ENERGY LAW AND ESG DUE DILIGENCE OBLIGATIONS FOR ENERGY COMPANIES

1. Introduction

ESG Due Diligence refers to the systematic process through which an energy company identifies, assesses, prevents, mitigates, monitors and remedies environmental, social and governance risks arising from its business operations, investments, supply chains and business relationships.

For energy companies, ESG due diligence is particularly important because activities such as oil and gas extraction, coal mining, electricity generation, pipelines, renewable-energy projects and large infrastructure developments can create significant environmental and social impacts. Modern energy law therefore increasingly requires companies to move beyond merely obtaining licences and to demonstrate continuous environmental compliance, responsible governance, stakeholder protection and risk management.

The importance of corporate climate responsibility was strongly illustrated by Milieudefensie v Royal Dutch Shell. The Hague District Court in 2021 held that Shell had a duty of care under Dutch law and ordered a 45% reduction of the Shell group's emissions by 2030 compared with 2019. The Court of Appeal overturned that specific reduction order in 2024, although it continued to recognise important legal principles concerning corporate responsibility for climate change.

2. Meaning of ESG Due Diligence

ESG due diligence consists of several interconnected obligations:

A. Environmental Due Diligence

An energy company should investigate:

greenhouse-gas emissions;

climate-change risks;

air and water pollution;

biodiversity impacts;

land degradation;

waste and hazardous substances;

environmental-clearance requirements;

methane and other fugitive emissions;

impacts of mining and drilling;

decommissioning obligations; and

environmental risks associated with suppliers and contractors.

The principle is that environmental assessment should occur before, during and after an energy project.

B. Social Due Diligence

Companies should identify risks relating to:

workers' health and safety;

indigenous and local communities;

displacement and resettlement;

land acquisition;

human rights;

labour standards;

community consultation;

occupational hazards;

equality and non-discrimination; and

access to effective grievance mechanisms.

C. Governance Due Diligence

Governance due diligence includes:

board-level ESG oversight;

anti-corruption controls;

accurate ESG disclosures;

internal controls;

conflict-of-interest management;

compliance systems;

risk reporting;

whistle-blower mechanisms;

executive accountability; and

independent auditing.

Thus, ESG due diligence is not simply an environmental audit. It is a corporate risk-management and accountability framework.

3. ESG Due Diligence and Energy Law

Energy companies operate within multiple overlapping legal regimes, including:

environmental law;

electricity and petroleum regulation;

mining law;

company and securities law;

labour and occupational-safety law;

land and planning law;

human-rights law;

climate regulation; and

corporate-governance requirements.

Consequently, ESG due diligence should be integrated into the company's legal compliance system.

An energy company that obtains an environmental approval but fails to monitor pollution, community impacts or regulatory compliance may still face penalties, compensation claims, closure orders or other remedies.

4. Environmental Due Diligence in Energy Projects

Environmental due diligence requires companies to identify foreseeable environmental risks before undertaking a project.

For example, an oil company considering offshore drilling should examine:

oil-spill risks;

marine biodiversity;

emergency-response capacity;

methane emissions;

effects on fisheries;

coastal communities;

decommissioning costs; and

cumulative climate impacts.

Similarly, a renewable-energy company should consider land-use conflicts, biodiversity, transmission infrastructure, community rights and end-of-life management of equipment.

The Supreme Court of India has repeatedly emphasised that environmental protection is accompanied by enforceable corporate responsibilities. In Alembic Pharmaceuticals Ltd. v Rohit Prajapati, the Court held that industries operating without the required environmental clearance could not escape legal consequences and directed substantial compensation for environmental restoration.

5. Precautionary Principle

The precautionary principle requires companies and regulators to take preventive measures where there is a credible risk of serious environmental harm, even where scientific certainty is incomplete.

For energy companies, this means that lack of complete scientific certainty cannot automatically justify ignoring environmental risks.

Due diligence should therefore include:

risk identification;

scientific assessment;

alternative analysis;

mitigation measures;

monitoring;

emergency planning; and

continuous reassessment.

This principle is particularly relevant to nuclear power, offshore drilling, carbon capture, hydrogen projects, mining and large renewable-energy developments.

6. Climate Due Diligence

Climate due diligence requires energy companies to examine both:

Physical risks

These include:

floods;

droughts;

extreme heat;

storms;

sea-level rise;

wildfire;

water scarcity; and

infrastructure damage.

Transition risks

These include:

carbon pricing;

stricter emissions regulation;

renewable-energy competition;

stranded fossil-fuel assets;

changing consumer demand;

technological disruption; and

changes in investor expectations.

A responsible energy company should therefore ask whether a proposed investment remains legally and economically sustainable under future climate scenarios.

The Shell litigation demonstrates why climate due diligence has become legally significant. The Hague Court of Appeal recognised that large companies have responsibilities concerning climate change and considered human-rights principles, international standards and climate science when analysing Shell's duty of care, although it ultimately rejected the specific emissions-reduction order imposed by the lower court.

7. Scope 1, Scope 2 and Scope 3 Due Diligence

Energy companies should distinguish between:

Scope 1: Direct emissions from sources owned or controlled by the company.

Scope 2: Indirect emissions associated with purchased electricity, heat or steam.

Scope 3: Other indirect emissions occurring throughout the value chain, including emissions associated with the use of products sold by the company.

Scope 3 is particularly important for fossil-fuel companies because the largest climate impact may arise from the eventual combustion of their products.

The original Shell judgment treated the company's broader business relationships and product-related emissions as relevant to its duty of care. The later appellate judgment, however, found that a specific Scope 3 reduction percentage could not be judicially imposed on the evidence before it.

8. Human-Rights Due Diligence

Energy companies must also evaluate whether their projects affect human rights.

A human-rights due-diligence process should examine:

land rights;

livelihood impacts;

health and safety;

indigenous peoples;

forced displacement;

labour rights;

security arrangements;

community consultation; and

access to remedies.

This is particularly significant for mining, pipelines, dams, transmission lines and large renewable-energy projects.

The Shell litigation is important because international human-rights principles and business-and-human-rights standards were relevant to the interpretation of the company's private-law duty of care.

9. Supply-Chain Due Diligence

Energy companies frequently depend upon complex supply chains involving:

mining companies;

equipment manufacturers;

construction contractors;

transport companies;

battery suppliers;

technology providers; and

fuel suppliers.

ESG due diligence should therefore extend beyond the company's immediate operations.

For example, a battery-storage company should consider whether critical minerals used in its batteries are associated with:

forced labour;

unsafe mining;

environmental destruction;

corruption; or

unlawful land acquisition.

Contractual ESG requirements, supplier audits, certification and termination mechanisms can help manage these risks.

10. ESG Due Diligence and Corporate Governance

Boards of directors have an important role in ESG due diligence.

A strong governance framework should establish:

Board oversight → ESG policy → risk identification → due diligence → mitigation → monitoring → reporting → remediation.

The board should receive regular information concerning:

environmental incidents;

regulatory investigations;

climate risks;

workplace accidents;

community disputes;

corruption allegations;

ESG litigation; and

material disclosure risks.

Failure to establish effective controls can transform ESG problems into corporate-governance failures.

11. IMPORTANT CASE LAWS

Case 1: Milieudefensie v Royal Dutch Shell plc — 2021

This is one of the most important cases concerning corporate climate responsibility.

The District Court of The Hague held that Shell had a duty of care to contribute to preventing dangerous climate change. It ordered a net 45% reduction in the Shell group's emissions by 2030 compared with 2019.

The court relied upon Dutch tort law, human-rights considerations, international standards and climate science.

ESG significance:
The case demonstrated that climate risk can become a matter of corporate legal responsibility rather than merely voluntary ESG policy.

Case 2: Milieudefensie v Shell — Court of Appeal, 2024

The Hague Court of Appeal overturned the 2021 reduction order.

However, the judgment remains highly significant because the court addressed corporate responsibilities concerning climate change, human rights, Scope 1, Scope 2 and Scope 3 emissions and the role of fossil-fuel companies.

The court concluded that the specific 45% reduction order could not be maintained, particularly because there was insufficient basis for imposing a specific Scope 3 percentage on Shell and because of questions concerning the effectiveness of such an order.

ESG significance:
The case shows that recognising a corporate climate duty does not necessarily mean that courts will impose a predetermined emissions target.

Case 3: Tamil Nadu Pollution Control Board v Sterlite Industries (India) Ltd.

The Supreme Court dealt with serious environmental violations involving the Sterlite copper facility.

The Court recognised environmental liability and imposed substantial compensation. Later proceedings continued to emphasise that serious environmental violations cannot simply be ignored.

The Supreme Court record notes violations involving pollution and regulatory non-compliance and the possibility of closure directions by the pollution-control authorities.

ESG significance:
Energy and industrial companies must maintain continuous environmental compliance rather than treating environmental approval as a one-time formality.

Case 4: Alembic Pharmaceuticals Ltd. v Rohit Prajapati

The Supreme Court considered industrial operations conducted without proper environmental clearances.

Although closure was not considered proportionate in the circumstances, the Court imposed compensation and required the funds to be used for environmental restoration.

The Court specifically treated compensation as a consequence of non-compliance and linked the remedy with the precautionary principle.

ESG significance:
Environmental due diligence must identify regulatory-permitting risks before operations begin.

Case 5: Goa Foundation v Union of India

The Supreme Court's environmental jurisprudence concerning mining in Goa emphasises sustainable development, environmental protection and the public-trust dimension of natural resources.

ESG significance:
Energy and mining companies cannot treat natural resources as purely private commercial assets. Their exploitation is subject to public-interest and environmental constraints.

Case 6: Vellore Citizens' Welfare Forum v Union of India

The Supreme Court recognised the precautionary principle, polluter-pays principle and sustainable development as important elements of Indian environmental jurisprudence.

ESG significance:
Companies must anticipate environmental harm and internalise environmental costs rather than transferring those costs to communities and the public.

Case 7: M.C. Mehta v Union of India — Oleum Gas Leak Case

The Supreme Court developed the doctrine of absolute liability for enterprises engaged in hazardous or inherently dangerous activities.

ESG significance:
Energy companies operating hazardous installations must maintain strong safety, environmental and emergency-response systems because traditional negligence-based defences may not protect enterprises from liability for hazardous activities.

12. ESG Disclosure as Due Diligence

ESG due diligence also requires accurate disclosure.

An energy company should ensure that its public statements concerning:

net-zero commitments;

renewable-energy investments;

carbon reductions;

methane reductions;

biodiversity;

worker safety;

community benefits; and

ESG performance

are supported by reliable evidence.

False or exaggerated ESG claims can create greenwashing liability, regulatory exposure, shareholder disputes and reputational damage.

Therefore, ESG reporting should be supported by:

reliable data;

documented methodologies;

internal verification;

independent assurance where appropriate; and

board oversight.

13. ESG Due Diligence in Mergers and Acquisitions

Energy companies must conduct ESG due diligence before acquiring assets or companies.

A purchaser should investigate:

environmental contamination;

outstanding regulatory notices;

environmental litigation;

carbon liabilities;

mine rehabilitation obligations;

decommissioning liabilities;

employee claims;

community disputes;

land-title issues;

permits;

pollution liabilities; and

future regulatory exposure.

Otherwise, the purchaser may inherit significant liabilities that were not reflected in the purchase price.

14. Decommissioning and Closure Due Diligence

ESG due diligence continues after production ends.

For oil, gas, coal and electricity facilities, companies should plan for:

site restoration;

removal of infrastructure;

waste management;

mine reclamation;

offshore-platform removal;

worker transition;

community impacts; and

financial assurance.

A responsible company should establish decommissioning funds and liabilities well before the end of the project's useful life.

15. Community Due Diligence

Energy projects frequently affect local communities.

A proper ESG process should therefore include:

Consultation → impact assessment → mitigation → benefit sharing → grievance mechanism → monitoring.

This is especially important for:

hydroelectric projects;

transmission corridors;

mines;

pipelines;

offshore projects;

solar parks; and

wind farms.

Community participation reduces both social conflict and legal risk.

16. Consequences of Failure of ESG Due Diligence

Failure may result in:

regulatory penalties;

environmental compensation;

suspension or cancellation of approvals;

closure orders;

civil liability;

shareholder litigation;

contractual claims;

director liability;

regulatory investigations;

reputational damage;

financing difficulties; and

stranded assets.

The Sterlite and Alembic cases demonstrate that environmental non-compliance can produce substantial financial consequences and restoration obligations.

17. Practical ESG Due-Diligence Framework for Energy Companies

An energy company should implement the following framework:

Step 1 — Identify

Identify environmental, social and governance risks.

Step 2 — Assess

Evaluate their probability, severity and potential legal consequences.

Step 3 — Prioritise

Give priority to high-risk activities such as hazardous operations, major emissions, land acquisition and human-rights impacts.

Step 4 — Prevent

Adopt policies and operational controls to prevent harm.

Step 5 — Mitigate

Where prevention is impossible, reduce the magnitude of the impact.

Step 6 — Monitor

Continuously monitor ESG performance.

Step 7 — Report

Provide accurate and transparent ESG information.

Step 8 — Remedy

Provide compensation, restoration or other appropriate remedies where harm occurs.

Step 9 — Review

Periodically reassess ESG risks as technology, climate science and regulation change.

18. Relationship Between ESG Due Diligence and Sustainable Development

ESG due diligence supports the principle of sustainable development by attempting to balance:

Energy security + economic development + environmental protection + social justice + corporate accountability.

The objective is not necessarily to prevent all energy development. Rather, the objective is to ensure that energy development occurs in a legally responsible and environmentally sustainable manner.

19. Conclusion

ESG due diligence is becoming an important component of modern energy law. Energy companies can no longer treat environmental and social responsibility as merely voluntary corporate philanthropy. Their operations create potentially significant environmental, climate, labour, human-rights and governance risks that must be identified and managed systematically.

The Milieudefensie v Shell litigation demonstrates the growing importance of corporate climate responsibility, while Indian cases such as Sterlite, Alembic Pharmaceuticals, Vellore Citizens' Welfare Forum, M.C. Mehta and Goa Foundation demonstrate the enforceability of environmental principles against industrial and resource-extraction activities.

Therefore, an effective ESG due-diligence regime for an energy company should be preventive, continuous, evidence-based, board-supervised, transparent and capable of providing effective remedies. The ultimate objective is to ensure that energy development remains consistent with environmental protection, human rights, sustainable development and long-term corporate accountability.

Key Principles

Precautionary Principle

Polluter Pays Principle

Sustainable Development

Environmental Impact Assessment

Human-Rights Due Diligence

Climate Due Diligence

Corporate Governance

Stakeholder Participation

Supply-Chain Responsibility

Transparency and ESG Disclosure

Remediation and Restoration

Continuous Regulatory Compliance

In essence, ESG due diligence transforms energy-company responsibility from a reactive model—“comply after harm occurs”—into a preventive model—“identify, prevent, monitor and remedy risks before they become legal and environmental crises.”