We need to reduce CO2 emissions to combat dangerous climate change. At the same time, legislators fail to create clear standards for businesses to meet the Netherlands' climate ambitions. Directors find themselves in an uncertain phase; on the one hand, it is evident that CO2 emissions must be reduced. On the other hand, the concrete standard for an individual company still needs to be determined. Directors face a greater liability risk as a result. If a rule already derives from unwritten law but needs to be enshrined in legislation, there is a risk of a company unknowingly breaking the rules. A director may be liable if they can be personally blamed for this breach of regulations. But how significant is this risk, and how do companies and boards arm themselves against it?
While the government still needs to set clear standards, the courts already did. In the Shell Climate case, the oil company was imposed that its CO2 emissions must be 45% lower by 2030 than in 2019. This applies not only to its emissions but also makes efforts to achieve this target for the emissions it causes indirectly through its procurement and sales. Friends of the Earth already warned Shell executives that if Shell fails to meet this clear standard, they will be held personally liable.
The Shell Climate Verdict, which the company has incidentally appealed against, does not create any direct obligations for other companies. However, it can be inferred from the judgment that, according to the court, there is a general unwritten standard to reduce CO2 emissions. Now that we know the causes and consequences of climate change, everyone must do their part to counteract that change. How far this obligation extends depends on the impact that the activities of a (legal) person have on the climate and the possibilities the (legal) person has to change this impact for the better. Therefore, the 45% standard set for Shell can only be adopted one-to-one by some other companies.
Good governance
Even after the Shell judgment, we cannot determine which reduction target applies concretely to each company. But now that it is clear that every company has an obligation to do everything reasonable to reduce CO2 emissions, there is a risk that a company will be sued retrospectively for failing to take sustainability measures. Therefore, good governance entails proactively making sustainability policies, regardless of legal standards. Against this background, there is also the possibility that the board will be held liable either internally by the company or externally by third parties if it has not developed sufficient vision or strategy in this area. Whether directors will actually be responsible, however, remains to be seen.
Are directors liable?
To date, the Supreme Court remains reluctant to accept the personal liability of directors. Doing business implies taking risks, which means wrong decisions are also possible. To prevent directors from losing their freedom to do business and being overly influenced by defensive considerations, the Supreme Court has adopted a guideline that a director can only be held liable under special circumstances.
When assessing claims against directors for negligence in taking sufficient sustainability measures, I expect that the ambiguities mentioned above in the regulations will also be considered an essential factor. Liability of directors is, put, only at issue in cases where the director 'should have known better'. This, therefore, requires, at a minimum, that the board should have known about the standard the company was required to meet. Moreover, the current lack of a level playing field between competing companies in terms of emission standards should also be considered when assessing what can reasonably be expected of a company. Indeed, if a company implements far-reaching measures when its competitor does not have to, this may weaken its competitive position. The board should be free to make a genuine trade-off between the social interest of addressing climate change and the company's interests.
Establishing causality is highly complex
Finally, it is also complex to establish a causal link between an individual company's CO2 emissions and its climate impacts and subsequent damages to an individual or group. Climate change is the result of cumulative emissions of CO2 from human activities over long periods of time. It is, therefore, challenging to establish a direct causal link between a specific claim and a company's emissions. It is even more difficult, or perhaps even impossible, to establish the causal link between those damages and the acts or omissions of an individual director. Incidentally, no damage claims in the area of climate liability are known in the Netherlands so far. Besides, it is not compensation for damages but the change of behaviour to prevent climate damage.
Although a damages liability will not be an issue soon, a damages claim can significantly impact the company and its directors. Anyone caught in the crosshairs of environmental organisations incurs damages by definition. The reputational risk and huge costs associated with such proceedings are almost always more damaging to a company than a liability claim itself.
Record it
In future proceedings against directors, judges will assess whether a board has done all that could reasonably be expected, to prioritise sustainability in a responsible manner. It is important to note that not every company has the financial resources to make the transition to net-zero emissions all at once without jeopardising its financial health. Therefore, an absolute commitment to complete climate neutrality is not expected in the short term. It is crucial to record all efforts in writing to demonstrate that a conscious trade-off was made in potential liability proceedings. This can be done in minutes, on board agendas or through e-mails. By documenting the decision-making and considerations, it can be shown that the board was aware of the sustainability issues and potential liability risks are controlled.
