Authors: Mark Smyth, Partner; Timothy Stutt, Partner
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In a time when investors, representative groups and climate activist groups across the world continue to scrutinise every action of corporate entities and governments, litigation is increasingly being used to pursue climate outcomes. Recent developments including the Sixth Assessment Report (AR6) and the forthcoming UN Climate Change Conference (COP26) will intensify this scrutiny and potentially lead to further claims on novel bases.
A number of recent challenges have been successful, and may form important sources of new legal duties and obligations for companies in emissions-intensive sectors. Others have not resulted in favourable judgments, but have succeeded in gaining publicity, obtaining leverage in negotiations, or influencing decisions.
In this article we shed light on trends we’re seeing unfold in the novel claims space, and what you need to consider in mitigating risks for your business.
What types of novel claims are being brought?
Claims have been initiated on the basis of a wide range of actions, including human rights law, continuous disclosure obligations, directors’ duties, criminal law and tort law.
Novel claims have recently targeted:
- new project approvals and investment decisions with emissions-intensive consequences;
- government decisions, grants and policies impacting climate change;
- companies’ alleged failure to take action to reduce emissions; and
- companies setting emissions reduction targets and making public statements alleged to give rise to ‘greenwashing’.
Recent examples include:
- a decision of the Australian Federal Court considering project approval for a mine extension, which found that a government minister owed a novel duty of care to protect Australian children from the potential harmful implications of climate change;
- a Dutch Court held that Royal Dutch Shell owed a duty of care to Dutch residents which required it to amend its emissions target to aiming to reduce emissions by net 45% by 2030;
- in the United States, the Securities and Exchange Commission is investigating a large investment bank for misleading clients about the nature of its sustainable investment offerings;
- the State of Vermont has commenced proceedings against a group of energy companies for making false or exaggerated statements to consumers concerning the impact of their businesses on the environment;
- the Australian Federal Court is considering a challenge to a leading energy and resources company’s net zero emissions target, alleging that there are not reasonable grounds to expect it can be achieved; and
- an environmental representative group has recently commenced a challenge to the licence approvals for coal-fired power stations in Victoria, alleging that the regulator failed adequately to take account of climate change and broader environmental issues in granting the approvals.
Our tips to mitigate the risks associated with novel claims
The litigation context of novel claims is shifting quickly.
In making investment and project approval decisions that may have significant emissions consequences, companies should be aware of new legal duties which may affect business decisions, as well as the ways in which threats of novel action can be brought to bear to change decisions, including through applying direct pressure and pressure on key stakeholders (including institutional investors and government).
Boards will be expected to exercise reasonable care and diligence in corporate decision-making to ensure that:
- they have taken reasonable steps to determine the environmental / climate change strategy of the business;
- they have tested that management has appropriate systems and processes in place to achieve that strategy;
- that statements on climate-related issues are made on reasonable grounds, where the company has a clear plan to achieve any relevant targets and has the intention and resources to do so. Any assumptions on which targets are based should be clearly disclosed;
- that investment decisions align with the company’s stated objectives and strategy or, where they do not, there is some reasonable basis for the departure; and
- the market is kept informed of material information on matters relating to the company’s climate strategy, and risk and disclosures are accurate and complete.
We are seeing that the types of claims formulated in one country are often adopted by activists in others, so staying across global developments will be invaluable.
Ultimately, it’s worth remembering that even unsuccessful novel claims can still cause unnecessary cost and delay – and this could have dire consequences for time-sensitive project approvals.
Navigating climate change litigation is becoming increasingly complex as activist groups bring novel claims with greater frequency. Companies and boards should be considering the legal duties which are emanating out of successful novel claims, and the influence novel claims have on leverage during negotiations and publicity more generally.