Want to know more? Call +41 22 73 31 649

21 June 2021

How can companies in the oil and gas industry efficiently address their ESG challenges? The case of Shell

 

On 26th May 2021, The Hague District Court has ordered Royal Dutch Shell to reduce the CO2 emissions of the Shell group by net 45% in 2030, compared to 2019 levels, through the Shell group's corporate policy. This is a landmark judgment because it is the first time in history that a judge has held a corporation liable for its contribution to climate change. The historic ruling, which has come as a result of the legal action brought by the environmental network Friends of the Earth Netherlands (Milieudefensie) together with 17,000 co-plaintiffs and six other organizations, can have enormous consequences for Shell and other enterprises operating in the oil and gas industry, regardless of whether the Appeals court confirms or overturns the District Court’s decision.

The judgment makes clear that preventing further climate change is not an obligation falling solely upon States, but that companies too must align their policies and comply with the emission targets set by the Paris Agreement. The same applies for the responsibility to respect human rights – in this case the right to life and the right to a secure family life – which entails a positive obligation for enterprises (and cannot only mean abstaining from interfering with the enjoyment of a right, as it does for States), and requires companies to take concrete measures to prevent, identify and mitigate human rights impacts. The ruling is a step further towards greater corporate accountability for social and environmental impact, as it extends a company’s responsibility to prevent human rights impacts linked to climate change to cover its whole global value chain. The Court considers that the parent company Royal Dutch Shell has control and influence over the Shell group sufficient to create an obligation of result upon it for the reduction obligation over the emissions connected to the activities of entire Shell group. The Court further believes that Royal Dutch Shell has an obligation of “significant best-efforts” with regard to the business relations of the Shell group – which means that it must take the necessary steps to remove and prevent (as well as use its influence to limit the consequences as much as possible of) the serious risks arising from the CO2 emissions generated by their suppliers and customers.

This judgment follows another landmark decision for the sector which arrived on 12th February this year, when the United Kingdom Supreme Court overturned a 2017 decision against the Ogale and Bille communities of Nigeria's Niger Delta, ruling that Royal Dutch Shell can be sued in English courts for the years of land, swamps, groundwater and waterways contamination caused in the Niger Delta by oil spills. The recognition of responsibility of the parent company of the Shell group, domiciled in the UK, allows the affected community members (in this case a group of 42,500 Nigerian farmers and fishermen) to claim reparation for the violation of their human rights committed by its overseas subsidiary Shell Petroleum Development Company of Nigeria (SPDC). This has opened the way for parent companies to be held accountable for the acts of their subsidiaries: their responsibility stems from the significant control they exercise over the subsidiary, towards which they are thus obliged to exercise duty of care. 

The Supreme Court held that the appeal of the claimants – who argued that they could not expect justice in a Nigerian court for this case – “had a real prospect of success” and should be heard in London. The Supreme Court determined that there is a good arguable case that Shell is legally responsible for the systemic pollution affecting the Ogale and Bille communities, overturning the lower Appeals Court’s decision by stating that it had "materially erred in law'' when it ruled against the claimants. This ruling could represent a turning point also in other common law countries such as Canada, Australia, and New Zealand, where it could constitute a precedent to grant access to an effective remedy to the impoverished communities whose rights have been violated by multinational corporations. 

The operations of Shell in Nigeria, which started in the late 1950s, are not new to sustainability-related complaints and legal battles.  In the past, Shell has had to pay conspicuous compensation sums to fishermen and farmers for destroying thousands of hectares of mangroves thereby damaging hugely the local fishing industry. The lengthy and numerous legal battles of the Anglo-Dutch energy giant, including the settlement that the company agreed to pay in 2015 to the Bodo community for oils spills, which costed 83.4 million dollars, as well as the damages awarded to farmers by an Appeals Court in the Netherlands this year (after 13 years of legal battles) over pipeline leaks in the Niger Delta, suggest that the ESG risks related to the company’s operations have not been efficiently mitigated, or their materialization proactively addressed. Although according to the UNGPs a business’ responsibility to respect human rights requires an active engagement in remediation when harm has occurred – and international standards require victims to have access to remedy for human rights violations – one of the points raised by the members of the Ogale and Bille communities was indeed that no adequate cleaning was provided, nor remediation to the damage caused to their health was offered by the oil company. 

But how can a company operating in complex settings and in a challenging sector such as the oil and gas industry be sure that it does no harm to the environment and the community affected by its operations?

The petroleum sector carries a profoundly poor ESG narrative with it, due to the industry’s environmental footprint on biodiversity and climate change and the associated impacts that these factors have on the human rights of the affected communities, who see their right to food, to safe drinking water, to health, to an adequate standard of living, and to an effective remedy – to name a few – harmed. These rights (as all human rights) are deeply interconnected: as contamination, depletion, and unequal distribution of water and food contributes to existing poverty, the right to safe drinking water and sanitation, as well as the right to food, are a prerequisite for many other human rights: they are derived from the right to an adequate standard of living and inextricably related to the right to the highest attainable standard of physical and mental health, as well as the right to life and human dignity.  

The potential that multi-billion-dollar companies in the gas and oil industry have to generate negative impact on both the E and the S can also mean that – if willing to take action – they surely have the ability and the resources to create positive durable impact on a range of areas covered by the SDGs. Embarking on a genuine sustainability journey – thereby accountingfor both the needs to deliver financial returns as well as the related broader social and environmental risks, opportunities, and obligations – requires time and expertise. Being a true sustainability leader means rethinking the very identity of an organization, changing its culture, norms, and values, and integrating the SDGs into its corporate operating model, including its corporate systems, policies and processes. This inevitably requires a shared understanding amongst all stakeholders of the potential of the SDGs to generate value, to allow the alignment of such objectives with its corporate goals, and their operationalization in its core business practices through the elaboration of a robust, norms-based sustainability strategy. 

An Atlas providing specific guidance for the oil and gas industry has been elaborated by the United Nations Development Progamme (UNDP), the International Finance Corporation (IFC) and IPIECA, and it includes how human rights impact assessments can inform engagement, contribution, and mitigation measures. The OECD Guidelines for Multinational Enterprises, as well as the OECD Due Diligence Guidance, further provide – respectively – guiding principles for a responsible business conduct in a global context, and a practical guide to operationalize these principles and address the impact of business operations on ESG factors. The international standards enshrined in the core human rights treaties on economic, social and cultural rights (ICESCR) and on civil and political rights (ICCPR) should be the central reference point for any sustainability strategy that aspires to further the rights of the local community members. Local communities are the stakeholders most directly affected by the impacts of the oil and gas industry operations, and proactively engaging with them on a continued basis is essential to truly identify salient ESG risks and inform the company’s planning, decision-making and implementation of sustainability initiatives accordingly. 

The case of Shell shows how SDGs can pose significant challenges for the oil and gas sector. Research has shed light on the negative effects that the petroleum industry can have, not only on the health of residents – e.g. health consequences derived from prologued exposure to harmful chemicals found in crude oil (either through direct skin contact or through the consumption of contaminated vegetables, or even through direct inhalation of the smoke released by burning oil) – but also on unborn children if the future mother leaves too close to an oil spill. Oil and gas companies must proactively manage potential negative impacts that their activities can have, inter alia, on livelihoods and food security (SDG 2), on the right to health (SDG 3)on access to water and sanitation (SDG 6), on the integrity of marine and coastal ecosystems (SDG 14), and on the preservation of terrestrial ecosystems and biodiversity (SDG 15). As the UNDP Guidelines highlight, identifying, preventing, and addressing these challenges requires a deep understanding of the complex social, economic, geographical, and biological dynamics of a given context. The Atlas suggests some practical measures that can help mitigate these risks, which include health impact assessments and early incorporation of protection strategies for the health of employees and local communities in the design of operations and planning processes; developing a corporate water strategy that accounts for the impact of operations on local water resources; incorporate environmental assessments into management plans, to mitigate the potential negative impacts on environment in the areas around offshore operations. Particular attention in the Guidelines is given to accident prevention, suggesting the establishment of standards and operations integrity management systems, and encouraging the use of advanced technologies to prevent oil spills and mitigate the risks/reduce the negative impacts of oil and gas companies’ activities on local biodiversity. 

The Hague District Court decision, the UK Supreme Court ruling, and other similar decisions taken by national courts, render very tangible the pressing expectation upon parent companies to carry deep, sufficient due diligence also on the operations of their subsidiaries and contractors in the supply chain. The upcoming EU regulation on Human Rights Due Diligence (HHDD) will be a further step in this direction, requiring not only EU based companies, but all EU operating companies to identify, prevent, and mitigate – e.g. through the establishment of an oil spill response plan – adverse human rights and environmental impacts on their entire upstream and downstream value chain, and to account for how adverse impacts are addressed, even if such impacts do not take place within EU borders. On the definition of the scope of the HHDD obligations, the UNGPs in Principle 13 state clearly that companies should (also) seek to prevent or mitigate adverse human rights impacts “that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.” The commentary further explains that business relationships “include relationships with business partners, entities in [their] value chain, and any other non-State or State entity directly linked to [their] business operations, products or services”, suggesting that parent companies would arguably have a responsibility also towards the action of their subsidiaries. 

Therefore, companies in the oil and gas sector find themselves under increasing pressure from both regulators and investors to avoid the risks of not sufficiently considering the implications of potential human rights violations in their due diligence process, which, as the recent Shell decisions make manifest, can result in significant financial impact.

Companies in the oil and gas sector must incorporate the SDGs in their risk and opportunity assessments and planning processes, in order to identify potential risks and implement preventative measures. To foster the respect of human rights, they need to align their policies with the UNGPs, integrate the relevant Sustainable Development Targets into their corporate objectives, and adopt internationally agreed standards as a basis for monitoring and reporting on their impact. No real progress in the implementation of rights can happen overnight. But a genuine commitment towards the realization of the SDGs starts with putting the rights as a foundation of any sustainability effort.