Shell’s Climate Liability Threat Goes Global

Can non-shareholder private entities force oil and gas companies to accept lower returns on capital? Investors in Royal Dutch Shell (RDS.A) (RDS.B) will receive an answer to this question if an environmental NGO moves forward with a threatened lawsuit in the Netherlands that would require the company to do exactly that.

Notably, Shell recently committed to reducing its greenhouse gas emissions by 50% through 2050 via billions of dollars of investments in renewable energy capacity. The NGO in question, Friends of the Earth Netherlands (aka Milieudefensie), deems this effort insufficient and insists that the company must abandon its oil and gas reserves and be “net zero” (i.e., no net emissions of greenhouse gases) by that date instead. While Shell’s investors largely shrugged off the threat (see figure), if they even noticed it at all, the development represents the opening of a new front in the lawsuits being waged by U.S. municipalities against the company and its Big Oil competitors.

Shell has previously pledged to spend up to $2 billion annually on clean energy investments via its New Energy division, doubling its previous year’scommitment. Friends of the Earth Netherlands responded to the updated pledge with a lengthy letter to the company pointing out, among other things, that $2 billion represents only 5% of Shell’s total annual capital investment. Deeming this insufficient if the company is to contribute to the Paris Climate Agreement’s greenhouse gas emission reduction target, the NGO’s letter further states that Shell will be “breaching its legal duty of care by causing climate damage across the globe” if it does not rapidly shift the majority of its capital spending to ventures such as the New Energy division. It is on this basis that Friends of the Earth Netherlands believes that it “is holding Shell to account” by promising to sue the company if it does not develop a plan for meeting the NGO’s demands by the end of May.

While the lawsuit threat is seemingly a standalone development, the NGO’s letter has all of the hallmarks of the climate litigation that has been brought against Shell by municipalities in both California and New York. The letter to the company details 11 indicators of Shell’s alleged “violation[s] of the law”:

a) Shell has been aware that fossil fuels lead to climate change for a long time; b) Shell has been aware that climate change has severe consequences for a long time; c) Shell substantially contributes to climate change; d) Shell has been aware that global warming must remain well below 2°C for a long time; e) Shell has been aware that it needs to take (precautionary) measures for a long time; f) Shell has been on a collision course with global climate objectives since 2007; g) Shell is misleading the general public with regard to the (un)sustainability of its business; h) Shell is basing its strategy on the assumption that the climate ambitions will not be realised; i) Shell’s climate ambitions are insufficient; j) Shell continues to invest in fossil resources which must remain in the ground; k) Shell is hampering the energy transition…

These supposed indicators of guilt all fall into one of three categories: (1) Shell is a major contributor to climate change; (2) Shell has known of the relationship between fossil fuel extraction and climate change for decades; and (3) Shell has misled the public about its past and future contributions to climate change. The climate lawsuits brought against Shell and several of its competitors by San Francisco, Oakland, and New York City focus on the same three issues, especially the distinction between what the company knew in the past and what it told the public about climate change.

Indeed, The Huffington Postreported the day after Friends of the Earth Netherlands sent its letter to Shell that the company had predicted these climate lawsuits 20 years ago. That same day The Washington Post reported on a trove of documents showing the company’s awareness of climate risks going back 30 years. About the only aspect of the U.S. climate lawsuits against Shell that the NGO’s letter does not explicitly borrow from is the specious similarities between Big Oil’s behavior and the Big Tobacco lawsuits of the 1990s (although, it does include a supporting reference to a 3rd-party report that makes the comparison).

A second reason that investors should follow this threat is because Dutch judges have ordered changes to climate plans in the past. As the NGO’s letter states about a similar lawsuit that was brought against the Dutch government,

It is by this [consequential] effect that treaty provisions and objectives of the Paris Agreement may determine what ought to constitute socially responsible behaviour on the part of Shell according to Dutch standards, even if Shell is not a party to the treaty…

It is, among other things, because of this consequential effect… that the District Court of The Hague in the Urgenda case ruled that the climate policy of the Dutch State was in breach of its duty of care and hence unlawful. The State was subsequently ordered by the court to amend and improve its climate policy. Like the State, Shell must accept this consequential effect and Milieudefensie is of the opinion that this should have consequences for Shell’s current climate strategy.

Just a week prior to the sending of the letter, The Economistpublished an articleon the investments being made by Shell and its European competitor Total(TOT) in renewable electricity (“Royal Dutch Shell and Total flirt with becoming utilities”). Among the more interesting facts in the article is the statement that Shell’s electricity business will need to grow to up to $100 billion just to “become material to Shell.” In addition to requiring a great deal of additional investment (and also assuming that this investment would be entirely in renewable electricity), the article also points out that Shell could expect lower returns on capital from its electricity investments: “[W]hereas supermajors aim for returns on capital on big oil and gas developments of 15%, renewables provide returns of 7-9%.” The head of Shell’s New Energies division is quoted as saying that he is targeting electricity returns of 8-12%, still below that of fossil fuel developments even if higher than the rates achieved by other renewables investments.

The primary difference between the American lawsuits against Shell and the threatened Dutch lawsuit is in the requested relief. The American lawsuits would force Shell and its competitors to pay into a climate change “abatement fund” that would finance infrastructure investments in major coastal population centers, but they explicitly state that they do not seek to restrain Shell’s business operations. The threatened Dutch lawsuit, on the other hand, would seek to fundamentally shift Shell to business operations with lower returns on capital than it currently targets. Shell investors should monitor this developing situation as a result.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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