Climate change litigation: how to limit your exposure
Mark Clarke, Partner, and Katherine Daley, Associate, at White & Case LLP share the top five steps to limit exposure to climate change litigation.
It is now beyond doubt that climate change litigation is a global trend. So concludes a new report by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. The report, which tracks cases brought since the 1990s, highlights that climate change litigation, pursued by a combination of investors, activist shareholders, cities and states, is expanding across jurisdictions and increasingly targeting corporates as well as governments and government-related entities.
Initially, climate change-related lawsuits were concentrated in the US and focused on the liability of local states, governments and wider governance groups. However, claims often failed because claimants were not able to prove a causal link between the actions of governing bodies and their loss. Local defendants, such as states and cities, also relied on arguments that climate change is a global issue requiring a global solution, sometimes successfully establishing that the claims brought against them had been issued at an inappropriate level.
This has resulted in a new wave of climate change-related lawsuits, in which businesses are the prime target. Increasingly, activists are suing a groups of 90 companies – which the Climate Accountability Institute refers to as the “Carbon Majors” – that are allegedly responsible for causing over two thirds of carbon dioxide emissions since the 1750s. Lawsuits have been brought on various grounds, including nuisance, failure to warn and negligence, but there is also a growing trend towards claims brought on the basis of protecting citizens’ rights regarding the environment. More recently, claims have also been brought with respect to the inadequate financial reporting of climate change related-risks.
In light of this growing trend, it is imperative that businesses in every sector take steps to mitigate the risk of climate change litigation. Below, we outline five steps that any business can take to limit its exposure.
1. Ensure employees appreciate the significance of climate change in the context of your business
In May 2019, an ExxonMobil Shareholder brought a derivative suit against ExxonMobil’s high-ranking directors for allegedly lying to the public about the impact of climate change in its business decisions (Von Colditz v Wood et al). The complaint alleges that executives have violated federal securities laws, breached fiduciary duties and wasted corporate assets resulting in damage to Exxon’s business reputation and exposure to liability for breaking the law.
Although the risk of climate change is most obvious to businesses operating in the energy sector, many other industries will be impacted. For example, the manufacturing and transport sectors are large contributors to global fossil fuel emissions. Effective strategy and company policy is central to navigating the risk of climate change litigation. The only way to ensure this is to educate employees, and especially directors, of the climate change-related issues affecting your business. Decision makers will be held accountable by shareholders and must be prepared to defend their management decisions regarding the issue of climate change.
2. Disclosure of climate change-related risks in financial reporting
Many businesses recognise the importance of corporate social responsibility, diligently preparing a report each year on their commitments to sustainability and green issues. However, climate change-related issues may also be a serious risk to your business. Accordingly, this risk must be adequately reflected in financial reporting.
In June 2017, the Task Force on Climate-related Financial Disclosures (TCFD) released a report recommending that disclosure of climate-related risks should be integrated in existing financial reporting frameworks. Although disclosure of climate change-related risks in financial reporting is not a legal requirement, businesses that do not adequately disclose these risks will be exposed to the risk of loss of investment and value, and may be exposed to legal action.
3. Public transparency
A frequent claim levelled against businesses is the inadequacy of public communication and information regarding climate change. In the recent case of Milieudefensie et al. v Royal Dutch Shell plc., a Dutch environmental organization served a court summons on Shell alleging that Shell’s business model poses a threat to the climate goals of the Paris Agreement and that Shell is breaching its legal duty of care, endangering human rights and acting unlawfully. The submissions rely on internal and external documents allegedly proving that Shell has known about climate change since the 1950s but did not communicate this to the public. Whilst it cannot necessarily address historic conduct, transparency with respect to climate change related liabilities and proactive management of the same should help mitigate the risk of litigation.
4. Keep up to date on climate change legislation
Climate change is now a permanent issue on the global political agenda. In response to growing public pressure and an increase of litigious claims, legislators are taking action to codify their policy commitments on climate change. In 1997 there were only 60 policies across the world based on climate change. Today, there are over 1,200. Businesses can mitigate the risk of legal action simply by keeping abreast of these legislative and policy changes to ensure they are not breaking the law.
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5. Diversification and innovation of business
In the cases filed to date, energy companies with a strong share in the fossil fuel markets have attracted the most legal action. One of the key ways that businesses (especially those in the energy sector) can mitigate their legal exposure is to diversify their business. This diversification is clearly already underway, with over $15 billion having been invested in non-hydrocarbon technologies worldwide since 2000.
Diversification goes hand in hand with innovation; a view endorsed by BHP chief executive, Andrew Mackenzie, who recently confirmed that BHP will spend $400 million over the next five years on researching and implementing new solutions and responses to global warming, including carbon capture and storage, use of renewables and reforestation. As Mackenzie put it, investments such as these help counter the calls for divestment from resources companies so that the commodities the world needs can continue to be produced, but in a way that causes as little damages as possible.
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