In its annual report of global climate change litigation trends, the Grantham Institute of London School of Economics warns “businesses need to be aware of litigation risk”.

Private sector and financial institutions are increasingly the targets of climate change litigation and the prevalence of such litigation in this space is only expected to increase.

For example, in the United Kingdom, corporates are under growing pressure from regulatory bodies, the public at large and shareholders to monitor, disclose and address the impact that their operations have on the environment. This introduces a raft of new legal risks. For the reasons explored in this article, it has never been more important for corporates to understand and act in accordance with climate-change and ESG related policies and regulations; failure to do so may be very damaging.

Climate change litigation: an upward trend

On 26 of May 2021, the Dutch Hague District Court ordered a private company, Royal Dutch Shell, to cut its CO2 emissions by 45%. As we explained in our previous update, this was a landmark ruling and in its wake, climate change litigation, as well as regulatory action driven by climate change, continues to proliferate around the world.

The Grantham Institute’s annual report was published in July 2021 (the “Grantham Report”). Unsurprisingly, the Grantham Report confirmed that the cumulative number of climate change-related cases has more than doubled since 2015, with over 1,000 cases brought worldwide in the last six years. The vast majority of cases are filed in the United States, Australia, the United Kingdom and the European Union. This article explores this growing global trend and highlights three important, and novel, types of claims that companies should be increasingly mindful of at the most senior level.

Public sector

States or government entities remain the most common defendants in climate change litigation. Cases against states and governments often rely on grounds based in constitutional or administrative law, hinging on their obligation to protect their citizens from the dangerous impacts of climate change (see Urgenda Foundation v Netherlands [2015] HAZA C/09/00456689). For example, in May 2021 the Federal Court of Australia ruled that the Minister for the Environment has a duty of care to avoid causing personal harm to children. This duty includes consideration of reasonable harm that may result from approving, in this case, an investment into the expansion of a coal mine in New South Wales (see Sharma and others v. Minister for the Environment).

In the last four months alone, cases alleging government inaction against climate change and the resulting failure to safeguard citizens’ fundamental rights have been brought in Spain, Poland and Italy. Litigation against governments is typically brought by non-governmental organisations (“NGOs”) alongside, in many cases, individuals. For example, recent proceedings in Italy were brought by A Sud, an Italian NGO, together with over 200 interested individuals.

However, claims are not just being brought against governments; we are also seeing claimants target state banks and financial institutions. In May 2021, the NGO ClientEarth filed proceedings against the Belgian National Bank for purchasing bonds from fossil fuel companies, through the European Central Bank’s Corporate Sector Purchase Program, which ClientEarth contends amounts to a failure of environmental, climate and human rights requirements in violation of European Union law.

The Grantham Report categorises these claims as ‘third wave’ climate change cases which have grown in volume and, buoyed by a growing awareness of the dangers of climate change, have also diversified in terms of legal grounds.

Private sector

Climate change litigation is also rapidly expanding in the private sector. Third wave claims are progressively targeting a wider variety of corporate defendants.

Major emitters such as fossil fuel companies continue to be the primary defendants in private sector climate change litigation. However, the Grantham Report notes that litigants are also taking on banks, pension funds, asset managers, insurers, and major retailers, to name a few. Instead of trying to establish corporate liability, which may present legal and evidentiary difficulties when seeking to attribute past contributions to climate change to a particular private sector defendant, claimants are adopting more imaginative legal grounds. Novel claims focus on disclosure of financial risks, fiduciary duties, corporate due diligence, and greenwashing. Such claims sit within the context of ever-increasing global scientific research, which strengthens a litigant’s ability to overcome evidential hurdles, and may increase the appetite for judicial activism.

While the scope of third wave litigation in the private sector continues to grow, below we address three prominent types of claims and some recent developments: (a) value change litigation, (b) climate change-related financial disclosures and (c) greenwashing.

Value chain litigation

The Grantham Report predicts corporates are likely to face increased “value chain litigation” in which corporates are held liable for the acts and omissions in their value or supply chains. A recent example is E Vert al. v Casino, filed in France in March 2021 by a coalition of 11 NGOs against supermarket giant Casino for environmental damage caused in cattle farms in Brazil and Colombia which form part of the supermarket’s supply chain. While the claim is based on the French Duty of Vigilance Law, which is unique to the French jurisdiction, the case is expected to spark similar litigation in other jurisdictions against companies with value or supply chains alleged to be violating environmental laws abroad.

The emergence of value chain litigation may be further propelled by the international trend towards imposing liability on parent companies for the actions taken by them and their foreign subsidiaries, bringing claims in the jurisdictions where corporate leadership and/or shareholders are based (see our previous updates here and here). The need to produce and improve policies and public reporting on climate change issues may well increase the chance that a parent company will face claims for the actions of its subsidiaries or acts and omissions within their global value or supply chains.

Disclosure of climate-related financial risk

Around the world, corporate entities are increasingly having to consider and disclose the impact of climate change risks on the operation of their business. These reporting requirements will continue to expand with upcoming regulation. These requirements are not limited to the operations of the company but include reporting on the impact of climate change on the company’s shareholders, investors, and the public at large.

Given the central role of finance in economic development and, more specifically, the pivotal role that the industry plays in cultivating a more sustainable economy, we expect these obligations to be concentrated in the financial sector.

In December 2020, the Financial Conduct Authority (the “FCA”) introduced new rules on disclosure of climate-related risks for premium listed companies to ensure alignment with the global Task Force on Climate-Related Financial Disclosures framework. The first annual reports subject to the new rules will be published early next year. In addition, the FCA is now proposing to expand the application of its listing rules as well as introduce new climate change disclosure requirements for asset managers, life insurers, and FCA-regulated pension providers. The FCA intends to confirm its final policy on climate-related disclosures before the end of 2021. The increased complexity of financial reporting obligations relating to climate change will inevitably increase legal risk for corporates who may face liability as a result of inadequate or inaccurate disclosures.

Greenwashing

We also expect to see an influx of greenwashing claims, which the Grantham Report urges corporates to be aware of. In the financial sector, public statements regarding the environmental sustainability or environmental impacts of investments will be put under the microscope. In September 2021 the Green Technical Advisory Group, an independent body established in June 2021 to assist in monitoring green claims made in respect of investments, is expected to provide initial recommendations regarding standards and monitoring to the UK Government.

Liability arising from public communications of climate change matters does not just impact financial institutions. With consumers increasingly interested in products that minimise harm to the environment, the UK regulatory watchdog, the Competition and Markets Authority (the “CMA”), is also clamping down on green claims made in respect of goods and services. The CMA has already started its review on the types of misleading environmental claims, and final guidance is expected to the published by the end of September 2021.

The Grantham Report notes that greenwashing allegations can also apply more broadly to disinformation disseminated by a corporate about their climate change goals. Corporates are likely to be increasingly held to account for inconsistencies between statements made in respect of climate change-related conduct and their actions.

A total of 70 FTSE 100 companies have now made a net-zero pledge and British businesses account for a third of the more than 2,000 companies that have signed up globally to the United Nations Framework Convention on Climate Change’s Race to Zero. In making such pledges, corporates must be aware of the legal risks and must be diligent by setting realistic targets and made substantiated public statements regarding climate change.

For more information on ESG cases, please visit the ESG page or contact Tim Elliss and Anna Brownrigg