As businesses commit to change in the interest of halting climate change, the need to make tangible progress towards achieving those goals is becoming increasing acute. In this article we look at why it’s not just mounting pressure from the public and regulation from governments, but also the growing risk of potential litigation, that should be borne in mind.
All eyes have been on world leaders attending the UN Climate Change Conference (COP26) in Glasgow as we waited to hear what progress could be made to tackle climate change. The focus has been on countries working together and committing to take substantial steps towards net zero. Some will feel not enough progress was made, but for the pledges to succeed in practice, pressure will continue to mount on corporate entities, and the decision makers behind them to take action.
There is a plethora of reasons why businesses are taking climate change seriously. While the cynical may view corporate climate change commitments as savvy brand and reputation management, the reality is that climate change poses real risks to businesses and their financial stability.
One pressure being felt in an increasing number of jurisdictions is climate change related litigation against companies and their directors.
What is climate change litigation?
Definitions vary, with some seeing it as limited to litigation where climate change is the central issue. Others also include litigation where climate change is a peripheral consideration or where climate change mitigation may be impacted by the outcome of the case.
The motivation for bringing proceedings can include attempts to influence government policy, attempts to influence business practices, as well as seeking compensation for damage caused, losses sustained or future costs.
However, there will also be more traditional business disputes arising from the changes needed to counter climate change.
Litigation targeting climate change contributors
An obvious example of the power of litigation in the context of climate change, and particularly prevalent in the US, has been the trend of NGOs and activist groups bringing claims against companies in the energy sector involved in the extraction, refinement and/or sale of fossil fuels. Claims have also been brought in some jurisdictions by private individuals.
While the energy sector may be an obvious target for climate change litigation, it is likely that as such litigation becomes more common place, the principles may be extended to industries including manufacturing, transportation, construction and agriculture.
Energy transition and contractual disputes
Given the commitments being made by governments to hit net zero, significant transition is going to be required to change energy supply and use at both national and global levels.
This will mean changes to existing supply chains, the introduction of complex new supply chains, construction projects and technological innovation projects. All of that is going to mean the review of countless existing contractual relationships, as well as the forging of new ones. Against this backdrop contractual disputes will inevitably arise.
Shareholder actions and climate change reporting
In a number of jurisdictions, proceedings have been brought against corporations by investors. This includes allegations of so-called “greenwashing”. The trend in recent times has been for businesses to actively promote environmental credentials. However, care is needed to ensure the veracity of claims being made and to avoid accusations of misleading investors about the risks that climate change, and related regulations, pose to the business.
Most cases relate to claims of investor misrepresentation and breaches of consumer protection laws in the US and there are high thresholds for shareholder actions in the UK (see below). However, there are other routes for these complaints. The NGO ‘ClientEarth’, for example, filed a complaint of breach of OECD Guidelines against BP in December 2019 in respect of the impression given as to the scale of BP's renewable energy business by its UK advertising campaign. The complaint resulted in BP pulling the campaign.
In terms of reporting requirements, it is worth noting that these are increasing in the UK. By way of example, the government announced last month that mandatory climate-related financial disclosure for quoted and large private companies is on its way. You can read more about that here.
Claims against directors
And, finally, what about the decision makers? Certainly, the US cases, such as those against Exxon Mobil Corp, have seen claims brought by shareholders against the Chairman, CEO and other directors.
There is also the potential for claims against directors in the English courts. This would involve a claim brought either by a company itself or, although difficult and requiring the court’s permission, by shareholders via a derivative claim under s260(3) of the Companies Act. This would likely be on the basis that the directors had, in breach of duty, failed to act in order to mitigate the impact of climate change on the company or to meet climate-related regulatory requirements.
Both the duty to promote the success of the company for the benefit of its members as a whole (s172 Companies Act) and the duty to exercise reasonable care skill and diligence (s174 Companies Act) could offer a basis. Given the risks that climate change poses to the economy and individual entities, directors must surely now consider climate risks when fulfilling their duties under these provisions.
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