WR ESG Alert: Shell appeals landmark climate ruling while EU members agree on Corporate Sustainability Due Diligence Directive
In this month's ESG alert, we describe Shell's appeal against a landmark climate ruling, the approval by EU members of a revised version of the Corporate Sustainability Due Diligence Directive as well as recent EU climate initiatives and proposals to align Norwegian climate regulations with EU standards
Environment
Hearing of Shell's appeal against judgment ordering 45% emissions reduction
On 2 April 2024, a Dutch court began hearing Shell's appeal against a landmark climate ruling from 2021, whereby a Dutch district court ordered Shell to reduce its absolute carbon emissions at a global level by 45% by 2030 compared with 2019 levels. This includes the so-called "scope 3" emissions from the company's value chain, including its customers' use of fuels, which account for around 95% of Shell's emissions.
The case was brought by several environmental groups, spearheaded by Friends of the Earth Netherlands (also known as Milieudefensie), on the grounds that Shell was in breach of its legal duty of care due to its impact on climate change, and that the company was undermining the ambitions of the Paris Agreement.
The court's decision stands in stark contrast to Shell's own stated climate goals, which include:
- a 15-20% reduction in the carbon intensity of products it sells by 2030 compared with 2016 levels;
- an "ambition" to reduce customer emissions from the use of its oil products by 15-20% by 2030 compared with 2021; and
- an aim to become a "net zero" emissions company by 2050.
In its appeal, Shell argued that the court's order goes beyond what is required under Dutch law and beyond "even the most ambitious pathways set out by policymakers". Shell also denied that it should be responsible for scope 3 emissions on the basis that Shell has little influence over the fuel consumption of its customers. Finally, Shell warned that the case could set a precedent that would be harmful to the Dutch economy, pointing to a recent announcement by Milieudefensie that they are bringing another climate lawsuit against the Dutch bank ING to, among other things, force the bank to reduce its CO2 emissions by 48% by 2030 compared with 2019 levels.
For their part, Milieudefensie remain firm, stating that "It’s important for Shell to accept its responsibility and phase out its oil and gas activities. We’d rather see Shell invest its time and energy in achieving its goals as mandated by the court rather than pursue an appeal. This is the only way we can avert catastrophic climate change.”
The hearing is expected to conclude by 13 April 2024. It is unclear how long the court will take to issue a verdict.
Proposition to the Parliament on the implementation of the Corporate Sustainability Reporting Directive (Norwegian)
On 15 March, the Norwegian government put forward a proposition to the Parliament with proposed amendments to the Accounting Act and a number of other laws to implement the Corporate Sustainability Reporting Directive (CSRD). The proposal is mainly a follow-up of the recommendations from the Securities Committee (Verdipapirutvalget, NOU 2023:15), and is closely aligned with the provisions in the CSRD. However, there are some deviations from the Committee's proposal, for instance that the Ministry is proposing that large state-owned enterprises should also be subject to the new obligations.
The CSRD entered into force in the EU in January 2023 and strengthens the reporting rules concerning environmental and social information. A broader set of large companies, as well as listed SMEs, will gradually be required to report on sustainability.
Under the CSRD, companies must disclose their business model, sustainability objectives, progress, management's involvement in sustainability policies, due diligence processes, adverse impacts, mitigating measures, sustainability risks, and relevant indicators. Additionally, the CSRD mandates disclosure of transition plans for climate change mitigation, if relevant, ensuring alignment with a sustainable economy and the Paris Agreement's goal of limiting warming to 1.5°C. Essentially, a transition plan delineates how a company intends to thrive in a greener economy, showcasing its adaptability and strategic alignment.
The first set of reporting standards under the CSRD, developed by the European Financial Reporting Advisory Group (EFRAG), was adopted in 2023.
The Norwegian legislative proposal suggests the same timeline for implementation in Norway as in the EU.
Proposition to the Parliament on a new Act regarding sustainable products and value chains (Norwegian)
On 22 March, the Norwegian government put forward a proposition to the Parliament for a new Act on sustainable products and value chains. The Act enables a new and strengthened framework for sustainable products.
The new Act provides a basis for requiring products to be designed to fit into a more circular economy, so that products last longer, are easier to repair, can be recyclable, result in reduced emissions of greenhouse gases and other pollutants, and create less waste. The Act also authorises further regulations with requirements for sustainability throughout the life cycle in product areas of high priority due to their environmental and economic importance for the transition to a circular economy. This applies to batteries, vehicles, packaging, plastics, electrical and electronic products and textiles. Accordingly, more specific requirements for these product categories will be developed continuously over the years to come.
An important backdrop for the new legislation is the circular economy action plan that the European Commission adopted in 2020, and which is one of the main building blocks of the European Green Deal. The circular economy action plan announces initiatives along the entire life cycle of products. It targets how products are designed, promotes circular economy processes, encourages sustainable consumption, and aims to ensure that waste is prevented and that resources are kept in the economy for as long as possible.
Revision of the Energy Performance of Buildings Directive
On 12 March, the European Parliament officially adopted the amended directive, already agreed with the Council, following provisional agreement reached in December 2023 on the proposed revision of the existing Energy Performance of Buildings Directive. The revision of the Energy Performance of Buildings Directive targets a gradual reduction of emissions and energy consumption, with the goal of achieving climate neutrality in the EU building sector by 2050. Key measures include:
- all new buildings must be zero-emission by 2030
- all new 'public' buildings must be zero-emission by 2028
- refurbishment of the 16% worst-performing non-residential buildings in terms of energy performance by 2030
- refurbishment of the 26% worst-performing non-residential buildings in terms of energy performance by 2033
Member states will consider the life-cycle global warming potential of buildings when calculating emissions. Residential buildings are expected to reduce average primary energy use by at least 16% by 2030 and by 20-22% by 2035.
Solar installations will be required in public and non-residential buildings, and in all new residential buildings by 2030. Member states are mandated to outline measures to decarbonise heating systems, with fossil fuel boilers phased out by 2040 and subsidies for stand-alone fossil fuel boilers prohibited from 2025. Financial incentives will be available for hybrid heating systems utilising renewable energy sources.
Agreement on the CO2 compensation scheme between the Norwegian government and industry (Norwegian)
On 15 March, the Norwegian government, industry associations and trade unions reached an agreement on the Norwegian CO2 compensation scheme that will be valid from 2024 until 2030.
The CO2 compensation scheme is linked to the EU Emissions Trading System (EU ETS), and allows for member states to partially compensate undertakings in energy-intensive industries for increases in electricity prices resulting from the EU ETS. The ultimate objective is to prevent carbon leakage, referring to the situation that might occur if businesses were to transfer production to other countries with less stringent climate policies.
The revised scheme includes an annual maximum of NOK 7 billion in CO2 compensation for eligible industries, a cap that will be subject to inflation adjustments. An important element in the revised scheme includes a commitment for the industries to implement emission reduction and energy efficiency measures corresponding to 40% of the CO2 compensation paid. Also, the existing CO2 allowances price floor will be removed.
Since the establishment of the measure in 2013, Norwegian spending under the CO2 compensation scheme has drastically increased, primarily driven by a rise in the price of emission allowances.
The Ministry of Climate and Environment will now direct the Norwegian Environment Agency to commence work on revising the existing rules for CO2 compensation. These revisions will then be open for public review. The revised CO2 compensation scheme will also be subject to approval by the EFTA Surveillance Authority (ESA), together with the Norwegian Parliament's annual approval as part of the ordinary state budget process.
Social
EU Council and Legal Affairs Committee of the European Parliament approves amended draft of the Corporate Sustainability Due Diligence Directive
On 15 March, the Council of the European Union (the "Council") surprisingly approved a largely watered-down draft of the Corporate Sustainability Due Diligence Directive (the "CS3D"). On 19 March, the amended draft of the CS3D was approved by the Legal Affairs Committee (JURI) of the European Parliament. The approvals followed in the wake of a volatile political process, in which the Council vote was postponed several times after an informal agreement on the CS3D was reached between the European Parliament and the Council on 14 December 2023.
The CS3D forms part of an extensive range of recently enacted and proposed EU legislation on sustainability and responsible business conduct, and was first proposed by the European Commission on 23 February 2022.
In the draft approved by the Council and JURI, the scope has been significantly reduced compared to the Commission's proposition. The thresholds for EU companies have been raised from 500 to 1000 employees and from 150 million euros to 450 million euros in global turnover. Non-EU companies must have a turnover exceeding this threshold within the EU, while the proposed lower thresholds for companies operating in high-impact sectors have been removed.
The scope is significantly narrower than that of the Norwegian Transparency Act, and estimates show that only about 0.05 % of European companies will be encompassed by the revised CS3D. Moreover, the amended draft provides for several phase-in steps, meaning that the full scope will only be applicable five years after the directive has entered into force.
Although the scope of the CS3D has been narrowed down, the key obligations imposed by the directive remain largely unchanged. First, in-scope companies must conduct risk-based human rights and environmental due diligence. Second, companies covered by the directive must adopt and effectuate a climate transition plan to ensure, through best efforts, that the company's business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement.
The European Parliament is expected to vote on the amended draft during the plenary session of 22-25 April 2024. The CS3D has been marked as EEA relevant, and alignments with the Norwegian Transparency Act will likely be required before the directive is implemented into Norwegian law. As envisaged in the preparatory works to the Transparency Act, an evaluation of the Transparency Act may result in environmental impacts being included in its material scope.
ILO agreement on living wages
On 13 March, the International Labour Organization's (ILO) Governing Body endorsed an agreement on living wages. The agreement includes a definition of what constitutes a "living wage", as well as clarifications on the methodologies which may be used to calculate living wages.
In the agreement, the concept of the living wage is defined as a wage which is:
- the wage level that is necessary to afford a decent standard of living for workers and their families, taking into account the country circumstances and calculated for the work performed during the normal hours of work;
- calculated according to the ILO’s principles of estimating the living wage, as outlined in the agreement; and
- to be achieved through the wage-setting process in line with ILO principles on wage setting.
Companies covered by the Transparency Act are required to carry out due diligence relating to fundamental human rights and decent working conditions. Section 3(1)(c) of the Act stipulates that the concept of decent working conditions includes work that provides a living wage. The ILO agreement on living wages may therefore provide guidance for the interpretation of the Norwegian Transparency Act, and may be an important tool for companies to determine whether decent working conditions are observed in their own operations, their supply chains or among their business partners. It may also be part of the framework employed for stakeholder consultations pursuant to the Transparency Act's due diligence requirements.
Wikborg Rein's monthly ESG alerts will cover key developments on topics of relevance under the ESG umbrella. The WR ESG alerts intend to offer a focused perspective on environmental and social issues, emphasising material developments and their implications. However, this may not encompass all aspects of the broader ESG spectrum and will generally not cover governance-related updates.
The WR ESG alerts primarily cover regulatory developments within Norway and the EU. We endeavour to keep you informed about the evolving landscape of ESG regulations, although it is essential to verify and cross-reference information, considering the dynamic nature of regulatory environments. Please note that the information shared in the WR ESG alerts is for informational purposes only and should not be construed as legal advice.