The Shell Case and the Corporate Climate Transition Plan Obligation

The Corporate Transition Plan Obligation

The current version of the European Corporate Sustainability Due Diligence Directive (hereafter: CSDDD) stipulates that corporations must adopt and put into effect a transition plan for climate change mitigation (Article 22 CSDDD). This plan aims to ensure, through best efforts, that a company's business model and strategy are compatible with the Paris goal of limiting global warming to 1.5°C and the European climate goals (particularly climate neutrality by 2050). In this transition plan, the corporation must also include time-bound greenhouse gas emissions reduction targets, for its Scope 1, Scope 2, and, under certain circumstances, Scope 3 emissions. Under the proposed Omnibus Simplification Package, this plan obligation will be weakened. The most significant proposed change in this regard is the removal of the obligation to put into effect the transition plan. This removal creates legal uncertainty and the risk that the adaptation of a transition plan becomes an exercise on paper, without any real-life improvement.

Thus the question arises: what could be the implications of Article 22 - either with or without the obligation to put the plan into effect - for future corporate climate change litigation addressing a corporate obligation to mitigate? Consider the ruling by the Court of Appeal of The Hague in the climate case of Milieudefensie v Shell. The Court concluded that under national tort law, a corporation may have an obligation to reduce its Scope 1, 2, and 3 emissions. The basis for this mitigation obligation primarily lies in the indirect effects of human rights in horizontal relationships and the applicability of soft law in determining the scope of the Dutch unwritten duty of care. According to the Court, relevant European legislation, including the CSDDD, does not preclude such a mitigation obligation.

Nonetheless, Milieudefensie's claim failed. With respect to the Scope 3 reduction obligation, the Court found no solid basis for determining the specific reduction targets and pathways (hereafter: targets) that Shell must adhere to. To that end it reasoned that (1) there is no legislation containing reduction targets for individual corporations, (2) the worldwide reduction target of 45% reduction by 2030 cannot be applied to a single corporation or a specific sector, and (3) there is too much scientific uncertainty about the specific reduction targets that apply to the oil and gas sector. Ultimately, according to the Court there were insufficient legal and scientific grounds for specifying Shell's Scope 3 mitigation obligation.

Three Types of Claims based on the Transition Plan Obligation

Could the introduction of the transition plan obligation mean that the issue of standard setting, i.e., of reduction target setting, will be less challenging in future corporate climate change litigation? After all, some corporations will soon be required to set their own reduction targets. Also, this obligation can possibly be enforced via civil law (which is in any event the case in the Netherlands - also when the obligation to put into effect the plan is being removed). In this regard, there are three possible claims that might be brought against a corporation based on the transition plan obligation contained in Article 22 CSDDD.

First, a corporation may be accused of failing to adequately implement the reduction targets set out in its transition plan. Crucial here will be the existence of an obligation to actually implement the transition plan. Currently, the CSDDD stipulates that compliance with the transition plan is a best-effort obligation (see Article 22 and para 73 of the preamble CSDDD). However, if the proposal in the Omnibus Package will be accepted the existence of such a duty will be a matter of national law. National legal systems will most likely approach the issue differently, leading to legal inequality and uncertainty (although under Dutch law a duty to implement the transition plan still will exist). That being said, if the duty to implement the transition plan exists, the court's focus when assessing compliance with that duty will primarily be on assessing the corporation's actual policies and actions. It will be less on the adequacy of the reduction targets themselves (although these of course can also be subjected to judicial scrutiny - see claim type 3).

Second, the corporation may be accused of failing to have a plan at all, or of failing to set any reduction targets in it. Under Article 22 CSDDD, the obligation to adopt a transition plan, including reduction targets, is an obligation of result. Most likely, the court can assess a claim aimed at enforcing compliance with that obligation without assessing reduction targets. It can, for instance, order the corporation to adopt a plan before a deadline set by the court.

Third, the corporation may be accused of setting insufficient reduction targets in its transition plan. In this case, the court must assess whether the corporation, based on the reasons provided and the scientific methods used to set the targets, is making its best efforts to achieve the applicable climate goals with its transition plan. To do so, the court would need to assess the adequacy of the reduction targets that have been laid down in the plan. But how should a court do that? Given the current emissions gap it makes sense to apply a non-regression principle: a corporation may not lower its own set targets over time. However, only applying this principle is not enough. In the absence of concrete (legal) rules regarding specific and sectoral reduction targets, we must look for other points of reference.

Assessing Corporate Reduction Targets

Article 22 CSDDD takes, as mentioned above, the 1.5°C target of the Paris Agreement and the reduction targets set by the European Climate Law as a starting point. Moreover, the (time-bound) targets set by the corporation must be based on conclusive scientific evidence (Article 22, section 2a). According to the preamble (para 73), this means 'evidence with independent scientific validation that is consistent with the limiting of global warming to 1.5°C as defined by the Intergovernmental Panel on Climate Change (IPCC)'. The corporation should also take into account recommendations from the European Scientific Advisory Board on Climate Change.

On the one hand, it could be argued that corporations must align their goals with the IPCC's insights, the climate goals of the EU and the recommendations of the European Scientific Advisory Board on Climate Change, even if these are not tailored to the specific sector in which the corporation operates. It is up to the corporation to provide compelling reasons for deviating from these insights and/or recommendations. This approach could mean that in future climate change litigation, it would be easier to set specific reduction targets than was the case in the Shell case, since there is now a legal basis for applying IPCC-insights to corporations. The implications of this approach could also be significant. For example, the European Scientific Advisory Board on Climate Change recommended a 90-95% reduction in emissions by 2040 compared to 1990 levels. Following this, the European Commission recommended that the EU's climate policy include a 90% emissions reduction target by 2040. Achieving this reduction target will pose a significant and potentially painful challenge for many corporations and governments over the next 15 years.

"...it could be argued that corporations must align their goals with the IPCC's insights, the climate goals of the EU and the recommendations of the European Scientific Advisory Board on Climate Change, even if these are not tailored to the specific sector in which the corporation operates."

An important question relates to the legal weight that should be attached to regulations that regulate corporate emissions on a sectoral level, such as the EU ETS system. What is, in other words, the relationship between sectoral legislation and the generic transition plan obligation? According to the European Commission (see under no. 3.2) a lex specialis (e.g., EU-ETS) supersedes a lex generalis (e.g., CSDDD). The EU legislator did not, however, address whether such specific acts exhaustively regulate the required reduction targets under Article 22 CSDDD. This question about the relationship between several legal sources for establishing reduction targets will particularly arise if scientific insights indicate that more reductions are needed than provided for in the lex specialis. According to the Court of Appeal in the Shell case, European legislation needs to be considered when determining the required reductions under national law; however, the Court does not explicitly address how this should be done.

On the other hand, Article 22 CSDDD leaves a corporation the freedom to set its reduction targets. Also, the wording that the targets should be 'consistent with' IPCC insights on the 1.5°C target provides a certain margin of appreciation to the corporation. In addition, the stipulation that the corporation must 'take into account' recommendations from the European Scientific Advisory Board on Climate Change is weakly formulated and also suggests a certain margin of appreciation for corporations. This all raises the question of how much weight should be attached to IPCC insights and recommendations of the European Scientific Advisory Board on Climate Change that do not differentiate for the specific sector in which the corporation is active.

Possibly, guidelines from public enforcement authorities and/or reduction targets already applied in the relevant sector could provide more clarity. The CSDDD specifies that the European Commission will produce practical guidelines and sector-specific guidelines for implementing the CSDDD (see Article 19 CSDDD). Such guidelines could theoretically be the fastest and most efficient route to legal clarity. However, the political will and support to develop (sufficient) guidelines may be less than they were some time ago and it thus remains to be seen how quickly clarity will emerge from this direction (in the Omnibus proposal, July 2027 is mentioned as a first date).

This brings us to the possibility that, just like in the Shell case, much emphasis will be placed on scientific insights regarding sectoral reduction targets, raising the question of which standard should be applied when interpreting these insights. Should, as the Court did in the Shell case, the focus be on consensus amongst scientists regarding the targets to be applied (apart from the question of how to determine whether such consensus exists)? Or should an even more stringent standard be applied that requires conclusive scientific evidence (as mentioned in Article 22 CSDDD)?

The Precautionary Principle

Scientific uncertainties and ambiguities are inherent in climate science. In litigation, such uncertainties will likely become even more pronounced when a corporation is accused of failing to apply adequate science and methods in determining its reduction targets. A follow-up question then is to what exactly the scientific consensus should pertain: should it concern the most cost-effective reduction targets at sectoral and/or societal levels, the minimum required reduction, the targets that are most economically viable for the corporation, or the target most aligned with the precautionary principle?

Although the precautionary principle is a leading principle in EU law and policymaking, it is not expressly mentioned in the CSDDD. There are, however, some arguments for accepting its relevance in this context. Take the Shell case. The Court rightly stated that on the basis of the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct the precautionary principle has relevance in determining a corporate mitigation duty under Dutch national law. However, in para. 7.95 of the judgment, the Court considered that the principle applies to situations where the effects of certain actions are uncertain, but not to situations where the applicable standard is unclear. For this reason, the Court did not take the precautionary principle into account when examining the scientific insights on the reduction targets for the oil and gas sector. It is submitted that this is too narrow an understanding of the precautionary principle, which provides a framework for standard setting in cases of scientific uncertainty related to risks. The relevant uncertainties may pertain to various aspects of a risk, such as the potential effects, the causes of those effects, the timeframe within which they may occur, and the measures needed to prevent them.

As said, uncertainty and ambiguity about the reduction targets and pathways are more or less always present in climate science, while it is unequivocally clear that severe and irreversible damage is imminent (and already occurring). The precautionary principle is largely based on the recognition that uncertainty about, among other things, the necessary measures is often falsely used as a reason to postpone taking (sufficient and timely) action. It also recognizes that there is a need to counter this dynamic because health and environmental risks are often underestimated and sufficient precautionary measures are usually taken too late, with severe and irreversible damage as a consequence. It is therefore arguable that the relevant test is whether a corporation is using scientific uncertainty or ambiguity about the reduction targets as an invalid reason for failing to reduce its emissions to a level necessary to prevent, or at least to minimise, severe and irreversible climate damage (in line with the wording in the OECD guidelines). In light of the foregoing, it is remarkable that in the Shell case the Court does not explicitly assess or establish a minimum reduction target for Shell.

Conclusion

Article 22 CSDDD, either the current version or a revised version, will undoubtedly play a role in future (Dutch) corporate climate change mitigation litigation. However, what that role specifically entails is far from clear. This creates legal uncertainty that might also negatively influence corporate emission reductions. We must hope that the needed clarity will emerge soon, or that corporations will set ambitious targets themselves. Unfortunately, the Omnibus proposal and the removal of the obligation to put the transition plan into effect even create more ambiguity and uncertainty. This all could seriously undermine the effectiveness of the transition plan obligation, which is far from a reassuring conclusion. The assignment for 2050 is at least clear: emissions must be reduced to zero.

Author:

Prof. Elbert de Jong is full professor of Private Law at Utrecht University, the Netherlands. He is the director of the Utrecht Centre for Accountability and Liability Law. De Jong deals with corporate accountability and liability for climate change (e.g. De Jong (ed), Corporate Accountability and Liability for Climate Change (Elgar 2024)); the role of private law in enhancing environmental accountability; the relationship between private law and scientific uncertainty; the lawmaking role of courts in public interest litigation; and tort law in general. Prof. de Jong is leading the Dutch team for BIICL's project on Corporate Climate Change Litigation.