential threat from voices as diverse as the UN Secretary General António Guterres to Treasury Secretary Janet Yellen.” They observe that courts apply the law to the facts (“[t]ort law in particular is informed by standards of ‘reasonableness’ and ‘foreseeability’”). Therefore, it “would be remiss, in the face of these facts and these shifting societal norms, to assume that courts in the U.S. and across the world will stand down.”
    • Company directors need to be aware of increased risks of lawsuits related to climate change. The authors believe that the Shell case “provides an opportune moment for U.S. directors to reflect on and update their understanding of the interaction of tort law standards for proper corporate actions, and corporate law standards for the standard of proper fiduciary conduct.” In particular, the authors recommend that boards “think expansively” about their potential tortious liability risks and put in place the right foundations to protect the company. Another key area for boards to consider is the risk of “greenwashing” or making misleading public claims about their performance on climate—specifically those companies that make public statements claiming to be “Paris-aligned” or in line with “science-based targets.”
    • Actions to take to align with the Paris Agreement. The authors note that requisite actions “may include considering whether and how to adopt and implement Paris-aligned business strategies that are consistent with emissions trajectories that limit global average warming to 1.5°C. If directors do not take steps today, they may breach their duty of oversight or duty of care, skill and diligence.” More specifically, this could include “a decarbonization trajectory consistent with 1.5°C” which “equates to 2030 targets of 45% reduction across all emissions (scopes 1, 2 and 3).” The authors conclude that “[w]hile the Shell judgment is not binding on U.S. courts, it is influential” and the judgment should be viewed “a sign of a broader trend towards climate-related tort liability, rather than an aberration, even if the decision is overturned on appeal.”

For more, see Cynthia A. Williams, Robert Eccles and Ellie Mulholland, What the Shell Judgment Means for US Directors, Harvard Law School Forum on Corporate Governance (July 2021)