Australian and Dutch courts find climate-related duties of care in Sharma and Shell

Groundbreaking climate change cases have significant consequences for companies and projects 13 min read

Two groundbreaking climate change-related court decisions in Australia and the Netherlands have shed light on the scope for claims based on duties to individuals to affect the emissions trajectories of companies and projects.

This Insight outlines the wider ramifications of the Federal Court's decision in Sharma v Minister for the Environment, and the Hague District Court's decision in Friends of the Earth v Shell, against the backdrop of other developments, including the International Energy Agency's most recent climate report.

Key takeaways

• In Australia, the Federal Court has found that the Commonwealth Minister for the Environment has a duty of care to protect Australian children from climate change harms when exercising powers under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (the EPBC Act).
• This decision adds a new and complex overlay to environmental approvals for carbon intensive projects under the EPBC Act. It is not yet clear how the Minister will act upon the duty that has been found to exist, and balance it with the statutory framework for decision-making under the EPBC Act. We also foresee scope for other state and territory environmental decision-makers to explore whether they owe a similar duty when deciding whether to issue statutory approvals.
• In the Netherlands, the District Court at The Hague ordered Royal Dutch Shell Plc to further reduce its future emissions targets to ensure that they are in line with the goals set out in the Paris Agreement. The court found that Shell has an obligation, arising from an 'unwritten standard of care' owed by Shell under Dutch law, to mitigate adverse human rights impacts arising from climate change, by reducing its scope 1 to 3 emissions. In interpreting the 'unwritten standard of care', the Dutch court applied the framework under the United Nations Guiding Principles on Business and Human Rights, and, in particular, the duty of companies to respect human rights, and to show diligence and remediate adverse human rights impacts. Shell has indicated that it plans to appeal the decision.
• The Dutch decision forms part of a broader trend, observable in eg the UK and Canada, whereby the courts are looking to international norms and soft law instruments to decide the standard of expected behaviour for companies in the ESG space. This 'hardening' of soft law instruments is likely to continue.
• These judicial decisions have been made in the wake of the International Energy Agency's new report, Net Zero by 2050: A Roadmap for the Global Energy Sector. We foresee scope for aspects of the IEA's report to come into consideration, and influence judicial decision-making, in future litigation similar to the Shell and Sharma cases.

Sharma

Background

In August 2020, the NSW Independent Planning Commission granted development consent for the extension of the Vickery Coal Project (the project) in northern NSW under the Environmental Planning and Assessment Act 1979 (NSW). As the project is likely to have impacts on federally listed threatened species and water resources, it also requires approval from the Federal Minister for the Environment (the Minister) under the EPBC Act.

The project, if approved, will involve the extraction of an additional 33 million tonnes of coal over the life of the mine. The combustion of this additional coal will result in the emission of approximately 100 million tonnes of CO₂.

In Sharma by her litigation representative Sister Marie Brigid Arthur v Minister for the Environment [2021] FCA 560, eight Australian children brought an action in negligence against the Minister, seeking a declaration that she owed them — and children around Australia — a duty to exercise her powers under the EPBC Act with reasonable care so as not to cause the children harm. They contended that the project would contribute to climate change, and consequently increase the risk of climate change-related harm to the applicants, including mental and physical injury, damage to property, and economic loss.

The claimants also sought an injunction restraining the Minister from committing an apprehended breach of that duty — that apprehended breach being the approval of the project.

The decision

The court found that the Minister owes the applicants a duty to take reasonable care when considering whether to approve the project under the EPBC Act.

In determining that the Minister owes a duty of care, the court held:

• The environmental impacts of increasing global surface temperatures, including greater incidence and severity of heatwaves and bushfires, would expose the applicants and the representative class to a real risk of death and personal injury.
• While the project would cause a 'tiny' increase to global average surface temperatures, that increase was measurable and therefore the risk of harm 'real', and not far-fetched or fanciful.
• A reasonable person in the Minister's position would foresee that the applicants would face an increased risk of injury brought about by climate change that would flow from the contribution to increased atmospheric CO₂ brought about by the project.
• The Minister's knowledge of the risk of harm and her control over the source of harm strongly supported finding a duty of care.
• While some factors weighed against a duty being recognised, in totality the salient features of the relationship between the Minister and the applicants favoured the recognition of a duty of care.

Despite recognising the duty of care, the court declined to grant an injunction preventing the Minister from approving the project. Ultimately, the court was not satisfied that the applicants had demonstrated the Minister would breach her duty of care, and said that, instead, it would be more appropriate to grant any relief once a decision had been made. The court did not accept the applicants' contention that an approval of the project would inevitably constitute a breach of duty, noting that the Minister's competing or conflicting responsibilities could influence a reasonable response to the foreseeable harm. Such a reasonable response could include conditions on any approval under the EPBC Act.

Implications

While the applicants were not successful in injuncting the Minister from granting the approval, the decision to recognise this novel duty of care could have significant consequences. This is the first time in Australia that a court has recognised a duty of care owed to children by a Minister exercising powers under any statutory environment or planning regime.

The recognition of a duty of care in connection with climate change-related harm under the EPBC Act framework is noteworthy, given the matters protected by the EPBC Act do not extend to greenhouse gas emissions or climate change. While protection is afforded to various environmental matters, including listed species and habitats, the health and wellbeing of human beings is not a protected aspect of the environment that would trigger the need for approval under the EPBC Act. However, by reference to the broader statutory scheme (including reference to the principle of inter-generational equity) the court noted the Act's object is to protect the interests of people and, in particular, future generations of people, in the environment — rather than the environment itself. Because this duty of care was not found by reference to the particular protected matters in the EPBC Act and instead within the broader statutory scheme, the interpretive approach may translate more readily to other pieces of environmental legislation at a state level.

This decision may also impact the grant of approvals under the EPBC Act. The court noted that in deciding whether to approve the project, 'a well-advised and responsible Minister would take notice of those matters', referring to the now-established duty of care owed to the applicants. Those in charge of approving carbon intensive projects may now be more alive to climate change-related issues and place greater weight on those risks when making decisions.

Shell

In a world first, the Dutch courts have intervened to require a private company to reduce its carbon emissions and bring its strategy in line with the goals of the Paris Agreement. Friends of the Earth v Shell is another example of how public interest organisations are using strategic litigation to seek to hold companies to account in reducing carbon emissions, as well as the role of 'soft law' frameworks in increasingly setting the standard of expected behaviour by companies.

Background

On 26 May 2021, Shell was ordered by the District Court in the Hague to reduce its aggregate annual volume of all CO² emissions by at least 45% by 2030, compared with its 2019 levels. This emission reduction applies to the entire Shell group — including its suppliers and customers (through its scope 3 emissions). Previously, Shell had committed to reducing its emissions by 20% within a decade, and to net-zero before 2050 — the District Court held that these commitments were not sufficient to meet the goals of the Paris Agreement.

The case was brought as a class action that comprised claimants including Friends of the Earth (among other public interest organisations) and over 17,000 Dutch citizens (the claimants).

The claimants' position was that Shell had an obligation arising from the 'unwritten standard of care' found in the Dutch Civil Code to contribute to the prevention of climate change through its corporate emissions reduction policy-setting for the Shell group.

The claimants argued that, based on Shell's current corporate policy-setting and proposed emissions reduction goals, Shell would not meet the standard of care, in part because the policy-setting was not in conformity with the goals of the Paris Agreement.

The claimants sought that, in order to meet the standard of care, Shell be required to reduce its aggregate annual volume of all CO² emissions by at least 45% by 2030 (the reduction obligation). The claimants argued the reduction obligation should be achieved relative to the emissions level of the Shell group in 2019 and in accordance with the global temperature target of the Paris Agreement (being to hold the increase in the global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C above pre-industrial levels).

The Dutch court found for the claimants and held that Shell should put in place the reduction obligation. In its judgment, the court noted:

'[t]he compelling common interest that is served by complying with the reduction obligation outweighs the negative consequences Shell might face due to the reduction obligation and also the commercial interests of the Shell group, which are served by an uncurtailed preservation or even increase of CO2-generating activities'.

Importantly, the court found that for the purpose of interpreting the 'unwritten standard of care' owed to the claimants under Dutch law, reference should be had to non-binding best practice 'soft law' instruments Shell had endorsed, such as the UN Guiding Principles on Business and Human Rights (UNGPs), the UN Global Compact Principles, and the OECD Guidelines for Multinational Enterprises. Further, the court noted that, due to the 'universally endorsed' content of the UNGPs, it would not matter for the purpose of interpreting the standard of care whether or not Shell had in fact committed to these standards.

In its interpretation of the unwritten standard of care, the court held that the global effects and harms arising from climate change were apparent from various reports published by the Intergovernmental Panel on Climate Change (the United Nations' key body for gaining insight into all aspects of climate change through scientific research). The court made the point that the goals of the Paris Agreement represent the best available findings in climate science, which is supported by widespread international consensus. The non-binding goals of the Paris Agreement represent a universally endorsed and accepted standard that protects the common interest of preventing dangerous climate change, which the court recognised in its interpretation of the unwritten standard of care.

Shell has noted that it plans to appeal the decision.

Key takeaways

The key takeaways from the decision are:

• The decision is an example of the hardening of 'soft law' instruments, including the UNGPs and other instruments such as the UN Global Compact Principles and the OECD Guidelines for Multinational Enterprises.
• This case is another milestone in the growing trend for courts to have regard to international law in deciding companies' obligations in the ESG space, regardless of whether the international law forms part of domestic legislation (eg in Nevsun Resources Ltd v Araya, the Canadian Supreme Court held that mining company Nevsun was able to be sued by miners under customary international law for alleged human rights abuses that occurred at a mine owned by Nevsun in Eritrea).
• While the decision is by a court of an individual Member State (as opposed to a European court), it may be persuasive in other jurisdictions, particularly in other EU Member States.
• Companies or organisations that are GHG emitters may also find themselves liable to suits in the Dutch courts, if a basis for assuming jurisdiction exists (eg if the defendant is domiciled in the Netherlands or if the Netherlands is 'where the harmful event occurred').

International Energy Agency Report

Background

As preparations ramp up for the UN Framework Convention on Climate Change COP26 scheduled for November 2021, this month the International Energy Agency (IEA) released a special report (the Report) at the request of the UK president of COP26, on what the world must do to achieve net zero carbon emissions by 2050. The Report concludes that net zero by 2050 requires a complete transformation of how the world produces, transports and consumes energy.

It can be expected that shareholders and activist litigants will compare companies' emissions reduction strategies or commitments to the measures set out in the Report. Shareholder scrutiny in this space is already high: last week, shareholders at Exxon's AGM voted to appoint two directors from activist hedge fund Engine No. 1, which has advocated for Exxon to invest in net-zero emissions energy sources and clean energy infrastructure, and re-evaluate its long-term capital allocation strategy to adapt to a changing energy market. Just hours later, at Chevron's AGM, shareholders voted in a proposal brought by Dutch campaign group Follow This for the company to cut its scope 3 emissions.

What does net zero by 2050 mean for the energy sector?

According to the Report, net zero by 2050 requires a dramatic decline in coal, oil and gas use, in combination with rapid upscaling of renewable investment and electricity generation, starting now. Unabated coal use must decline by 90%, oil by 75% and gas by 55% by 2050, while wind, solar, bioenergy, geothermal and hydro-energy must expand to provide two-thirds of the world's energy supply.

The Report concludes:

• Aside from projects that are already committed to, there should be no new oil and gas fields approved for development, and no new coal mines or mine extensions.
• Many of the LNG liquefaction facilities currently under construction or at planning stage are not needed.
• Advanced economies must phase out inefficient coal plants by 2030, with all old coal plants phasing out globally by 2040. Any plants existing post-2040 will be retrofitted with carbon abatement technologies.
• Emissions from existing coal, oil and natural gas supply chains must also fall, through a huge increase in emissions reductions measures, and eliminating avoidable methane emissions by 2030. This will involve ending flaring, using CCUS with centralised sources of emissions, and electrifying upstream operations.

While the IEA report was issued before the Shell and Sharma decisions, the full impact of it on future judicial decision-making is yet to be understood. We expect courts may be open to considering the decarbonisation pathways described in the IEA report to provide substance and context in similar duties-based disputes in the future.