- Success for first climate litigation cases
Growing risks for companies and investors – failings may be punished
Climate litigation supports transformation processes
Climate litigation – a curse or blessing for investors?
“Human dignity shall be inviolable. To respect and protect it shall be the duty of all state authority” (German Basic Law (GG), article 1 (1).
“The issue of achieving the goals of the Paris Climate Agreement could be about no less than the survival of our continent” (Angela Merkel in Davos, February 2020).
Could successful action be brought against the German government because its current climate policy is in breach of Germany’s constitution? While the German Basic Law guarantees protection of life, it is known that climate change poses a huge threat to this protection. After all, it is a physical reality that greenhouse gas emissions and thus global warming are increasing almost unchecked, which may cause living conditions to deteriorate significantly. A growing number of court cases are addressing this potential conflict. Although this may provide clarity for investors, it also creates economic and legal risks for companies and governments alike. This paper offers an overview of climate litigation.
A few days before Christmas 2019, the Dutch supreme court upheld an earlier ruling requiring the government to adjust its targets for reducing greenhouse gas emissions to a much greater degree than it had already. Along with 900 citizens, the non-governmental organisation (NGO) Urgenda Foundation die Exekutive had initially brought the action against the government at a district court in The Hague in order to protect the Dutch people against the avoidable consequences of climate change. In the action, the government was accused of failing in its constitutional duty of care towards its citizens by setting CO₂ reduction targets that were not ambitious enough. The court ruled in favour of the action. The factors on which it based its decision included article 21 of the Dutch constitution, international human rights conventions and climate change agreements. By the end of 2020, the country now has to cut its emissions by 25 per cent compared with 1990. Levels have fallen only slightly in previous years. This litigation provides clarity for investors because the necessary steps to be taken by politicians have a legal basis and the Netherlands is aiming for climate neutrality by 2050. A legal decision to stop using coal is also in place, as is a lower speed limit on Dutch motorways. At the same time, this ruling has economic consequences for those companies and investors who had previously ‘bet against’ climate protection. The outcome of the Dutch case makes it clear that investors can no longer ignore climate litigation.
Climate litigation is gaining importance
It is perhaps surprising to know that climate litigation was already playing a key but almost invisible role in the years before the Paris Climate Agreement.
In March 2015, an international group of legal experts, including practitioners and academics, were prompted to formulate and define the Oslo Principles as a result of their conviction that irresponsible activity – particularly with regard to greenhouse gas emissions – by governments, companies and individuals was having an irreversible impact on our environment. They were of the opinion that sufficient legislation existed to be able to limit climate change, even before the Paris Climate Agreement was adopted in December 2015. However, the disregard for these existing rules – especially in industrialised nations – and widespread inactivity constituted failings that they believed could lead to potential litigation. According to the Oslo Principles, many companies and governments were in breach of applicable legislation but had not faced any legal consequences up to that point. What prevailed was the legal saying ‘nullo actore, nullus iudex’ (where there is no claimant, there is no judge).
This situation has since changed, however. According to a recent study by the London School of Economics (LSE), there had been more than 1,300 lawsuits in over 28 countries by the summer of 2019. Lawsuits are being brought in both industrialised and developing countries and even to the UN Human Rights Committee.
The fact that more than 1,000 climate litigation cases have been identified in the US is a reflection of the US legal system on the one hand and, on the other, resistance to the Trump administration’s controversial climate policy. Attempts to row back on environmental standards in the US often fail in the courts, and not just in California.
Internationally, it is no longer just countries and their governments that are the focus of litigation. Although there are any number of conceivable combinations of defendant and claimant, figure 1 overleaf shows, unsurprisingly, that governments and companies make up the majority of defendants. The claimants, or plaintiffs, are often companies, but they also include individuals and NGOs. In many of these cases, however, companies are challenging what they consider to be overly strict climate protection regulations or rules that are hindering their business.
Figure 1: Overview of claimants and defendants
Figures 2 and 3 below also make it clear that the number of climate litigation cases began to rise rapidly in 2005, especially in the US but also elsewhere. This trend was partly fuelled by the climate summit in Montreal. Although this event did not result in any firm targets for reducing CO₂, the participants agreed to extend the Kyoto Protocol – including the control system – and launch further-reaching initiatives to reduce CO₂ emissions. The litigation was brought by a wide variety of groups and people. Particularly in recent years, NGOs and individuals have become much more prolific claimants.
Figure 2: US climate litigation, broken down by claimant group
Figure 3: Climate litigation in countries other than the US, broken down by claimant group (1994–2018)
Large number of conceivable combinations of defendant and claimant
With regard to the types of litigation, which vary depending on the national legal system, a distinction can be made between action under civil law and action brought against the executive at a general level or a constitutional complaint more specifically. Proceedings that are based on violations of a country’s constitution often deal with a fundamental matter and may serve to introduce stricter regulation. Or they require the defendant to comply (more closely) with rules already in place, whether national or international. In these cases, the defendant is often the government or a public-sector body. By contrast, many civil-law cases are brought in order to claim compensation for loss or damage resulting from climate change itself. In these cases, defendants are primarily companies. It is also worth distinguishing between strategic and routine litigation. While action brought for strategic reasons aims to create new legislation by setting a precedent, routine cases are predominantly aimed at enforcing existing law.
Action aimed at greater climate protection is generally brought for one of three main reasons, as explained below.
Failure to mitigate
The first reason for bringing action is the failure of a government or company to limit climate change (failure to mitigate). Such litigation, as illustrated by the aforementioned example in the Netherlands, is often of a strategic nature and usually aimed at raising public awareness and bringing about political consequences. In this context, there are two general legislation variants:
- Citizens or NGOs bring action against the government in order to achieve greater climate protection.
- Governments or NGOs bring action against major emitters of greenhouse gases in order to achieve greater climate protection or to claim compensation for loss or damage resulting from a lack of climate protection.
Successful examples of the first variant can be found in the Netherlands, as already mentioned, and in New Zealand. With the Dutch supreme court now having confirmed that inadequate climate protection represents a violation of human rights, it is likely that other European constitutional courts will issue critical rulings (of course depending on the constitution in question). Other proceedings with a similar basis are currently taking place in France, Belgium, Ireland and the US as well at EU level. Germany’s Federal Constitutional Court will also have to deal with such a case: A constitutional complaint concerning ‘the Federal Republic of Germany’s failure to enact suitable laws and take suitable measures to combat climate change’ is currently pending (case no. 1 BvR 2656/18). In this complaint, citizens and NGOs accuse the German government of failing to fulfil its duties according to articles 2 and 14 of the German Basic Law. Unsurprisingly, their arguments are based on the successful action brought in the Netherlands.
There are many pending proceedings of the second variant but few successful ones so far. In Poland, for example, Greenpeace brought action against electricity supplier PGE Polska Grupa Energetyczna in order to stop new investment in coal-fired power plants (Greenpeace Poland v. PGE). A similar case is pending against Polish utility company Enea (ClientEarth v. Enea). The City of New York has brought action against oil companies BP, Chevron, ConocoPhillips, Exxon Mobil and Royal Dutch Shell, accusing them of deliberately playing down their responsibility for climate change and thus harming the city (City of New York v. BP plc). This case highlights the extent of possible claims for compensation. New York is demanding that the oil companies provide adequate reimbursement for the cost of measures that have had to be taken, or will have to be taken in the future, in order to protect citizens and their property against the consequences of climate change. Flood protection alone costs up to US$ 118 billion according to the U.S. Army Corps of Engineers.
A similar case in Germany is no less dramatic. With the support of German NGO Germanwatch, Peruvian farmer Saul Luciano Lliuya has brought a civil-law action against utility company RWE stating that its CO₂ emissions are contributing to the melting of glaciers in Peru (Lliuya v. RWE AG). The claim for compensation, which is based on section 1004 of the German Civil Code (BGB), alleges that the effects of climate change are threatening and damaging his livelihood and the well-being of his entire family in Peru. The case was initially dismissed, with the court noting that no linear causal chain could be discerned. On appeal, however, the next court of instance – Hamm regional appeal court – reached a different conclusion and ruled that evidence should be gathered on the ground, i.e. in Peru. The court also found that cumulative causation by multiple parties (in this case by large-scale emitters of CO₂) did not fundamentally make it impossible for one of the parties to eliminate their own contribution. Although the final ruling is still pending, the mere fact that the case is continuing in a German court has made the headlines and makes it clear that the impact of climate change is no longer a national problem. International litigation is likely because, according to the Rome II regulation, German law can be applied in cases involving (global) environmental damage and claimants can choose to bring the action at the place where the damage occurred, in this case Peru.
The prospects for success in such cases are still uncertain because, for example, it has to be proved that the oil companies’ business policies specifically and directly resulted in increased flooding in New York. However, if a precedent is set, which is becoming increasingly likely as a result of the advances in climate research, a court victory could result in a huge wave of litigation in similar areas. This could include litigation targeting not only oil companies but also power plant operators, steel and cement manufacturers and airlines.
Failure to adapt
The second reason for bringing action is the failure of a government or company to sufficiently prepare itself for unavoidable (physical) risks and possible damage caused by climate change (failure to adapt). In 2016, for example, homeowners in Ontario (Canada) brought action against the Canadian government because they did not feel sufficiently protected against the risk of flooding.
- Failure to disclose
In many cases, however, insufficient preparation for climate change also extends to companies’ failure to adequately explain the risks of climate change (failure to disclose), which may lead to risks for companies themselves and for investors. Here too, there are two main types of case:
- Regulatory investigations or actions brought by investors against companies (or their senior managers) if they provide false or even no information about risks in connection with climate change, especially if these failings result in losses.
- Action brought by investors, or even companies themselves, against consultancy firms (e.g. rating agencies and specialist auditing companies) if they have not adequately highlighted the risks of climate change.
Growing climate litigation risks for companies and investors
It is clear that there are many types of climate litigation and many reasons for bringing legal action. At the same time, cases such as the one in the Netherlands show that these risks for investors – and, of course, for the defendants themselves – are no longer purely theoretical in nature. It is still too early to definitively say how successful climate litigation will be overall. This is because many court cases are lengthy and the initial outcome is (immediately) challenged by the losing side, which means that there have been few final ruling so far. Nevertheless, climate litigation has now become firmly embedded in the public consciousness, even though some of the actions brought so far have not been successful. As a result, governments and companies are increasingly under pressure to avoid high-profile trials in which they are accused of mismanagement and failings in connection with climate change.
The specific risks for companies potentially include:
Changes to the political environment in the wake of strategic cases that set a precedent. In June 2019, for example, Poland’s highest administrative court definitively revoked the approval that had previously been granted for the construction of a coal-fired power plant.
Large fines plus legal costs may reduce the profitability and liquidity of the company on trial. Legal disputes have an adverse impact on the affected company’s balance sheet because it has to recognise provisions, often long in advance of the actual ruling.
The recognition of provisions may potentially lead to a deterioration in the company’s credit rating, thereby making it more difficult to access the capital markets.
Not only individual action but also class action is possible, in which multiple claimants seek compensation together. This tends to result in higher compensation payments.
Complex legal disputes lasting several years may occupy too much of senior management’s attention and tie up too much of their capacity. Moreover, there is sometimes a risk of the affected company being excluded from bidding for public-sector contracts, which further limits its ability to do business and its prospects for the future.
Reputational damage is a risk, particularly in strategic action where the proceedings attract a lot of public attention. This damage often sticks in people’s minds, even if the company is not found guilty.
Investors also often find themselves exposed to climate litigation if they do not report transparently on the risks and opportunities of climate change or do not adequately factor them into their investment decisions. This is one of the key reasons why the Task Force on Climate-related Financial Disclosures (TCFD) issued a set of recommendations on how investors can increase this transparency. The TCFD aims to improve investors’ understanding of material climate-related company data. The transparent, standardised company assessments are designed to make it easier to analyse the opportunities and risks of climate change.
Climate litigation can help to separate the wheat from the chaff
Investors who have already established a dialogue with less sustainability-oriented companies in order to bring about change can draw on classic tools such as individual and collaborative engagement and shareholder motions, speeches and voting behaviour at annual general meetings. But litigation is another tried-and-tested option. It is likely that companies will face such action more often than in the past due to their failure to disclose. This will especially be the case if dialogue with companies and voluntary statements of intent have not led to the desired outcome.
By contrast, companies with a firm focus on sustainability do especially well in terms of environmental, social and corporate governance factors. These companies – particularly if they have strong green credentials – are, almost by definition, not on the radar for climate litigation, giving them an edge over their less sustainable competitors:
Firstly, sustainability-oriented companies tend to be more compliant with environmental and financial regulatory requirements. It is this compliance that makes them particularly sustainable in the first place. Compared with their competitors, they are therefore at less risk of being taken to court because of a failure to disclose or failure to mitigate.
Secondly, companies that take a sustainable approach – particularly when it comes to climate change – have to deal with the fact that less sustainable companies are not forced to explicitly take account of negative external environmental effects, for example when electricity generated from conventional sources (e.g. coal or gas) is taxed at the same rate as green electricity even though the difference in their environmental impact is huge. Consequently, sustainable companies are often the beneficiaries of strategic climate litigation (brought against their rivals) if, as a result of the action, negative externalities start to be taken into account or the underlying reason for the negative externalities is eliminated.
Thirdly, climate litigation in which the highest court makes a final ruling also provides companies with legal certainty and a reliable basis for planning in many cases. However, companies that act sustainably are initially the only ones to benefit in the event of a successful outcome. Only for them will the legal certainty established as a result of climate litigation match up with their business planning. For all other companies, climate-friendly rulings mean restructuring that may jeopardise their very existence. To put it more positively: Climate litigation can trigger the necessary change processes.
Change processes triggered by climate litigation
The procedures and objectives of climate litigation described above may often smack of rebuke and punishment to the general public. After all, climate litigation is often a wake-up call for companies that are not sustainability-oriented and shows them that they cannot carry on as they are. Past experience also demonstrates that statutory requirements and the threat of litigation can help to build up (regulatory) pressure on companies, particularly at the start of a fundamental change process. Climate litigation therefore does more than punish and deter and may also be an external source of motivation for the company to overhaul its business model.
At the moment, oil and gas companies are particularly affected by such litigation risks, not only because of their failure to mitigate but also because of their failure to adapt and failure to disclose. However, if companies like Repsol, BP and Shell are now aiming for climate neutrality in terms of their greenhouse gas emissions, then climate litigation – and the potential risk it poses to these companies – has certainly played a significant part in their change of mindset.
Climate litigation is often perceived by the public as a relatively new phenomenon in the fight against climate change, but it is rapidly gaining a foothold worldwide and is of growing importance both for governments and for companies that find themselves as the defendant. The cases have a variety of different defendants and claimants, but what they have in common is the aim of either creating new legislation or enforcing existing law. Numerous cases based on the three main reasons for litigation (failure to mitigate, failure to adapt and failure to disclose) have taken place with very specific objectives and with varying prospects for success. Some cases have already seen final rulings that have found that an individual government failed to protect the climate. By contrast, notable and comparable success in action brought against companies has yet to materialise. However, it is likely that a successful ruling against a company will trigger a wave of further litigation.
Companies and investors alike therefore need to keep a close eye on climate litigation because the risk to them is not limited to reputational damage. They could also face serious financial loss as a result of possible fines and compensation payments. This risk may increase sharply due to the better options for high-volume class actions. It is clear that climate litigation is much more than a legal telling-off. Companies that are well run from a sustainability perspective should be better placed in future to avoid such litigation and therefore provide investors with greater certainty for their investment decisions.
As at 01 July 2020.