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Q&A: How businesses are being sued over their contribution to climate change

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Publications: 25 September 2023

Part 5: Conclusion and potential solutions

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Part 4: Private finance is positioned to meet the opportunity and fill the needs gap

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Part 3: Public finance and policies must play a catalytic role

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Part 2: The need for sector- and region-wide climate strategies

NGOs and individuals are increasingly suing governments, public bodies and private entities over their impact on the climate. Here we answer the key questions for businesses on this growing wave of disputes.

What developments are we seeing in this space?

One of the most significant is the so-called “human rights turn”, which has seen cases launched – primarily against carbon-intensive industries – that draw on human rights-based arguments to achieve their goals.

Here, the cases often target businesses that adhere to or support the UN Guiding Principles on Business and Human Rights, with the logic that a company’s public statements aligning with the UNGPs could define the duty of care to which it will be held accountable.

Courts around the world are increasingly receptive to hearing these cases, which have been successfully deployed to establish direct corporate responsibility for environmental harm.

Within the European Union, we are also seeing permit litigation used in a bid to force regulators and permit-granting authorities to address (and regulate or limit) scope 3 emissions from installations.

These cases argue the environmental impact assessments (EIA) that underlie the granting of any permit for a project should address scope 3 impact as part of the “indirect emissions” required by regulation. It is anticipated that this issue may soon be submitted to the European Court of Justice for preliminary review.

Alongside this, the CJEU (in its Deutsche Umwelthifle (C-873/19) ruling) considerably expanded the rights of environmental associations by allowing NGOs to take legal action against the EC type-approval of vehicles fitted with “dieselgate” software.

The ruling suggests claimants can bring proceedings against any acts and omissions that contravene the provisions of national environmental law – paving the way for more intense and broader climate disputes in future.

Is there a standout climate impact case?

In a landmark decision in May 2021, the District Court in The Hague ordered an oil major (itself an adherent to the UNGPs) to cut its global carbon emissions by 45% from their 2019 levels by the end of 2030.

The ruling in the case – led by Milieudefensie (Friends of the Earth Netherlands) – applies not just to the company’s own emissions, but also to those created by its products.

It is the first example of a court ordering a company to reduce its carbon output in line with the trajectory that the Paris climate agreement has set for countries. The ruling has inspiring further claims against other significant industry players.

Why did the Netherlands lawsuit succeed?

Claimants in the case were able to argue that the company was bound to take steps to prevent dangerous climate change under a domestic, statutory duty of care, which holds that companies have a duty not to do damage to others (or do too little to prevent such damage occurring).

What barriers do claimants face in common law jurisdictions?

Early tort-based climate litigation has had limited success (at least in a strict legal sense) in common law jurisdictions.

One of the primary challenges is that these cases often depend on the claimant being able to demonstrate a relational link to the defendant company – that is, a sufficiently proximate connection to warrant the imposition of a corporate duty of care.

This has proved difficult to establish in many of the negligence claims we have seen to date.

Then there is the challenge of establishing a causal link between a defendant’s contribution to a collective issue and the particular harm suffered by a claimant.

In the case of climate change, this is particularly complex given its temporally and geographically diffuse effects. 

Is there anything on the horizon that changes this picture?

It is possible that rapid scientific developments (including advances in quantifying the proportional contribution of the world's largest emitters to climate change), coupled with the global recognition of the impact of carbon emissions on catastrophic climate events set out in the Paris Agreement, may help courts resolve issues of causation.

Rapid scientific developments and recognition of the impact of carbon emissions may help courts resolve issues of causation.

Businesses are also starting to feel the impact of corporate duty of vigilance laws (such as those introduced in France, Germany and Norway), which require companies in scope to identify and prevent any severe environmental impacts across their supply chains.

These frameworks create the corporate duty of care to protect the environment which has been so difficult to establish through the courts in common law jurisdictions, sparking a wave of lawsuits against banks over the climate impact of the activities they finance.

And with the EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) set to be implemented into member state law next year, we could see an uptick in climate-related litigation follow.

What risks does climate litigation pose for boards?

As a result of the duties of care and diligence they owe to their companies, board directors could be held responsible for not taking adequate steps to manage and mitigate the impact of climate change on the business.

For example in the UK, directors and officers may face claims for breach of fiduciary duties based on their alleged failure to consider the environmental impact of their decisions in the context of their obligation to promote the success of the company.

In some jurisdictions, directors and officers of financial institutions may face claims alleging that their decisions to finance “brown” energy, in and of themselves, constitute a breach of duty given the likely short-term damage to the reputation of the business, as well as the longer-term risks that such loans might become non-performing due to regulatory change.

As Lord Sales, a Justice of the Supreme Court of the United Kingdom, observed in remarks to the Anglo-Australian Law Society: “Under certain circumstances … companies’ interests may be so implicated by climate change effects that [directors’ and officers’] general fiduciary and due care obligations actually require them to cause their companies to take action to reduce their contribution to climate changing activity.”[1]

While this remains a developing area of the law, it is important for directors to weigh climate change factors in their decision-making to limit any adverse reputational and financial impacts on the companies they manage and, in turn, reduce the potential for climate-related litigation.

What actions can companies and their boards take to reduce their risk of litigation?

In most jurisdictions, board directors are ultimately responsible for understanding the climate-related risks and opportunities their business faces, as well as its potential exposure.

As far as mitigating the risk of litigation over historic climate impacts, boards should therefore ensure they are aware of key legislative and case law developments, especially in relation to rulings that establish precedents around causation.

In terms of climate impact litigation more broadly, the principal risks arise from any perceived failures to reduce the impact of the business and its supply chain on the climate, and to manage the effect of climate change on the business (we look at the litigation risks associated with climate-related disclosures in a separate Q&A here).

Good risk management processes ensure that climate impacts are taken into account in board decision-making.

Good risk management processes ensure that climate impacts are taken into account in board decision-making and that this is appropriately documented in board minutes.

Boards should also look at their governance structures and consider whether responsibility for climate-related issues should sit with a nominated director or committee.

Some investors are putting pressure on companies to go further than this (for example by proposing specific climate-related resolutions that are binding on the business), so proactive engagement with shareholders is critical.

The rise of duty of vigilance laws requires businesses to prevent severe harms to the environment across their supply chains, which necessitates extensive due diligence to map where these issues arise.

“Prevent” in this context requires the business to use whatever leverage it has with its suppliers (in much the same way as with human rights laws such as the UK Modern Slavery Act), for example by renegotiating contracts to introduce penalties for poor environmental performance or by switching to greener business partners.

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