High Court refuses permission for climate change judicial review against the FCA for a second time

The High Court has refused environmental NGO ClientEarth’s application for permission for judicial review of the decision taken by the Financial Conduct Authority (FCA) to approve the prospectus of an oil and gas operator Ithaca Energy plc: R (on the application of ClientEarth) v Financial Conduct Authority [2023] EWHC 3301 (Admin).

This was an innovative attempt by an environmental NGO to use an existing statutory and regulatory regime to introduce heightened climate change considerations. However, the court made it clear that it was not part of the FCA’s function to evaluate the extent to which a prospectus may or may not promote climate change mitigation or net-zero targets. The court respected the discretion and decision making of the FCA as an expert regulator and limited itself to applying established public law principles despite the broader context of the climate crisis.

Although unsuccessful, the challenge highlights the increased scrutiny on climate issues and growing pressure on a wider range of regulators and public authorities who are not traditionally seen as operating in the environmental sphere.

It is also notable that the court was not prepared to classify the claim as environmental for the purposes of allowing costs protection for the claimant, which may serve to discourage other such speculative claims.

For more information see this post on our Public Law Notes blog.

Adaptation – From Paris to Dubai and beyond

Momentum for adaptation action is growing across the board – but who will lead the way?

With the effects of climate change already being felt around the world, climate mitigation measures, while important, may not be enough. More than ever, equal attention needs to be given to climate adaptation – to protect, and ensure the long-term resilience of, communities and ecosystems vulnerable to the impacts of a changed climate. Although a central component of the 2015 Paris Agreement, adaptation received scant attention at succeeding COPs. Then, with a two-year work programme introduced at COP26 to stimulate momentum around the Global Goal on Adaptation ((GGA) Article 7 of the Paris Agreement), all eyes were on COP28.

But the eagerly awaited GGA framework adopted at COP28 is something of a mixed bag. While the final text signals a global consensus on adaptation commitments, the absence of specific time-bound targets and financial metrics raises practical questions about implementation of the framework. The bottom line is there is some way to go to achieve progress, especially when it comes to adaptation finance, one of the major sticking points of the GGA framework discussions. At the very least, there is renewed international impetus and, with analysis to suggest growing market opportunities to finance adaptation, it may even be the private sector that drives this impetus going forward (see also our article on blended finance).

What is climate adaptation and why is it important?

Changes in average temperatures are bringing about shifts in seasons, an increase in frequency of extreme weather events, as well as slow onset events. Against this background, the United Nations Framework Convention on Climate Change tells us that adaptation refers to the adjustments in ecological, social or economic systems in response to actual or expected climatic stimuli and their effects. In other words, it’s the changes in processes, practices and structures to moderate potential damages or, indeed, to benefit from the opportunities associated with climate change. What this means in practice is that the longer we put off adaptation efforts, the harder and more expensive it will be to deal with the consequences.

Global goal on adaptation – From Paris to Dubai

Article 7.1 of the Paris Agreement says the “Parties hereby establish the global goal on adaptation of enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change, with a view to contributing to sustainable development and ensuring an adequate adaptation response in the context of the temperature goal referred to in Article 2“.

The GGA was first put forward by the African Group of Negotiators in 2013. The Group then went on to successfully propose the two-year Glasgow-Sharm El-Sheik work programme at COP26 in 2021. After an ostensible hiatus on adaptation discussions at intervening COPs, the work programme was intended to reinvigorate and refocus attention on adaptation action, and to place it on an even keel with that of mitigation. Several objectives were agreed under the programme, including to:

  • enable the full and sustained implementation of the Paris Agreement, towards achieving the global goal on adaptation, with a view to enhancing adaptation action and support;
  • enhance understanding of the global goal on adaptation, including of the methodologies, indicators, data and metrics, needs and support needed for assessing progress towards it; and
  • enhance national planning and implementation of adaptation actions through the process to formulate and implement national adaptation plans and through nationally determined contributions and adaptation communications.

Operationalising the global goal on adaptation – Dubai

With the work programme drawing to a close, an immediate goal for COP28 negotiators was to agree on a framework that would help guide countries in their adaptation progress. But early drafts of the framework were met with dissatisfaction – developing countries and civil society groups clashed with developed countries on the inclusion of actual financial targets and the principle of common but differentiated responsibilities and respective capabilities (CBDR-RC), both of which would assign greater responsibility to developed countries.

In the end, explicit references to developed countries providing adaptation finance to developing countries were removed and replaced with a broad invitation for “continuous and enhanced international support”. Quantifiable financial targets, the principle of CBDR-RC and other thematic sub-goals (such as universal health coverage and the maintenance, enhancement and restoration of at least 30% of ecosystems) were excluded. Rightly, this has spurred questions around the actionable, measurable and accountable nature of the agreed framework.

What next for adaptation action?

On a positive note, the final global stocktake text urges developed countries to prepare a report on their progress towards doubling adaptation finance by 2025 and acknowledges that this will have to be “significantly scaled up beyond the doubling”. The text also says that a ministerial dialogue will be convened “on the urgent need to scale up adaptation finance, and to ensure the mobilisation by developed country parties of the adaptation support pledged”.

As for the GGA, a further two-year work programme was agreed to establish indicators for measuring and assessing steps taken to achieve the framework’s overarching objectives.

While there is no clear political roadmap for increasing adaptation finance – and no clear accountability for filling the finance gap – there is hope yet. After all, COP28 has revived international momentum for adaptation action. Together with growing market interest in financing adaptation, we can be cautiously optimistic for a resilient, well-adapted future that protects the long-term interests of the climate-vulnerable.

For our round-up of COP28 negotiations, see our article here.

Key contacts

Jannis Bille
Jannis Bille
Senior Associate, London
+44 20 7466 6314
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Joanne Holbrook
Joanne Holbrook
Of Counsel, London
+44 20 7466 3411
Jacqui Reed
Jacqui Reed
Senior Associate, Johannesburg
+27 10 500 2648
Natalie Shippen
Natalie Shippen
Professional Support Lawyer, London
+44 20 7466 7623

Greenwashing dispute risks – International perspectives

With companies increasingly making environmental claims and a rise in ESG regulation, we outline the risks of greenwashing allegations in three key markets

Fuelled by the global spread of ESG and climate-related disclosure obligations and coupled with pressures from increasingly ESG-driven stakeholders, businesses are saying more than ever about their environmental and social performance. These statements might be product-specific, relate to investment strategy or corporate governance. Such statements might be seen as good marketing, positive for a company’s reputation and may well reflect a laudable transparency or ambition. But what are the potential legal consequences if these statements are attacked as inaccurate, unsubstantiated, misleading or false (ie, “greenwashing”)? In this article, we explore the increasing risks for a business in making environmental or social claims, focusing on the UK, Australia and the US.

The UK

The regulatory regime

As set out in our previous post, there are a number of regimes that require UK businesses to report in relation to social and/or environmental matters. Many of these derive from the EU’s European Green Deal, such as the Corporate Sustainability Reporting Directive, the Sustainable Finance Disclosure Regulation or the anticipated Corporate Sustainability Due Diligence Directive. Many of the EU regimes apply (or may apply) to entities accessing the single market and so apply directly to UK based companies. Others include references to “value chains” that will likely impact UK-based companies indirectly as the expectations of their EU business partners align with these new regimes.

There are also UK-specific reporting regimes, such as the UK Modern Slavery Act, the Task Force on Climate-related Financial Disclosures (the widely adopted voluntary standard that is now mandatory for all UK listed entities), the Task Force on Nature-related Disclosures and the International Sustainability Standards Board’s standards.

Other regulatory steps are being taken to ensure that what companies say accurately reflects what they do. In particular:

  • The EU Taxonomy Regulation establishes benchmarks for determining whether an economic activity is “sustainable”.
  • The EU Commission published a proposal for a Directive on Green Claims in March 2023.
  • The UK Competition and Markets Authority (CMA) has adopted a Green Claims Code that seeks to help businesses comply with the existing consumer protection regimes in the UK when making environmental claims. The CMA is working with the International Consumer Protection and Enforcement Network, with a view to aligning standards globally.

Investigations and litigation

There are five emerging categories of potential actions we would highlight:

  • Complaints to the EU Commission and/or CMA: In June 2023, a group of European national consumer protection organisations, supported by ClientEarth, filed a complaint with the EU Commission in relation to what they describe as misleading climate-related claims by 17 European airlines. The complainants are calling for a Europe-wide investigation. In January 2023, the CMA opened an investigation into three “fast fashion” brands to scrutinise their green claims, noting particular concerns about the way the firms’ products are marketed to customers as “eco-friendly”.
  • Complaints to the UK Advertising Standards Agency (ASA): Complaints can be made to the ASA that green claims in adverts are misleading. If the claim is upheld, the company will be ordered to remove the advert. Recent complaints have been made to, and upheld by, the ASA in relation to green marketing claims made by Ryanair (that it was the “lowest emissions airline” with “low CO₂ emissions”) and Repsol (where an advert relating to “renewable hydrogen” omitted material information.
  • Shareholder claims under the Financial Services and Markets Act: Section 90 and Section 90A of the Financial Services and Markets Act 2000 provide potential routes to redress for shareholders in a listed company that makes false or misleading claims about their response to climate change. While shareholder actions under FSMA are not new, ESG-related claims are a more recent area of focus for potential claimants. We explain these potential claims in more detail here and consider the issue of reliance under Section 90A here.
  • Shareholder derivative actions: Derivative actions under Section 261(1) of the Companies Act 2006 allow minority shareholders to bring a claim on a company’s behalf and for its benefit, typically with a view to challenging the conduct or decisions of the company’s directors. The highest profile example of such an action in relation to ESG issues was the unsuccessful action brought by the environmental charity ClientEarth against the directors of Shell, which we discuss in more detail here.
  • Consumer class actions: While we are yet to see a big rise in greenwashing class actions in the UK, claimant firms may seek to allege that misrepresentations by a business have induced consumers to make purchases that would not otherwise have been made, causing loss. These claims could be brought in the UK High Court on an “opt-in” basis (potentially following the example of the group litigation currently being pursued against vehicle manufacturers in relation to allegations concerning NOx emissions from certain diesel engines). Alternatively, claimants might seek to bring consumer claims based on alleged abuses of competition law in the Competition Appeal Tribunal, so as to take advantage of the “opt-out” regime (ie, where each member of the class is automatically enrolled as a claimant unless they take active steps to opt out). Notably, claimant firms have already sought to bring environmental claims via that route, in particular, against water companies.

Australia

The regulatory regime

Greenwashing in Australia is largely dealt with under existing legislative provisions in relation to false, misleading, deceptive or dishonest conduct, and in relation to corporate disclosure obligations and representations without reasonable grounds. Some of those provisions may be relied upon by private persons and entities, and many are also enforced by national regulators, including the Australian Securities and Investments Commission (ASIC), the Australian Competition and Consumer Commission (ACCC) and Ad Standards.

In August 2022, ASIC identified greenwashing as an enforcement priority for 2023. In November 2023, it then confirmed its focus on greenwashing will remain a priority in 2024 and indicated that focus would widen to give attention to “net zero” statements and targets and the use of such terms as “carbon neutral”, “clean” and “green”.

In its March 2023 “internet sweep” of environmental claims, the ACCC noted concerns that a significant portion of statements made by businesses may be false, misleading or have no reasonable basis, including “vague” terms including “green”, “eco-friendly”, “sustainable”, “recycled”, “carbon neutral” and “zero emissions”. In July 2023, the ACCC released draft guidance on environmental and sustainability claims.

Ad Standards, Australia’s advertising regulator, independently administers industry codes such as the Environmental Claims Code. The Code requires environmental claims to be presented truthfully and factually, not to be misleading or deceptive, and must be substantiated and verifiable. Ad Standards’ Community Panel handles complaints concerning breaches of the Code.

Litigation

In relation to private actions:

  • in August 2021, a shareholder environmental activist organisation filed proceedings against an oil and gas producer alleging that its market disclosures amounted to misleading or deceptive conduct in relation to: its 2030 and 2040 emissions reduction targets; its use of the word “clean” to describe its business and the production of natural gas; and it describing the use of hydrogen as “zero emissions” or “clean”; and
  • in August 2023, Australian Parents for Climate Action (AP4CA) filed proceedings against EnergyAustralia, challenging claims made on its website that its “Go Neutral” electricity and gas products are “carbon neutral”; emissions created by “Go Neutral” products are “cancelled out” or “negated”; and that by opting into its “Go Neutral” products, consumers “have a positive impact on the environment”.

In relation to regulator actions:

  • in February 2023, ASIC commenced its first greenwashing proceedings against Mercer Superannuation (Australia) Ltd (Mercer), alleging that Mercer engaged in greenwashing in relation to its ”Sustainable Plus” investment options because those options relevantly included investments in companies involved in the extraction or sale of fossil fuels, despite marketing statements made by Mercer to the contrary;
  • in January 2023, Ad Standards’ Community Panel upheld a complaint in relation to a flyer produced by ATCO which included the words, “Natural gas not only saves you money on hot water, cooking and heating, it’s also better for the environment” and under the subheading “Benefits” included a dot point with the words “Produce 70% less greenhouse gas”. The Panel held that this claim was misleading as there are other energy sources which produce less greenhouse gas than natural gas;
  • in July 2023, ASIC commenced proceedings against Vanguard Investments Australia Ltd (Vanguard) alleging that Vanguard had engaged in misleading and deceptive conduct because it represented that all securities in its “Ethically Conscious” fund were screened according to ESG criteria to exclude issuers with significant business activities in a range of industries, including fossil fuels, when it is alleged that Vanguard largely did not undertake that screening;
  • in August 2023, ASIC commenced proceedings against Active Super, alleging greenwashing in relation to claims that it eliminated investments from its superannuation fund that posed too great a risk to the environment and community (including tobacco, oil and gambling-related investments) in circumstances where the fund was allegedly exposed to securities in gambling, tobacco, oil and coal mining; and;
  • in March 2023, the ACCC announced it had researched 247 business and/or brands across Australia and had found that some of those businesses were: using vague or unclear environmental claims; not providing sufficient evidence for their claims; setting environmental goals without clear plans for how these will be achieved; and using third-party certifications and symbols in a confusing way.

The US

The regulatory regime

We have previously considered the SEC’s activities in this area here and here. This post, therefore, focuses on the consumer angle.

US regulatory action with respect to greenwashing claims remains fairly passive.  For the first time in more than a decade, the US Federal Trade Commission (FTC), which enforces federal antitrust and consumer protection laws, plans to release updated Green Guides for environmental marketing communications. The Green Guides, first issued in 1992 and last updated in 2012, are intended to help marketers avoid making unfair or deceptive environmental marketing claims in violation of Section 5 of the FTC Act. The revised Green Guides are expected to address current gaps in guidance with respect to claims that form the basis for modern greenwashing actions, such as claims that products are “sustainable” or “carbon neutral,” claims of achieving (or being on target to achieve) “net zero” carbon emissions, and claimed or implied endorsements from third-party organisations with strong ESG credentials. The revised guidance is expected to include examples of problematic statements and marketing, as well as the type and degree of substantiation required to defend against claims that given marketing statements are false or misleading.

Litigation

Even as the FTC works to better define the contours of false or misleading environmental claims, private class action litigation, rather than agency action, remains the principal means of regulating greenwashing in the US. For decades, plaintiffs’ firms have brought consumer fraud class actions premised on allegedly false or misleading claims that products are, for example, “healthy” or “all natural”.  Applying that same template, consumer fraud class actions have now begun to target statements that products are carbon neutral, fully recyclable, or made of recycled content, and other green or sustainable marketing claims.

Recent examples include Dorris v. Danone Waters of America, challenging Danone’s labelling Evian-brand bottled water as “carbon neutral”; Lizama v. H&M Hennes & Mauritz, challenging H&M’s use of “conscious choice” branding to market clothing made with 50% or more “sustainable materials”; and Ellis v. Nike USA Inc, similarly challenging Nike’s “Sustainability” product line. In these and other greenwashing class actions, plaintiffs allege (i) the marketer’s claim is false or misleading and (ii) the misleading statement inflated the purchase price of the product by a certain amount, as reflected in sales data and analyses by economic experts.

Like other US class actions, greenwashing class actions generally are brought by plaintiffs’ firms as “opt-out” class actions (as above, where each member of the class is automatically enrolled as a plaintiff in the action and must take steps if they wish to opt out of the class, which few people do), as consumers do not have the financial incentive to pursue these claims on an individual basis. If successful, plaintiffs’ firms can recoup a large contingent fee percentage (eg, 30% to 40%) of the class recovery, with damages calculated based upon the number of products sold with false or misleading claims multiplied by the amount by which the challenged statement inflated the purchase price.

Greenwashing class actions have seen mixed success in US courts. Some consumer fraud class actions have survived motions to dismiss because questions of fact remained as to whether the challenged statements were false or misleading and/or improperly substantiated. In other cases, courts have dismissed greenwashing claims because the challenged statements were held not to be false or misleading on their face (eg, in the Lizama case, the court granted H&M’s motion to dismiss because the only reasonable reading of H&M’s “conscious choice” marketing was that the products at issue used more sustainable materials than H&M’s other clothing, which was not in question).

Nonetheless, greenwashing class actions (and similar claims brought under state consumer protection laws by governments) are expected to continue in the US given the growing importance consumers place on ESG considerations and, as a consequence, marketers’ increased efforts to promote their brands and products based on those considerations.

To follow the rest of this series on climate change disputes, please subscribe to our ESG blog here or click here to view on our website.

Key contacts

Rachel Lidgate
Rachel Lidgate
Partner, London
+44 20 7466 2418
David Bennett
David Bennett
Partner, London
+44 20 7466 6435
Oliver Elgie
Oliver Elgie
Senior Associate, London
+44 20 7466 6446
Benjamin Rubinstein
Benjamin Rubinstein
Partner, New York
+1 917 542 7818
Chris Emch
Chris Emch
Associate, New York
+1 917 542 7838
Mark Smyth
Mark Smyth
Partner, Sydney
+61 2 9225 5440

Innovation, IP and the energy transition – Creative tensions

Reconciling the need for breakthroughs to back the energy transition with the commercial drivers required to achieve them will demand thoughtful use of IP

The scale of the change needed to tackle climate change is enormous and it is clear the global transformation to a low carbon economy will be underpinned by technological innovation. Incredibly, according to the International Energy Agency’s Net Zero by 2050 report, almost half of emission reductions required by 2050 will come from technologies currently at the demonstration or prototype stage. So, attracting investment and increasing the speed with which this technology can come to market is critical.

The Glasgow Climate Pact from COP26 focused on co-operative action on technology development and transfer. However, in the absence of fundamental changes to governmental funding structures, it seems likely that much of the required innovation will come from the private sector. Used well, intellectual property (IP) has the potential to incentivise innovation and enhance the commercial viability and dissemination of new technologies by providing greater certainty over returns on investment. As noted by Kathi Vidal, Director of the US Patent and Trade Mark Office, the patent system can be used to “power the new technologies aimed at the reduction of greenhouse gas emissions”. Her speech can be read here and our report here.

However, such views are arguably at odds with the stance that has been expressed by, among others, the UN Secretary General, who has called for the removal of obstacles to technological transfer, including specifically IP rights. Further, there is always scope for disputes arising in relation to IP rights.

So where does that leave us?

Is IP really a barrier to technology transfer?

To answer this question, much can be learnt from the pharmaceutical industry in terms of how to use IP rights to incentivise innovation while also facilitating the sharing of technology in the middle of a global emergency. At the onset of Covid-19, all the major manufacturers of Covid-19 vaccines voluntarily agreed to make their vaccines available to developing countries through a variety of mechanisms. These mechanisms involved, for example, licensing of patent rights to generic drug manufacturers, which also facilitated the transfer of the essential know-how required to make the vaccines.

The success of these mechanisms is perhaps reflected in the fact that, although the WTO introduced a Covid-19 Vaccine Patent Waiver, no country has to date declared an intent to make use of it.

This experience suggests that if IP rights exist that might prevent the transfer of technology to developing countries, those obstacles can be overcome through the conscientious decision of rights owners in relation to their IP rights. This experience also suggests that in the middle of a global emergency, the private sector does recognise the need and desirability of ensuring IP rights do not prevent the transfer of essential technology to all quarters of the globe and has shown itself willing to take steps to facilitate that knowledge sharing. It is also worth asking whether the innovation seen in response to Covid-19 which brought new vaccines to market in record time would have occurred had IP over such technology been abolished before the pandemic struck.

It is also possible that some countries may attempt to use compulsory licencing powers in the context of energy transition technologies. Depending on the circumstances this might amount to a de facto expropriation or a control on use of property within the meaning of human rights legislation and also as generally protected against in bilateral investment treaties depending on the jurisdictions involved.  This could, therefore, give rise to potential disputes.

Climate change carve-outs

Even if companies do enforce their IP rights, there are also policy questions around the extent to which the courts will allow IP holders to force infringers off the market when doing so would adversely affect the development of renewable energy projects in the middle of the climate crisis.

In 2022, in the US case of Siemens Gamesa v General Electric, Siemens successfully sued General Electric (GE) for infringement of a patent relating to the design of wind turbine rotor hubs. The Court had accepted GE should not be allowed to stay on the market given the impact it would have on Siemens, and therefore issued an injunction but, significantly, it was not a blanket one. Instead, GE was permitted to continue its work on the US’s first two commercial-scale offshore wind turbine projects in light of the fact that that “the world is currently facing a rapidly developing climate crisis”. The judge stated that, given the investment in and complexity of the offshore projects to date, GE should be permitted to continue work on them as “delaying largescale wind energy projects can impact efforts to combat [the climate crisis]”. The judge also considered the potential job losses if GE’s participation in these projects were to be halted.

Although Siemens was not able to obtain a blanket injunction, it was not left without a remedy and could seek financial redress from GE by way of a royalty of $60,000 per MW that applied to the GE projects carved-out from the injunction.

In the pharmaceutical sector we have seen claims brought by rights owners against competitors in which the rights owner has not sought injunctive relief, presumably because they recognised the desirability from a patient or public health perspective of the competitor product remaining on the market. In those cases, like Siemens, the rights owner has pursued a claim for financial compensation as a remedy for infringement of their rights.

Standards, standard essential patents and FRAND licensing

As new technologies are developed, we might also see the use of patent pools and standards to achieve interoperability and facilitate the development of commercially viable markets. Here, the telecoms industry provides a model for how IP might in fact be used constructively.

In the telecoms industry, standards ensure that devices from different manufacturers can work together seamlessly. To enable this in an industry home to some of the largest patent portfolios in the world, all patentees whose patents are essential to using the technology in a standard (ie, they are Standard Essential Patents or SEPs) must licence it on Fair Reasonable And Non-Discriminatory (FRAND) terms.

The use of standards has allowed significant advancement of technology with multiple competing commercial entities paying for access to the key patented technologies and integrating elements but it has also given rise to disputes. For example, what exactly FRAND terms are has proved controversial. Some potential infringers have tried to evade being sued by declaring themselves “willing licensees” when they have refused to take a licence from the patentees on the basis the terms being offered are not FRAND. This has frustrated SEPs patentees who have brought their disputes to the courts in different countries, which have dealt with multiple cases in the last few years concerning disputes over licensing terms (including the royalty rates to be paid) in relation to telecoms patents.

We anticipate that standards are likely to emerge in the implementation of some new clean energy technologies (perhaps autonomous vehicles) and that disputes are likely to follow.

Disputes arising from collaborations

IP has the ability to provide the foundation for successful collaborations and, given the complexity of the problems to be solved in the climate crisis, and the pace, breadth and scale of innovation required, collaboration will be essential. However, a side-effect of collaborations is the risk of disputes among various stakeholders and IP rights owners.

Again, we can look to the pharmaceutical sector. Here disputes have emerged over who owns the IP generated, the type and scope of IP licensed into a collaboration, whether a party has fulfilled its obligations to collaborate and innovate under the licence, and whether royalties are payable under a licence (and how much). We have seen, for example, a dispute over the ownership to a US patent covering a Covid-19 vaccine which was filed by Moderna, over which the National Institutes of Health is arguing its scientists should be named as co-inventors. This apparently arose because the collaboration agreements that governed the joint development of vaccines did not specify the ownership of IP which was generated from the collaboration. In another example, before the Covid-19 pandemic, Moderna was looking to licence mRNA delivery technology owned by Arbutus and Genevant but did not do so directly from the pair, instead sub-licencing it from a third party. Disputes subsequently arose regarding whether sub-licensing was allowed under the head licence, and whether the scope of Moderna’s activities fell within the sub-licence.

Disputes of this nature are not unique to the pharmaceutical sector and similar issues could readily arise out of collaborations in the clean energy space. However, there is also scope to reduce the risks of disputes by learning from the experiences of others. Identifying the background IP each party is contributing; anticipating the outcome of the collaboration and who will be entitled to do what with the resulting IP; having a coherent IP protection strategy; and setting up clear employment contracts for those participating in the project are all measures that can be taken to reduce risk.

Conclusion

IP underpins the energy transition and the new technologies needed to bring it about. The industry needs to give thought to potential challenges to IP in the sector and consider how it can best ensure that technology is widely disseminated. Innovators need to take care to consider IP and possible disputes relating to it as they develop and implement business strategies relating to the energy transition.

To follow the rest of this series on climate change disputes, please subscribe to our ESG blog here or click here to view on our website.

Key contacts

Rebekah Gay
Rebekah Gay
Partner, Sydney
+61 2 9225 5242
Emma Iles
Emma Iles
Partner, Melbourne
+61 3 9288 1625
Andrew Wells
Andrew Wells
Partner, London
+44 20 7466 2929
Rachel Montagnon
Rachel Montagnon
Professional Support Consultant, London
+44 20 7466 2217
Natasha Daniell
Natasha Daniell
Senior Associate, London
Julie Chiu
Julie Chiu
Senior Associate (Australia), London

Climate disputes – Parent company and supply chain risk

Growth of transnational tort claims means businesses risk liability for environmental failures by subsidiaries and counterparties

In recent decades, there has been a marked increase in the number of actions brought in the UK and elsewhere based on alleged environmental and human rights-based failings by large multinational corporations.

As these claims have developed in the English courts, the typical model is for groups of foreign claimants to allege a UK-domiciled company owes them a duty of care in relation to environmental or other impacts of the acts (or omissions) of another company in another country. For example, a foreign subsidiary, or even an unrelated business partner in the company’s supply chain.

These cases, often referred to as transnational tort claims, have risen in prominence in recent years for a number of reasons. Against the background of evolving views on the importance of ESG issues, transnational tort litigation is perceived to fill a gap where local laws or procedures leave no basis for redress or where lawyers cannot act on a no win, no fee basis to enable prospective claimants. Moreover, it may be attractive from a claimant perspective to pursue parent companies or large business partners with the deepest pockets.

Such factors have led claimant law firms and litigation funders to find creative avenues for claims, while local communities are becoming increasingly mobilised to seek redress. With the impacts of climate change becoming ever greater around the world, and in light of the resultant increase in corporate policymaking, climate-related impacts may become a focus for transnational tort claims in the future. While this is a developing area, there are significant hurdles facing any attempt to hold corporations liable for causing or contributing to climate change per se. It is, however, foreseeable that claims could be brought based on activities which allegedly exacerbate the effects of climate change in a particular area or for a particular community.

Parent company liability

It is well-established that each company in a corporate group has a separate legal personality, and a parent company is therefore not generally responsible for the acts or omissions of its subsidiaries. However, as a matter of tort law, the way a parent company operates and interacts with its subsidiaries can lead to it assuming a duty of care to third parties at risk of harm from the acts and omissions of those subsidiaries.

Recent cases where the English courts have considered such allegations against UK-domiciled parent companies at a preliminary stage include Vedanta Resources Plc v Lungowe and Okpabi v Royal Dutch Shell (outlined in our blog post here), both of which were appealed to the Supreme Court on the question of whether it was arguable that a duty of care was owed by a parent company. In Vedanta, some 1,800 Zambian villagers sought compensation from Vedanta Resources Plc, and its Zambian subsidiary, for alleged environmental damage from a copper mine in Zambia. In Shell, around 40,000 individuals from the Niger Delta region sought compensation from Royal Dutch Shell Plc and its Nigerian subsidiary for alleged environmental damage resulting from oil spills off the Nigerian coast. In both cases, the defendants challenged jurisdiction on the basis there was no arguable claim against the parent company as “anchor defendant” and therefore no basis for the court to allow service out of the jurisdiction on the subsidiary as a “necessary or proper party” to that claim.

In both Vedanta and Shell, the Supreme Court found it arguable that a duty of care was owed by the parent company defendants, emphasising that the question will inevitably turn on the facts of each case and the court should not conduct a “mini-trial” at the jurisdictional stage. A key issue will be the extent to which the parent company took over, or shared in, the management of the relevant activity. Relevant factors may include whether the parent company has provided defective advice or policies which were implemented by the subsidiary; promulgated group-wide safety or environmental policies and taken steps to ensure their implementation; or held out that they exercised a particular degree of supervision and control of the subsidiary. But this is not an exhaustive list.

Supply chain risk

Claims are also starting to emerge against companies in relation to the acts or omissions of unrelated entities in their supply chain, or those who have purchased corporate assets.

In Begum v Maran (UK) Ltda claim was brought against Maran, a UK-domiciled company, which had acted as agent for a related company in the sale of an oil tanker to a demolition cash buyer. Following the death of a worker dismantling the ship in Bangladesh after the sale, a claim was brought against Maran alleging a duty of care on the basis that it knew the vessel would be broken up in Bangladesh in highly dangerous working conditions.

On an appeal against a summary judgment and strike-out ruling, the Court of Appeal held the claim should be allowed to continue. Despite acknowledging it was an unusual basis of claim, the court found there was an arguable duty of care based on the assumed facts. It noted that claims based on a duty of care in respect of damage caused by a third party were “currently at the forefront of the development of the law of negligence” and described the alleged duty in Maran as being “on the edge of that development”. However, the court thought it would be inappropriate to strike out the claim in the circumstances.

It is not clear whether this case has progressed further, but it demonstrates the potential breadth of the bases on which transnational tort cases could be brought in future, the difficulty of striking them out at an early stage and the resulting risks for corporates.

Jurisdiction issues

Vedanta and Shell have shown it will generally be challenging for a UK-domiciled defendant to knock out a transnational tort claim at an early stage on the basis that there is no duty of care since the English courts approach this as a fact-specific question and will not conduct a “mini-trial”.

For cases brought before the end of the Brexit transition period (31 December 2020), the European regime for jurisdiction and the enforcement of judgments applied to the UK and accordingly the English courts were obliged to accept jurisdiction in claims against UK-domiciled defendants. They could not decline to hear the claim simply on the basis there was another available forum that was more appropriate. However, following Brexit, that regime no longer applies.

Therefore, a UK-domiciled company may be able to persuade the English courts to decline to exercise jurisdiction over a case which has little or no other connection to the UK. This is illustrated by the recent decision in Limbu v Dyson Ltd, where the High Court declined to exercise jurisdiction over a claim by migrant workers relating to alleged forced labour and exploitative conditions in a factory in Malaysia which manufactured products and components for Dyson branded products.

However, even if the English court has found that England is not the most appropriate forum, it will nevertheless refuse a stay if satisfied there is a real risk the claimant will not obtain justice in the foreign court. In Vedanta, for example, despite the claim’s connections to Zambia, the Supreme Court found there was a real risk of the denial of substantial justice if the claim was heard in Zambia, including because of its scale and complexity and the claimants’ inability to access litigation funding there.

Moreover, where the English court is prepared to stay the action in favour of a foreign court, this is likely to be on the basis of the UK-domiciled defendant’s willingness to submit to the jurisdiction of that court, which may bring risks depending on the jurisdiction in question. In the Dyson case, the UK defendants gave undertakings not only to submit to the jurisdiction of the Malaysian courts but also, for example: not to seek security for costs or an adverse costs order to the extent such costs would not be recoverable under the Qualified One-Way Cost Shifting regime in England; and not to challenge the lawfulness of any success fee arrangement between the claimants and their Malaysian lawyers.

Challenges for defendants

A number of aspects increase the risks and uncertainty for defendants facing these sorts of claims in the English courts.

First, there is limited guidance on how the English courts will approach these claims at trial, including on the question of what level of control or involvement is sufficient to establish a duty of care. To date, while we have Supreme Court guidance as to the circumstances where a duty of care arguably exists, in none of these transnational tort cases has the court had to finally determine whether a duty was owed to those affected by the acts or omissions of the relevant subsidiary, supplier or other third party. What is clear is the question is highly fact-specific, which makes the result difficult to predict in any particular case.

Second, despite these claims being heard in the English courts, the applicable law will usually be that of the foreign country where the alleged tort occurred. In many cases, that means the parties must obtain expert evidence as to the content of the relevant foreign law. This can increase costs and (although the English courts have extensive experience in applying foreign law) may ultimately lead to a more uncertain result than where the court is applying its own law.

Third, defendants may face significant challenges in recovering their costs in these cases where the claims fail. The claimants will often be individuals of few means, each is likely to be liable only for their individual share of the costs, and they may be supported by lawyers acting under a conditional fee or damages-based agreement who will not generally be liable for adverse costs if the claim fails. So, unless there is sufficient after-the-event insurance in place, or a third-party litigation funder is involved, defendants may be unable to recover the costs of a successful defence. Even then, where the claims have a personal injury element, Qualified One-Way Costs Shifting will often prevent a successful defendant from recovering costs in respect of those claims.

And all this is separate from the reputational damage these claims can cause, as well as the negative impact on relations with governments and local communities.

Managing the risks

Companies looking to mitigate the risks of these cases should carefully consider their policymaking process and implementation. Businesses should ask themselves whether their legal teams have sufficient oversight of the formulation of policies, particularly in relation to ESG issues, and whether there are established and effective governance processes for the adoption and implementation of group-wide policies.

It will also be important to consider carefully the language used in public statements, and in particular annual reporting. Considerable emphasis has been placed on these types of documents in the cases seen to date. Where appropriate, care should be taken to draft these documents in a way that reflects the corporate separation between parent and subsidiary.

When considering risk exposure to transnational torts, corporates should also remember to check how their insurance might respond to such scenarios. For example, does current insurance have adequate limits or sub-limits for defence costs? Or, in the event of a claim against them, does the corporate need to consider making a notification to its insurers?

The risks of claims arising due to failings in the supply chain or by those purchasing corporate assets can also be mitigated through prior consideration of risk, undertaking appropriate due diligence of suppliers and other business partners and (potentially) careful contract drafting. Maran signals that a company’s knowledge of the relevant risks of harm will be closely scrutinised in determining whether a duty of care has arisen. Where issues are identified with the practices of suppliers or other business partners, it will be crucial to take steps to address them, or (in an extreme case) to put an end to the relevant business arrangements.

To follow the rest of this series on climate change disputes, please subscribe to our ESG blog here or click here to view on our website.

Key contacts

Neil Blake
Neil Blake
Partner, London
+44 20 7466 2755
Maura McIntosh
Maura McIntosh
Professional Support Consultant, London
+44 20 7466 2608
Rebekah Dixon
Rebekah Dixon
Senior Associate (New Zealand), London
+44 20 7466 2958

Court of Appeal rejects second major attempt at a climate-related derivative action

In July 2023, the Court of Appeal upheld the first instance decision in McGaughey & Anor v Universities Superannuation Scheme Limited [2023] EWCA Civ 873 (“McGaughey“), dismissing the application by members of a pension scheme to bring a derivative action against the directors of the scheme’s trustee company.

McGaughey and ClientEarth v Shell, taken together, confirm that the courts of England and Wales remain wary of challenging reasonably made decisions of company directors. In McGaughey, the Court of Appeal also made clear that derivative actions are not appropriate when direct challenges are available. For more on ClientEarth v Shell, see our blog post here.

So, while derivative actions may continue to be brought as a disruptive tactic by activist shareholders, there is likewise continued judicial reluctance to second-guess corporate decision-making. The Courts are aware that climate risks are just one of the many risks which executives consider when deciding on strategy. In the absence of evidence of egregious disregard for climate risks, the courts seem unwilling to find that directors have the balance wrong.

Factual background to McGaughey

Two academics (the “Applicants“), members of the Universities Superannuation Scheme (the “Scheme“), one of the largest private occupational pension schemes in the UK, appealed the High Court’s rejection of their attempt to bring a derivative action against the directors of the Scheme’s trustee company.

The directors had approved resolutions amending Scheme benefits by making changes to salary threshold, accrual rate and inflationary increases and increased member contributions. They had also obtained an actuarial valuation as at 31 March 2020, when they were not required to do so until a year later. The Applicants challenged these decisions.

The Applicants also argued that the directors had breached their duties under the Companies Act 2006 by continuing to invest in fossil fuels despite the Scheme’s ambition to be carbon neutral by 2050. They argued the directors had not adequately considered the attendant financial risks. These breaches were therefore said to cause current and future loss to Scheme members, in the form of lost assets, increased deficit and other knock-on future losses.

As the trustee company of the Scheme is a company limited by guarantee, it has no shareholders. The statutory derivative action under the Companies Act 2006 was therefore not available and the Applicants consequently framed their claim at common law.

A common law derivative action must satisfy four requirements:

  1. sufficient interest or standing to pursue the claim on behalf of the company;
  2. a prima facie case that the claim falls within an exception to the rule in Foss v Harbottle;
  3. a prima facie case on the merits; and
  4. that it is appropriate in all the circumstances to permit the derivative claim(s).

The test for standing

The appeal in McGaughey failed at the first hurdle. The Court highlighted two key aspects to the Applicants’ lack of standing:

  1. Under the ‘Reflective Loss’ principle, the Applicants had to show they had suffered a loss. Also, importantly, they had to show this loss related to (or at least correlated with) the Scheme’s loss. The Applicants were unable to make out either of these. In particular, they could not prove any substantive loss suffered by the company on account of the directors’ actions (including in relation to fossil fuels claims).
  2. Further, because changes made by the directors to the Scheme benefits were not uniformly detrimental (ie the changes affected different classes of Scheme members differently), the Applicants were not able to bring the claim on behalf of all the members of the Scheme. Contrast this to the position of shareholders in a company, who all enjoy the same benefits.

Directors’ duties and other obligations

McGaughey makes clear that directors’ duties must be considered separately from their other obligations.

The rule in Foss v Harbottle is that, generally, the Company is the correct party to bring an action against its directors. There are, however, a number of exceptions to this rule, including where a fraud has been committed and the minority (ie shareholders) are prevented from remedying the fraud because the company is controlled by the wrongdoers (ie the directors).

The Applicants claimed that the directors knew or believed that the changes to Scheme benefits involved indirect discrimination and were nonetheless prepared to tolerate it for their own ends.

However, the Court of Appeal found this attempted to elide the directors’ statutory duties, owed to the company, with the objects of the trust. Mere allegations of directors acting in bad faith or having conflicts of interest are insufficient to fall under an exception. Claimants must specifically identify the fraud on minority stakeholders and the wrongfully obtained benefits of that fraud. The Applicants’ vague allegations were given short shrift, with Lady Justice Asplin commenting that “it was entirely inappropriate that the[se] allegations [of fraud] should have been made.”

Direct claims rather than derivative actions

Both the High Court and Court of Appeal showed a preference for direct claims over derivative claims. The derivative action mechanism is “not intended to enable would be claimants to avoid other procedural hurdles“.

The Court of Appeal noted that because of this, even if the Applicants had a prima facie case, the derivative action would not have been allowed to continue. In particular, the Court of Appeal noted it was “surprised” that the claim had been brought in this form, noting there was “no reason, save perhaps a desire to avoid the difficulties in relation to costs and representation,” for bringing it as a derivative action. Instead, the Applicants should have brought a claim which challenged the Scheme’s investment policy directly, here most simply in breach of trust.

The importance of internal governance to climate claims

While clearly a success for the Scheme’s directors, McGaughey also shows the importance of shareholder resolutions in corporate governance.

Leech J, deciding at first instance in McGaughey, considered a survey of members in finding that the directors had complied with their obligations to diversify and manage the Scheme’s assets.

Similarly, in deciding not to grant ClientEarth leave to pursue its derivative action, the High Court explicitly had regard to a shareholders’ vote of approval for Shell’s Energy Transition Strategy at previous Annual General Meetings.

Both the McGaughey and ClientEarth decisions highlight the courts’ consideration of these resolutions, signalling that proactive shareholder involvement can shape corporate climate strategy and that companies should consider their internal controls when assessing litigation risk.

Key contacts

Rachel Pinto
Rachel Pinto
Partner, London
+44 20 7466 2638
Rupert Swallow
Rupert Swallow
Associate, London
+44 20 7466 2157
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Rebecca Perlman
Rebecca Perlman
Partner, London
+44 20 7466 2075
Natalie Shippen
Natalie Shippen
Professional Support Lawyer, London
+44 20 7466 7623

Global perspectives on climate disputes – A recent history of shareholder claims

Our series on climate disputes finds the UK, Australia and the US placing high hurdles to successful investor claims but the risk is growing.

Recent years have shown a rise in activist shareholders striving to shape corporate conduct around ESG matters, particularly climate change. Institutional investors are increasingly backing such initiatives, driven by the need to showcase their ESG commitments, fulfil investment strategies and reduce risk associated with their investment labels.

In England and Wales, shareholder activism has traditionally taken the form of shareholder resolutions during general meetings. However, investors are now expanding the climate agenda beyond such forums and looking to the courts to put pressure on large corporates. This article looks at emerging shareholder claims related to climate change in the courts of England and Wales and provides an international perspective by briefly considering the position in the US and Australia, two other key jurisdictions.

Claims under the Financial Services and Markets Act

Businesses are facing increasing demands to disclose how their operations and products might impact the climate. Their positions on ESG issues are also becoming distinguishing factors in communications with investors, consumers and the public. However, the more public declarations made, the greater the risk of a discrepancy between words and action, often referred to as the “say-do gap”.

Where listed companies make claims about their response to climate change that later prove – or are thought to be – false or misleading, shareholders may resort to causes of action available under Section 90 and Section 90A of the 2000 Financial Services and Markets Act (FSMA).

Section 90 relates to statements in both prospectuses and listing particulars where there are untrue or misleading statements or omissions of necessary information. It enables any person who has acquired the securities (or an interest in the securities) and has suffered a loss as a result of the defect, to claim compensation from those responsible for the defective document. Typically liable will be the issuer and the issuer’s directors. There is no express requirement for investors to prove that they relied on the alleged mis-statements or omissions. The fault standard is essentially negligence (albeit with the burden of proof reversed so it is for defendants to show they were not negligent) by virtue of a defence of “reasonable belief” that the contents of the document were complete and accurate.

Section 90A (and its successor, Schedule 10A FSMA) imposes civil liability in respect of untrue or misleading statements in (or omissions from) other information published to the market via a recognised information service. There is also liability for dishonest delay in publishing information to the market. This provides an additional avenue for claims by shareholders who have suffered loss when buying, selling or holding securities. This only applies, however, in circumstances where a person discharging managerial responsibilities (PDMR) at the issuer knew, or was reckless as to whether, the statement was untrue or misleading, or knew the omission to be a dishonest concealment of a material fact or dishonestly delayed making the market announcement. Unlike Section 90 FSMA, there is an express requirement the shareholder must have reasonably relied on the statement to make good their claim and this cause of action is only available against the issuer.

It is likely that the UK market will start to see claims challenging the integrity of climate-related disclosures made by listed issuers, for example, where there has been a mischaracterisation of the company’s climate profile leading to reputational damage and a loss of share price. The risk of claims is heightened by the rapid growth in mandated reporting and disclosure requirements and exacerbated by the fact that standards are continuing to evolve, creating a moving target for companies to hit. FSMA claims may also be fuelled by the general growth of the class action market in the UK, supported by the availability of litigation funding. While claims under Section 90A are likely to be more common, given that every announcement to the market creates a potential trigger for liability, these are more challenging claims to bring for shareholders because of the higher fault standard as well as the requirement to prove reliance.

Derivative claims

Another avenue for shareholders to challenge a company’s approach to climate change risks is via derivative action in accordance with Section 261(1) of the Companies Act 2006 (CA 2006). Derivative claims allow minority shareholders to bring a claim on a company’s behalf and for its benefit, typically with a view to challenging the conduct or decisions of the company’s directors.

The most prominent derivative action to date in the ESG space was brought by the environmental charity ClientEarth against the directors of Shell. In bringing these claims, ClientEarth claimed to have the support of a group of institutional investors collectively holding more than 12 million shares in the company. The outcome in this case suggests it will be difficult for shareholders to use the statutory derivative action procedure to challenge directors’ decision making relating to environmental strategy.

In summary, ClientEarth alleged that Shell’s board of directors breached their statutory duties owed to Shell (including under Section 172 and 174 of the CA 2006) by failing to implement an energy transition plan that aligned with targets set out in the Paris Agreement. Also cited was an alleged failure to comply fully with a May 2021 judgment of the Dutch Court regarding the reduction of the company’s emissions.

The procedural mechanism for derivative actions under CA 2006 is complex, involving a permission stage aimed at weeding out weak claims. In considering the case on the papers, the High Court ruled that ClientEarth failed to meet the initial threshold of establishing a prima facie case for granting permission to continue the claim. ClientEarth exercised its right to have an oral hearing, where the High Court confirmed its earlier decision to refuse permission. Interestingly, in a departure from the usual costs rules for applications of this type, the court concluded that it was appropriate for Shell to attend the oral permission hearing and make submissions in this case, ordering ClientEarth to pay Shell’s costs for the proceedings. However, ClientEarth has already appealed the costs result and announced its intention to appeal the permission outcome.

ClientEarth sought declarations the directors had breached their duties. In the court’s view, the declaratory relief would not fulfil any legitimate purpose: it was not the court’s function to express views as to the directors’ conduct and the proper forum for ClientEarth to voice its concerns was by way of a vote of the members in the general meeting. The court emphasised that it will not generally interfere in management decisions, particularly where they require directors to balance competing considerations. The court was also critical of ClientEarth’s attempts to formulate new and absolute duties in respect of climate change on directors, which cut across their general duties under CA 2006. Notably, the court was prepared to look at ClientEarth’s motivation behind the action, which was to publicise and advance its own policy agenda, rather than to secure the directors’ compliance with their duties for the benefit of Shell’s members as a whole. The court was also interested in the views of other members with no personal interest in the matter, quoting support for Shell’s energy transition strategy in votes cast by members at Shell’s previous annual general meetings.

ClientEarth also sought a mandatory injunction requiring Shell’s directors to adopt and implement a strategy to manage climate risk in compliance with their statutory duties, which the court said was too imprecise to be suitable for enforcement, requiring constant court supervision. This is likely to be a significant hurdle for any campaign group seeking similar relief.

ClientEarth v Shell is not an isolated example of the derivative action procedure being used to shift the dial on corporate approaches to climate change. In McGaughey v Universities Superannuation Scheme (heard in the High Court and then the Court of Appeal), members of a pension scheme sought permission to continue a common law derivative claim. The common law procedure is generally used only where the statutory route is not available because the minority shareholders wish to challenge the wrongs done to companies further down the corporate chain (a so-called “double” or “multiple” derivative action).

In the McGaughey case, the applicants were members of a pension scheme (the Universities Superannuation Scheme, one of the UK’s largest pension funds). They sought to continue proceedings on behalf of the pension trustee company (not the pension scheme itself), against the directors of the pension trustee company. The directors’ alleged breaches of duty included direct and indirect investments in fossil fuels. The Court of Appeal found that the applicants could not establish a prima facie case on permission, with the judgment suggesting it will be difficult to harness the common law derivative procedure to pursue climate-related objectives.

International perspectives

The US

Shareholders and others have filed claims in the US alleging climate and other ESG-related misstatements or omissions, thus far without much success. In 2019, a New York judge held that the state’s Attorney General had failed to prove that Exxon had misled shareholders over the true cost of climate change. In particular, the Attorney General failed to establish that Exxon had made any material misstatements or omissions about its practices and procedures that misled any reasonable investor. In 2022, Enviva Inc., a company that develops wood pellet production plants, was sued by one of its investors, who filed a putative securities class action in Maryland alleging the company made false and misleading statements regarding the environmental sustainability of its wood pellet production and procurement. Motions to dismiss that case are pending. Similarly, in 2021, an investor filed a putative securities class action against Danimer Scientific, a biodegradable plastics company, in New York, alleging that statements touting the company’s biodegradable plastic product as revolutionary were merely greenwashing. The court in that case recently granted the defendants’ motion to dismiss, holding that, although the plaintiffs had adequately alleged that the defendants had made some materially misleading statements, they had failed to adequately allege scienter (ie, the adequate intent). It is not difficult to envision additional securities fraud class actions based on alleged climate-related misstatements or omissions, although US law provides various defences to such actions, eg, the failure to adequately allege loss causation and a lack of materiality.

Regulators and in particular the Securities and Exchange Commission (the SEC) have also taken enforcement action in connection with climate disclosures. The SEC charged Vale, S.A. in April 2022 with making false and misleading statements regarding the safety of its dams following the 2019 collapse of the company’s Brumadinho dam. Earlier this year, Vale agreed to pay $55.9 million (disgorgement and penalties) to settle the charges. Similarly, in May 2022, the SEC announced that a US bank had agreed to pay $1.5 million to resolve charges that it had issued false and misleading statements regarding ESG investment policies for certain mutual funds. There have also been recent media reports of the SEC serving ESG-related subpoenas on various investment advisers.

The SEC has also proposed a climate disclosure requirement that, should it become law, is likely to lead to additional litigation.

Australia

Australia continues to be an active jurisdiction for climate-related disclosure litigation and complaints. This includes direct litigation by shareholders challenging climate-related commitments, disclosures and policies. It also includes a campaign of legal demands made against institutional investors from fund members seeking to challenge investments said to be not in the best interests of those members. Shareholder litigation risk in Australia is also impacted by heavy regulatory enforcement activity, repeated challenges to project approvals and an active shareholder class action landscape. It will be further impacted by the proposed introduction of a mandatory climate reporting regime, which will have a phased introduction, starting from 2024-25 for Australia’s largest entities. The Australian Securities and Investment Commission – which has identified greenwashing as an enforcement priority – has said that disclosing and managing climate-related risk is a key director responsibility.

Conclusion

To date, there have been no Section 90/90A FSMA claims based on climate-related disclosures in the English jurisdiction. However, given the growth of securities class actions in recent years, including in relation to the social and governance aspects of ESG, and considering the various types of disclosure actions in the US and Australia, a rise in environmental claims seems highly likely, particularly set against emerging mandatory disclosure requirements. Likewise, while it has proven difficult for shareholders to get any traction using the derivative action procedure, the ClientEarth v Shell litigation obtained significant publicity, which may be of equal importance from the perspective of activist shareholders and should not be underestimated.

It is important for boards to remember that it is not only activist shareholders who will be tracking corporate climate-related disclosures and management decisions. Increasingly other shareholders are scrutinising and holding to account the companies in which they hold investments.

Combined with agitation from shareholders in general meetings, climate-related litigation is likely to be a key tool for shareholders looking to make change and investors seeking to demonstrate they are taking climate considerations into account when formulating investment strategies.

To follow the rest of this series on climate change disputes, please subscribe to our ESG blog here or click here to view on our website.

Key contacts

Rupert Lewis
Rupert Lewis
Partner, London
+44 20 7466 2517
Ceri Morgan
Ceri Morgan
Professional Support Consultant, London
+44 20 7466 2948
Benjamin Rubinstein
Benjamin Rubinstein
Partner, New York
+1 917 542 7818
Lisa Fried
Lisa Fried
Partner, New York
+1 917 542 7865
Mark Smyth
Mark Smyth
Partner, Sydney
+61 2 9225 5440
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Rebecca Perlman
Rebecca Perlman
Partner, London
+44 20 7466 2075

UK government launches call for evidence on scope 3 emissions reporting

UK government seeks views on the costs, benefits and practicalities of Scope 3 emissions reporting to inform whether it endorses the International Sustainability Standard Board’s sustainability disclosure standards. 

The Department for Energy Security and Net Zero (“DESNZ“) has launched a call for evidence on Scope 3 greenhouse gas emissions (“GHG“) reporting. Scope 3 emissions are the indirect emissions (not included in Scope 2) that occur in the reporting company’s value chain. Disclosure of most Scope 3 emissions remains voluntary under current reporting requirements. However, the International Sustainability Standards Board’s (“ISSB“) first two standards – IFRS S1 (general requirements for disclosure of sustainability-related financial information) and IFRS S2 (climate-related disclosures) – require entities to report their Scope 1 (direct emissions from owned or controlled sources), Scope 2 (indirect emissions from the generation of purchased energy) as well as Scope 3 emissions. The government’s call for evidence therefore seeks views on the costs, benefits and practicalities of Scope 3 emissions reporting to inform its decision as to whether it endorses the ISSB’s sustainability standards.

The government acknowledges the complexities associated with identifying and quantifying Scope 3 emissions but, at the same time, recognises the significance of measuring these emissions to prioritise and support decarbonisation efforts. As such, the call for evidence is more likely an exercise of how the government will endorse the ISSB standards rather than whether it will do so. This is especially so given the government’s announcement in August 2023 that it will establish the UK Sustainability Disclosure Standards based on the ISSB standards, which is expected by July 2024. Stakeholders have until 14 December 2023 to respond.

Background

A variety of legal regimes govern emissions reporting in the UK. The Companies Act 2006 (Strategic Report and Director’s Report) Regulations 2013 put in place requirements for quoted companies to report their annual emissions and an intensity ratio. The Streamlined Energy and Carbon Reporting (“SECR“) framework, introduced in 2019, added further disclosure requirements on quoted companies. It also created new requirements for large unquoted companies and large limited liability partnerships. By and large, the SECR framework focuses on Scope 1 and Scope 2 emissions, with only a limited subset of Scope 3 emissions and energy use requiring disclosures. This means most Scope 3 disclosures are voluntary, notwithstanding that Scope 3 emissions make up roughly 80-95% of total emissions for many organisations.

Rationale for Scope 3 disclosures

Investors and stakeholders are increasingly taking into account the transition readiness of businesses to adapt to a low-carbon economy in light of net-zero commitments made in the UK and elsewhere. Disclosure of Scope 3 emissions is deemed an important indicator of such readiness because there is a clear link between a business’ exposure to GHG emissions and its exposure to risks in a decarbonising society and economy. This rationale led to calls for the ISSB’s sustainability disclosures standards to require disclosure of absolute gross GHG emissions, that is, Scope 1, Scope 2 and Scope 3 emissions, which the ISSB subsequently accepted. The final IFRS S2 requires an entity to disclose information about its climate-related risks and opportunities that is useful to primary users of general-purpose financial reports in making decisions. Such information will include disclosure of absolute gross GHG emissions so long as the information is “material”, that is, it could reasonably be expected to affect the business’ prospects.

Objectives of the call for evidence

As noted, the government’s call for evidence seeks feedback on the costs, benefits and practicalities of Scope 3 emissions reporting. The feedback gathered will help inform the government’s decision as to whether it endorses the ISSB standards for use by UK businesses. The call for evidence also seeks information on how endorsement of the ISSB standards might complement existing reporting requirements under the SECR framework and any future changes to the framework that will be considered in its post-implementation review in 2024.

 

Key contacts

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Rebecca Perlman
Rebecca Perlman
Partner, London
+44 20 7466 2075
Jannis Bille
Jannis Bille
Senior Associate, London
+44 20 7466 6314
Natalie Shippen
Natalie Shippen
Professional Support Lawyer, London
+44 20 7466 7623

UK Transition Plan Taskforce publishes final disclosure framework

On 9 October 2023, the UK’s Transition Plan Taskforce (“TPT“) published its final disclosure framework (“Disclosure Framework“) and supporting documents. The Disclosure Framework is intended to act as a “gold standard” for companies to develop, disclose and deliver their climate transition plans.

The Disclosure Framework seeks to offer practical support to UK companies already disclosing their transition plans on a voluntary basis or those preparing to do so in accordance with international sustainability standards, in particular, the European Sustainability Reporting Standards (“ESRS“) and those of the International Sustainability Standards Board (“ISSB“). Given the proliferation of sustainability standards across the globe, stakeholders are likely to welcome TPT’s alignment with ESRS and ISSB. We understand the ISSB itself may adopt TPT’s Disclosure Framework as part of its own guidance on complying with IFRS S2, ISSB’s standards that deal with climate-related disclosures.

In this blog, we set out a high-level overview of the Disclosure Framework and implementation guidance, including key changes from the TPT’s initial November 2022 consultation, which we previously covered here.

Climate transition plans in the UK

As set out in our more detailed June 2023 briefing, a transition plan sets out an organisation’s strategy to adapt its business model to a low-carbon economy.

More broadly, the UK has adopted a legally binding target under the Climate Change Act 2008 to achieve net-zero emissions by 2050. This commits the UK to reduce its greenhouse gas (“GHG“) emissions by 100% by 2050 compared to 1990 levels. The UK’s sixth carbon budget, adopted in April 2021, further commits the government to reduce emissions by 78% by 2035 compared to 1990 levels.

TPT’s Disclosure Framework is intended to facilitate the decarbonisation of businesses to help achieve these targets.

TPT’s Disclosure Framework

In keeping with the November 2022 consultation, the Disclosure Framework is centred on three principles: ambition, action and accountability. In practice, this means transition plans will be expected to cover:

  • high-level ambitions to mitigate climate change risks and leverage opportunities (“Strategic Ambition“);
  • short-, medium- and long-term actions to achieve these strategic ambitions; and
  • governance and accountability mechanisms supporting delivery of those actions.

More specifically, the three principles are put into effect through five central disclosure elements:

  1. Foundations, which cover the scope of the transition plan by reference to the company’s objectives and priorities in transitioning to a low-carbon economy (ie, its Strategic Ambition), including the impact on its business model and value chain and key assumptions and external factors affecting the achievement of the Strategic Ambition.
  2. Implementation strategy, which requires companies to disclose the policies implemented and actions taken in pursuit of the Strategic Ambition, including the impact of such policies and actions on financial position, performance and cashflow.
  3. Engagement strategy, which requires companies to disclose their plan of engagement with key stakeholders to achieve their Strategic Ambition and, in particular, their engagement with its value chain, industry, government, public sector, host and affected communities and civil society.
  4. Metrics and targets, which require companies to identify the key metrics and targets by reference to which they monitor and assess their progress in achieving the Strategic Ambition.
  5. Governance, which requires companies to disclose how they are embedding their transition plans within their governance structures to achieve the Strategic Ambition.

These five disclosure elements are further broken down into sub-elements, totalling 19 individual recommended disclosures that companies will be required to report against in their transition plans.

TPT suggests that transition plans are updated at least every three years, with periodic updates in the event of significant changes. In interim years, entities should report on progress against the commitments set out in the current transition plan, as well as on all other content deemed to be material to investors, in line with ISSB-aligned disclosures.

Changes from November 2022 consultation

The Disclosure Framework is generally consistent with the draft published as part of the November 2022 consultation, although a few changes have been made as a result of feedback received.

In particular, two changes are notable:

  1. The foundations element has been expanded to require companies to report on their Strategic Ambition, value chain, key assumptions and external factors affecting its achievement. Previously, this element was limited to disclosure of the company’s objectives, priorities and business model implications of its transition plan.
  2. The implementation strategy element has been curtailed as a result of implementation concerns highlighted in TPT’s July 2023 status update. In practice, this means companies will no longer be required to disclose the results of their sensitivity analysis as part of the disclosures relating to their implementation strategy. This would have previously involved disclosing “key assumptions and dependencies underlying the entity’s business, operational and financial plans and the implications for achievement of the strategic ambitions in its transition plan if its central assumptions are not met.”

Interaction with ISSB, TCFD and ESRS

The wording of the Disclosure Framework has been updated to be more consistent with the ISSB standards. This is in line with TPT’s aim to align the Disclosure Framework closely with the ISSB standards, the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD“) and the ESRS. To aid interoperability with these standards, TPT has published technical mapping documents.

Implementation guidance and next steps

TPT has also published additional guidance for each recommended disclosure. Notably, the implementation guidance, previously set out in one document as part of the November 2022 consultation, has now been split into two parts:

  1. Implementation guidance, which sets out a practical guide for companies in relation to each stage of the transition planning cycle; and
  2. Interpretative guidance, which sets out the importance of element and sub-element of the Disclosure Framework as well as additional disclosure considerations that companies may want to take into account when preparing their disclosures.

Next steps

In addition to the implementation guidance, TPT has published summary guidance for 40 sectors outlining the decarbonisation levers and metrics and targets which may be relevant to each particular sector. This guidance is based on existing market guidance and is open to comment until 24 November 2023.

TPT will also consult on sector deep-dive guidance for seven additional sectors: asset managers, asset owners, banks, food and beverage, electric utilities and power generators, metals and mining, and oil and gas. The draft sector deep-dives are intended to provide supplemental disclosures in relation to each of the relevant sectors, as well as sector-specific guidance and references to third-party materials. They are expected to be published on 13 November 2023 and finalised in February 2024.

In its Primary Market Bulletin 45, the FCA set out plans to consult on guidance that will note its expectations for listed companies’ transition plan disclosures, by reference to the Disclosure Framework. Note that, in the FCA’s view, TPT’s Disclosure Framework will help issuers “report more effectively on the transition plan-related aspects of IFRS S2“, which is expected to form a core component of the UK Sustainability Disclosure Requirements expected to come into force from 2025.

 

Key contacts

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Rebecca Perlman
Rebecca Perlman
Partner, London
+44 20 7466 2075
Tihomir Svilanovic
Tihomir Svilanovic
Associate, London
+44 20 7466 3941
Jannis Bille
Jannis Bille
Senior Associate, London
+44 20 7466 6314
Natalie Shippen
Natalie Shippen
Professional Support Lawyer, London
+44 20 7466 7623

Federal Minister for the Environment does not owe duty of care

The Full Federal Court handed down its much-anticipated judgment in Sharma today. A summary of the judgment of the Full Federal Court allowing the appeal is set out below, with the full judgment available here. The Minister for the environment does not owe a novel duty of care at common law when exercising her power under ss 130 and 133 of the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) to consider and approve an extension of a coal mine in New South Wales.

Snapshot

  • Each judge handed down a separate judgment, finding that the duty was not owed on different legal bases (see further detail below). The EPBC act formed a central part of each judge’s reasoning.
  • The court was unanimous in finding that all of the findings of the primary judge were open to be made on the uncontested evidence led by the applicants about climate change and the dangers to the world and humanity from it. Beach J noted that he thought it was unsatisfactory that only one expert was called, who was not cross-examined “given that there was one aspect of the science that appeared to be contentious concerning the tipping point hypothesis and the non-linear effects of GHG emissions when temperature reached 2°C above the relevant base line” (at [369]). This suggests that in claims where expert evidence is led on climate change, defendants should consider engaging with the evidence and not assume they can defeat a claim by relying on the plaintiff’s expert.
  • Although the parties approached the appeal on the basis that human safety could be taken into account, ultimately the court found that human safety is not an implied mandatory consideration for the Minister in deciding whether to approve an action under the EPBC Act.
Overview of appeal

On 15 March 2022, the Full Court of the Federal Court allowed the Commonwealth’s appeal of Bromberg J’s judgement finding that the Minister of the Environment did not owe a duty of care to young people to Australian children who may suffer potential “catastrophic harm” from the climate change implications of approving the extension to the Vickery coal mine.

If you would like a refresher of the original decision, our note be accessed here.

Reasons

While each judge came to the same conclusion that no duty of care was owed, each judge delivered a separate judgment and had had different bases for their decisions. These are set out below.

Chief Justice Allsop

  • Assessment of breach not suitable for the Court: His Honour was of the view that assessing breach of the duty would give rise to core questions of policy which are “unsuitable in their nature and character for judicial determination”.

At one level of abstraction we all rely on an elected government to develop and implement wise policy in the interests of all Australians, in one sense especially the children of the country who are its future.  That is not the foundation of the law of torts.  It is the foundation of responsible democratic government.” (at [344]).

And further that:

[t]he role of the Judicial branch of government is to quell controversies between citizens or the state and citizens on the basis of evidence tendered by the parties, not on the basis of policy formulation by the court” (at [230]).

His Honour agreed with the Court of Appeal of New Zealand’s expression in Smith v Fonterra Co-operative Group Limited [2021] NZCA 552 (which upheld the striking out of a claim for public nuisance, negligence and a proposed new tort described as “breach of duty” brought against seven New Zealand companies in relation to their contribution to climate change) that courts are “ill-equipped” to address the issues in relation to the duty claim (see [255]).

  • Duty is inconsistent and incoherent with the EPBC Act: Recognising a duty of care in negligence would be inconsistent with the statutory decision-making power of the Minister under the EPBC Act, and the context that it provides to state and federal responsibilities. To recognise a duty of care would therefore cause incoherence in the law.

His Honour was of the view that by Bromberg J did not utilise the salient features appropriately and that the proper starting point in determining a duty of care was the existing relationship of the parties which was to be determined by reference to the EPBC Act. In considering that Act, his Honour held there was no implied mandatory consideration of human safety and the imposition of the duty would create a form of mandatory consideration beyond the considerations provided for in the EPBC Act. His Honour explained this point at [268]:

“The creation of an overriding common law duty to a significant proportion of the population of Australia to consider all factors and information concerned with greenhouse gas emissions and the risks of global warming, and the proper policy response thereto is to impose upon the EPBC Act, or overlay the EPBC Act with, a responsibility and duty of the Minister personally not found within the statute and which, given its capacity for personal liability, would be to change the whole nature of the decision-making in question.”

  • Other considerations: The lack of control over the harm as opposed to the minor increase in the overall risk of damage from climate change, lack of special vulnerability, lack of proportionality, indeterminacy of liability and risk of imposing on the Minister tortious liability for all climate events were all factors that went against a duty of care being recognised, especially given that the relationship was governed by the EPBC Act (as above).
  • His Honour did note that there were situations where a decision under the EPBC Act could give rise to a duty of care in negligence, suggesting more specific circumstances when this could be so, such as “to exercise care in relation to the approval of a mine on land containing a large deposit of blue asbestos near a centre of population” (at [261])).

Justice Beach

  • Insufficient closeness and directness: His Honour’s principal basis for concluding that no duty of care was owed is that there was not a sufficient closeness or directness between the Minister’s exercise of statutory power and the likely risk of harm to the respondents and the class that they represent.  His Honour stated that there was no temporal closeness, geographic closeness, causal closeness and directness and no otherwise relationship between the Minister and the claimant (see [696] – [700]).
  • Indeterminate liability: His Honour was concerned that imposing a duty of care in negligence would give rise to indeterminate liability, as the likely number of members of the claimant class are not readily ascertainable today:

I agree with the Minister that the concern is with rolling events potentially causing damage where there is no meaningful limit on how many of the claimant class will suffer harm and how many times they will be so harmed, when that damage will occur over the next century or so, and the extent of that damage.” (at [745])

  • In the conclusion of his judgement, His Honour noted that he “would entertain an application to remove the representative nature of the proceedings” as it “may be that one day, one or more members of the claimant class may suffer damage and so have an apparently complete cause of action”. His Honour noted that he would be prepared to receive further submissions from the parties on such questions before making formal orders to set aside the primary judge’s declaration (at [749]).

Justice Wheelahan

  • EPBC Act does not facilitate a relationship between the Minister and respondents: The statutory context of the EPBC Act does not facilitate a relationship between the Minister and the respondents (or the class of persons who they represent). In particular, his Honour held that the control of carbon dioxide emissions and the effects of climate change were not responsibilities conferred on the Minister in that statutory context.
  • Incoherence: His Honour could not envisage an appropriate standard of care in negligence, such that the recognition of a duty of care would be incoherent in light of the statutory duty the Minister had under the EPBC Act. His Honour noted that in public law, “jurisdictional error in the making of a decision under statute on the ground of legal unreasonableness has a high threshold that accommodates decisional freedom” and that avoids the court sliding into a merits review. However, subjecting a Ministerial decision to a tortious standard that requires reasonable care to be taken in making the decisions, exposes the decision to a merits review by the Court (at [853]). As such, the issue in dispute would be whether there was a departure from some standard of reasonable care that would have to be established by the respondents. This would require the Court to consider questions such as what matters might be taken into account by a Court standing in the shoes of the reasonable Minister, which would involve the consideration of political issues that are “uniquely suited to elected representatives and executive government responsible for law-making and policy-making” (at [868]).
  • Damage not reasonably foreseeable: His Honour held it was not reasonably foreseeable that the extension of the coal mine would cause damage to the respondents, in the sense that tortious causation is understood:

The “tiny” contribution to which the primary judge referred would at most amount to a contribution to an increased risk of harm, but not a risk of contribution to the harm itself, still less a material contribution that would attract the principles in Bonnington Castings. That is because the claimed foreseeable injuries would not be caused by any effect on the human body or mind by the accumulation of CO2 itself, but by consequential events such as bushfires, heat, droughts, cyclones, floods, and other weather events.” (at [882])

  • Like Beach J, his Honour provided that the parties should be afforded the opportunity to make submissions to the Court as to whether the proceeding should continue as a representative proceeding, by reason that the effect of allowing the appeal is to expose untold represented persons to an issue estoppel (disagreeing with Beach J, who said that no issue estoppel arises) (at [888]).
  • Although the parties maintained that the declaration granted by the primary judge was a permissible, Beach J engaged in some analysis in relation to whether in the circumstances of this case, it was appropriate to entertain making a declaration as to the existence of a duty of care absent any allegation of a completed cause of action:

The problems in entertaining an application for a declaration as to the existence of a common law duty of care in a novel case, in a representative proceeding, and where no cause of action has accrued, include that an array of issues relevant to the existence and scope of a duty of care owed to an individual may be overlooked, because the court is deprived of the insight that may be gained by a global examination of a claimed cause of action with the consequence, as Hayne and Callinan JJ identified in Dovuro, that the determination of questions of liability is distorted.” (see [782])

Going forward

This decision has been handed down in the context of a rapidly growing body of climate change claims invoking novel duties of care such as the Pabai Pabai claim against the Commonwealth Government. In terms of implications:

  • We anticipate that this decision, and the reasoning of the Full Court, will make similar novel duty of care claims substantially more difficult. Unless the statutory context or the relationship between the defendant’s emissions-related conduct and harm to the claimant are more closely-connected and demonstrable than in Sharma, the Full Court’s decision is likely to discourage the trajectory of similar claims we’ve seen recently.
  • Going forward, plaintiffs may seek to identify more suitable test cases where a close causal connection between emissions impact and harm can more easily be demonstrated.
  • The decision is also likely to have implications for the treatment of climate change considerations in other environmental approval regimes, where regulators have been having regard to the primary judge’s reasoning.

We would be very happy to discuss recent developments in this space with you, including this judgment and any potential implications.

By Anna Sutherland, Partner, Peter Briggs, Partner, Heidi Asten, Partner, Melanie Debenham, Partner, Kathryn Pacey, Partner, Jacqueline Wootton, Partner, Juliana Warner, Partner, Mark Smyth, Partner and Timothy Stutt, Partner.

Contacts
Anna Sutherland
Anna Sutherland
Partner, Sydney
+61 2 9225 5280
Peter Briggs
Peter Briggs
Partner, Sydney
+61 2 9225 5155
Heidi Asten
Heidi Asten
Partner, Melbourne
+61 3 9288 1710
Melanie Debenham
Melanie Debenham
Partner, Perth
+61 8 9211 7560
Kathryn Pacey
Kathryn Pacey
Partner, Brisbane
+61 7 3258 6788
Jacqueline Wootton
Jacqueline Wootton
Partner, Brisbane
+61 7 3258 6569
Juliana Warner
Juliana Warner
Partner, Sydney
+61 2 9225 5409
Mark Smyth
Mark Smyth
Partner, Sydney
+61 2 9225 5440
Timothy Stutt
Timothy Stutt
Partner, Sydney
+61 2 9225 5794