The Impact Of Dutch Court’s Ruling On Shell

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The Impact Of Dutch Court’s Ruling On Shell
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Late last month a Dutch court ruling sent shockwaves throughout the oil and gas industry after Royal Dutch Shell PLC was found to be “partially responsible for climate change”. Shell has been ordered to significantly reduce their current ‘absolute carbon emissions’ output. From their 2019 levels, Shell must reduce their emissions by 45% by 2030.

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Dutch Ruling On Shell

The ruling has been a long time in the making. In 2019, Milieudefensie, the Dutch arm of Friends of the Earth, an environmental non-profit, filed the initial lawsuit, which was then joined by tens of thousands of other Dutch citizens, including six other environmental groups. Their claim was that the core business operations of Shell are considered human rights violations in both the Netherlands and European Union. Additionally, the suit argued that Shell continued their business practices for numerous decades knowing the dangerous extent of the carbon emissions. In their defense, Shell claimed that if they were ordered to lower their fossil fuel output, and thus their overall carbon emissions, their competitors would steal market share as Shell’s access to markets would be impacted by the court’s emissions ruling. After the ruling, Shell’s Chief Executive Ben van Beurden echoed this sentiment, sharing “Imagine Shell decided to stop selling petrol and diesel today. This would certainly cut Shell’s carbon emissions. But it would not help the world one bit. Demand for fuel would not change. People would fill up their cars and delivery trucks at other service stations” (The Guardian).

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Shares of Shell actually increased 0.4% in the hours after news broke, and in the weeks after the Dutch ruling no significant changes in share price have occurred. Perhaps investors see the ruling as a minor setback, or the beginning of a long-anticipated industry revolution towards industry addressing the pollution it creates. Regardless, the ruling's impact is not clear. Despite 28% of Shell’s 2020 revenue coming from Europe, Shell may need to change their business practices effective immediately (Statista). “The decision is provisionally enforceable. This means Shell needs to start complying immediately, even if it decides to appeal to the Court of Appeals. And it is likely the case will finally end up, after several years, in the Supreme Court” (pH Report).

What kind of effect will this have on the markets Shell and other industry incumbents depend on for the majority of their revenue? As for the United States, industry analysts do not expect the ruling to have much immediate impact. U.S. law has historically been less favorable to environmental groups, due largely in part to the fact that “federal courts have not recognized a constitutional right to a clean environment” as European courts have. The news must, however, be galvanizing environmental groups and citizens throughout the United States to call for more action, curious as to why their government is not making similar strides. As a global leader, many people within the United States would like to see environmental issues as such taken more seriously. As stated, European nations have recognized a clean environment as a constitutional right, and are more likely to adopt legislation/court orders that enforce carbon emissions in a strict fashion similar to the Netherlands.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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