Emissions ruling could set precedent

If there’s any doubt about the extent to which societal and legal expectations regarding climate change are evolving, a Netherlands court’s ruling ordering Royal Dutch Shell Plc to reduce the CO2 emissions of its 1,100 companies by 45 per cent as of 2030 from 2019 level should put the naysayers to rest.

“What you’ve got is a court interfering in the internal operations of a very big corporate target on the basis that the dangers of climate change outweigh the company’s commercial interests,” said Caroline Jageman, an energy and commercial lawyer at Jageman Law in Toronto.

Shell said last week it will appeal the Dutch court ruling.

But what are the chances that a Canadian court would respond similarly? And what impact will the decision have on Canadian carbon emitters?

Seven environmental organizations, including Greenpeace, representing 17,000 individual claimants, brought the case to The Hague District Court. They argued that the Dutch Civil Code required Shell to help prevent climate change through its corporate policy.

Shell’s failure to do so, they maintained, violated the claimants’ human rights, more particularly the right to life.

In its May 26 ruling, the court relied on a provision in the Dutch Civil Code making it unlawful to act in conflict with “unwritten law”. As the court saw it, the United Nations Guiding Principles on Business and Human Rights and international human rights jurisprudence had established that corporations have a duty to mitigate human rights abuses, including the right to be protected against climate change. That, the court concluded, also required companies to ensure that their supply chain and end-users, including consumers, limited CO2 emissions as much as possible.

The decision is a blow to traditional thought, which holds that corporations’ duty of care only goes as far as meeting minimum standards set by government. But the Shell ruling makes corporations responsible not only for consequences caused by their actual emissions, but also imposes a proactive (and prospective) duty to reduce them.

“The unique thing about the Shell ruling is that it is not merely preventative, but remedial in the sense that it imposes a specific target on the company and its subsidiaries,” Jageman said. “So the thinking about what’s reasonably required of corporations is definitely changing.”

This being said, it’s not even clear that the Dutch judgment, if upheld on appeal, will be enforceable against Shell Canada. The question bears asking because Shell Canada has stated that the ruling will “not change the actions we are taking.”

“Canadian courts are reluctant to enforce judgments that amount to mandatory injunctions, which is the case in RDS, and it’s going to be even harder to enforce those that are seeking policy change,” says Karen Galpern, a partner at Hansell LLP and a member of the Hansell Mclaughlin Advisory Group.

Although the Supreme Court of Canada recently ruled in a case upholding the constitutionality of federal emission standards that climate change was an “existential threat,” Canadian courts are in no way bound by the Hague court’s decision. Even if they were, the decision is clearly distinguishable as Canadian legislation does not mirror the Dutch Civil Code provision on which it rests.

“Making the same argument successfully in a Canadian court would definitely be an uphill battle,” Jageman said.

Especially so because Canadian courts have long been loath to trench on policy decisions, historically reserved for governments.

“The Shell decision is a departure from the doctrine of judicial restraint that is everpresent in Canadian courts,” said Melanie Gillis, a lawyer in Mcinnes Cooper’s Halifax office.

“That said, the case could act as yet another catalyst that transitions the common law to a renewable energy economy.”

In other words, precedent is one thing, persuasive effect is another.

“RDS shows that relevant, thoughtful courts in countries whose laws we respect are prepared to take judicial notice of climate change and its impacts,” said Carol Hansell of Hansell LLP and the founder of Toronto-based Hansell Mclaughlin Advisory Group, a corporate governance consultancy. “It’s a decision that’s worth paying attention to, and that people are talking about.”

Michael Gerrard, the founder and faculty director of the Sabin Center for Climate Change Law at Columbia University, believes the Dutch ruling will inspire similar cases elsewhere.

“The decision is getting a lot of attention and has raised many eyebrows around the world, especially when coupled with other important developments,” he said.

Those “important developments” include: Engine No. 1, a tiny hedge fund, unseated three members of Exxon Mobil Corp.’s board in May by way of trying to force the company’s leadership to deal with its alleged failure to adjust business strategy to match global efforts to combat climate change. About the same time, Chevron Corp. shareholders voted 62 per cent in favour of an activist proposal forcing the group to cut its carbon emissions. Also in May, the International Energy Agency called for an immediate halt in fossil fuel supply projects, while the U.S. Securities and Exchange Commission has embarked on a much anticipated re-evaluation of climate change disclosure rules.

In Canada, the pressure’s been mounting too.

A widely-cited opinion from pension expert Randy Bauslaugh in Mccarthy Tétrault LLP’S Toronto office, solicited by the Canada Climate Law Initiative (CCLI), an inter-disciplinary research group based at York University’s Osgoode Hall Law School and the Peter A. Allard School of Law at the University of British Columbia, concludes that Canadian pension standards legislation and jurisprudence impose a responsibility on pension fiduciaries to manage climate-related risk when investing their funds’ assets.

“People who manage investments need to take account of the financial implications of climate change, which affects every kind of economic activity across the country,” Bauslaugh said. “Those who don’t are being pretty foolish and opening themselves to a lot of criticism and liability.”

Professor Cynthia Williams at York University’s Osgoode Hall Law School believes Bauslaugh’s paper puts climate-related risk into the mainstream.

“Bauslaugh’s analysis say climate change is like any potential material risk in the sense that it needs to be incorporated in strategy, oversight and possibly disclosure,” she said.

Still, the core question raised in the Shell case remains: does corporate assessment of climate risk need to take into account an overriding duty of care beyond minimum government standards?

Whatever the courts decide, there’s no questioning the judgment’s broader impact.

“My gut feeling is that the case will give a broad boost to corporate ESG initiatives,” says Michael Killeavy, the Toronto-based commercial director at Power Advisory LLC, an energy industry consultancy. “There are large corporations who have been dormant to date on this front but are now starting to think about it.”