Royal Dutch Shell wins landmark climate case – what does this mean for investors?
Joshua Sherrard-Bewhay, ESG analyst, Hargreaves Lansdown: “Royal Dutch Shell’s appeal against a landmark ruling that legally obliged it to reduce its carbon emissions by 45% by 2030, including Scope 3 emissions (95% of Shell’s carbon footprint), has been granted by the Hague District Court.
The legal precedent, that applied Dutch Duty of Care and international human rights laws to Shell, over and above their corporate requirements, would have legally obliged it 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.
While this successful appeal signals to high emitters that they are safe for now from the jurisdiction of international frameworks, like the Paris Agreement and The European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR), the case still may be elevated to the Supreme Court if claimants Milieudefensie (Friends of the Earth Netherlands) decide to do so.
A ruling here would see an issue that’s pivotal to the fight for Net Zero debated: can companies be held accountable to international human and environmental rights obligations in the same way countries currently are. This could have seismic implications both for global decarbonisation and the way international law functions.”
Derren Nathan, head of equity research at Hargreaves Lansdown: “There’s no doubt that financial returns have been the key focus of Shell’s strategic direction and investment spend in recent times. 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.
In distribution, Shell is particularly well placed to provide lower carbon options to motorists. Its global network of 47,000 service stations is the largest of all the oil majors. By 2030, it’s hoping to nearly quadruple the size of its Electric Vehicle charging estate, to around 200,000 connection points.
It’s also a big player in Biofuels and is currently building one of the largest renewable hydrogen facilities in the Netherlands. These technologies can help provide alternative sources of energy for not just automobiles, but also heavy-duty trucks, planes, and ships.
Strong financials enable it to self-fund the significant organic investment required to replace oil reserves and pursue renewable energy and low-carbon fuel initiatives. Shell invests over $20bn each year across its business, with $10bn-15bn earmarked for low-carbon energy solutions between 2023 and 2025.
However, this year’s investment spending is now set to come in lower than initially expected. If this proves to be part of a wider pullback, it could raise some questions over Shell’s longer-term growth prospects.
With a big chunk of cash flows ringfenced for shareholder returns, there’s also pressure for cash generation to remain high. On this front, Shell’s doing a remarkable job of navigating a tricky backdrop, maintaining high levels of shareholder payouts and continuing to pay down debt.
It’s no huge surprise that corporate strategy is being shaped by market forces, and for the oil majors to take bigger steps away from fossil fuels then it’s this that will be the driving factor. Financial penalties, be they levied by the courts or tax officials, are one option. The flipside to that are financial incentives to invest in renewables at scale.
But neither of these are as powerful as shifts in demand, which can drive oil prices down, and make renewables more appealing. The only way for that to happen is for consumers and businesses to vote with their cash.”
