Why Shell’s climate defeat matters

What is a landmark legal defeat worth? One that apparently upends a company’s carefully crafted strategy and blows holes in a whole industry’s messaging around where its responsibilities begin and end.

Not much, according to the market. Shell shares barely budged on Wednesday after a Dutch court ordered it to deepen its cuts to emissions to align itself with the Paris target of preventing global temperatures from rising more than 1.5C above pre-industrial levels. The stock fell on Thursday, perhaps as other bad news for Big Oil sank in, but then so did the oil price. 

It would be easy to conclude, as one Rystad Energy analyst did, that the case had “little relevance for the actual business” (let alone the industry at large). But make no mistake: this decision matters. 

Both the above can be true, in a way. Shell has already said it will appeal, which can take two to three years. The judgment, which specifies that Shell should reduce its emissions by 45 per cent by 2030, is immediately enforceable. But it also says the company is not currently in breach of its obligations.

It may be a low bar but Shell has been at the more enlightened end of the sector on these issues. What if it did need to change course quickly? Rystad argues it has flexibility: 45 per cent of Shell’s direct emissions come from only 14 per cent of its total portfolio production.

But beyond Shell’s near-term operations, the judgment shows where the expectations of companies — in this sector and others — are heading. It gave a clear view that oil and gas companies have a responsibility for what customers do with their products (Scope 3 emissions) and not just their own operations. It knocked down the argument that if big international companies do not produce this oil, someone else will and possibly in a less responsible fashion. 

It also made clear that reducing emissions intensity (which is possible even if production expands, and is the basis for goal-setting for most of the industry) is not good enough. True, Shell’s court-mandated target for cutting emissions by 45 per cent is on a net basis, leaving scope for tree-planting, carbon capture or other offsetting technologies. But the 2030 timeframe in reality probably necessitates cuts to output, campaigners say.

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The industry says that it cannot move in isolation; that it provides a product that society still needs and wants. This will probably form part of Shell’s appeal.

But there is little doubt this judgment will increase the pressure to be more ambitious on climate change pledges — and it provides the tools for further legal challenges. 

There is now a precedent that a company has a duty to take action on climate change in accordance with Paris goals (regardless, by the way, of what the state is doing).

And the legal basis for this case, around duty of care, is one that could easily translate to other jurisdictions. Yes, this is the Netherlands. But overnight the federal court in Australia, hardly a green paradise, found that a minister has a duty of care to protect young people against climate-related harm, in a case involving the expansion of a coal mine. 

The market is never brilliant at gauging longer-term, vaguely defined threats that don’t have clear implications for near-term cash flows. That’s doubly true here: shares in Shell and BP have recently overwhelmingly traded on the expected timing of that cash flow heading back to investors in the form of share buybacks. (It’s one reason BP’s pledge last year to cut 40 per cent of its own oil and gas production by 2030 went largely unrewarded, although it has gained ground on rivals more recently.)

These companies have been walking a strategic tightrope, between generating the returns and cash expected of them in a world powered by fossil fuels and showing an inclination and ability to be relevant in a world that wants to get rid of them. 

That was a balancing act made easier by oil prices at close to $70 a barrel. It just got rather harder. 

helen.thomas@ft.com
@helentbiz