Shell wins landmark climate case - what does it mean for investors?

A Dutch court has overturned a landmark ruling against British-Dutch owned oil and gas company Shell ordering it to cut its absolute carbon emissions by 45% by 2030 compared with its 2019 levels.

In a written summary of the ruling, the Court of Appeal of The Hague said that it annulled the lower court's decision because it was "unable to establish that the social standard of care entails an obligation for Shell to reduce its CO2 emissions by 45%, or some other percentage.

"There is currently insufficient consensus in climate science on a specific reduction percentage to which an individual company like Shell should adhere."

The ruling said that: "for Shell to reduce CO2 emissions caused by buyers of Shell products ... by a particular percentage would be ineffective in this case. Shell could meet that obligation by ceasing to trade in the fuels it purchases from third parties. Other companies would then take over that trade."

However, the court did say that the company has a duty of care to limit its emissions, and that "protection against dangerous climate change is a human right".

The previous ruling had included both Shell's own emissions and so-called Scope 3 emissions produced by consumers using its products.

Shell pleased with the decision

In a statement, Shell plc Chief Executive Officer Wael Sawan said after the ruling: "We are pleased with the court's decision, which we believe is the right one for the global energy transition, the Netherlands and our company.

"Our target to become a net-zero emissions energy business by 2050 remains at the heart of Shell's strategy and is transforming our business."

The company added: "By the end of 2023, Shell had achieved more than 60% of its target to reduce Scope 1 and 2 emissions from its operations by 50% by 2030, compared with 2016." However, Scope 3 emissions count for 95% of Shell’s carbon footprint.

Court ruling disappoints environmental groups

The decision was a defeat for environmental group Friends of the Earth Netherlands which filed the original case and had hailed the original 2021 ruling as a victory for the climate.

"We are shocked by today's judgment," Friends of the Earth said in an email. "It is a setback for us, for the climate movement and for millions of people around the world who worry about their future. But if there's one thing to know about us, it's that we don't give up."

What does the ruling mean?

The previous ruling, which had just been overturned, "would have legally obliged it [Shell] to significantly reduce the exploration of new oil and gas operations, something that the oil and gas giant previously pledged to do but is now facing pressure for backtracking on," said Joshua Sherrard-Bewhay, ESG analyst at Hargreaves Lansdown.

Analysts at the investment firm say that the key driver of Shell's investment decisions remains financial returns.

"That's gone down pretty well with shareholders of late, despite the longer-term viability questions raised by reduced emissions targets. However, that doesn't mean Shell is ignoring the energy transition entirely", said Derren Nathan, head of equity research at Hargreaves Lansdown.

Green investments still in the pipeline

Shell has ambitious green investment plans, including nearly quadrupling the size of its electric vehicle charging estate, to around 200,000 connection points by 2030. The company is also building one of the largest renewable hydrogen facilities in the Netherlands.

The company invests more than $20bn (€18.84bn) each year across its business. Between 2023 and the end of 2025 the oil company is investing between $10bn and $15bn into "low-carbon energy solutions including charging for electric vehicles, biofuels, and renewable power".

However: "This year's investment spending is now set to come in lower than initially expected," said Nathan, adding: "If this proves to be part of a wider pullback, it could raise some questions over Shell's longer-term growth prospects."

For the future, the analyst said, it is clear that "the pressure for cash generation remains high", a big part of which is being ringfenced for shareholder returns.

Otherwise, for the oil majors, including Shell, a corporate strategy suggesting taking bigger steps away from fossil fuels, could mainly be shaped by market forces, for instance by financial penalties or incentives.

But, overall, the most powerful effect could come from the shifts in demand, which can drive oil prices down, and make renewables more appealing, according to HL's analysis. "The only way for that to happen is for consumers and businesses to vote with their cash," said Nathan.

The latest ruling can be taken to the Dutch Supreme Court.

The ruling upholding Shell's appeal came as a 12-day UN climate conference was entering its second day in Azerbaijan.