Recently, climate-related disputes in the UK focused on challenges to government decision-making and policy through the judicial review mechanism. However, the English courts have, to date, made it clear that their role is not to make policy decisions or to decide on government strategy, continuing instead to reaffirm that Parliament has a wide discretion to exercise its powers (see, for example, Client Earth v. BEIS, Plan B Earth, Cox v. Oil and Gas Authority, and R (on the application of Friends of the Earth Ltd and others) v. Heathrow). Climate-related actions in the UK have, therefore, arguably proved less successful than in other jurisdictions (a notable example being the Urgenda decision, in which a Dutch court held that, by failing to reduce emissions, the Dutch government had acted unlawfully).
We are now seeing the first signs of a change of approach, focusing instead on corporate actors as the strategic target for UK-centred climate change litigation. This change is the result, in part, of increased transparency and disclosure requirements placed on corporate entities, which produces more actionable information and gives claimants greater scope to target claims based on embedded international standards and settled climate knowledge. This is the “information paradox”: inadequate disclosure of information may give rise to corporate liability, yet publication of this same data may provide a foot in the door for strategic litigation against corporates. In this article, we explore some of the attendant risks for corporations.
The Client Earth action – a game changer?
By way of example, after much speculation, on 9 February 2023, Client Earth confirmed that it had filed a “derivative action” against the board of directors of Shell in the English High Court, although the precise details of the claim have not yet been made public. Client Earth alleges that Shell’s directors have acted in breach of their duties under the Companies Act 2006.
Potential claimants and defendants alike, in analogous situations, will closely monitor developments, the outcome of which could open the floodgates to climate-related claims, enabling actions to be taken against both businesses and individuals controlling company decision-making.
Transparency and climate litigation risk
Strategic climate change claims like Client Earth v. Shell, targeting officers and directors, depend on the availability of information on which to formulate the legal basis of any claim. In the UK, this exposure is arguably higher since the UK became the first G20 country to put into practice the goals of the Task Force on Climate-related Financial Disclosures (TCFD) by making it mandatory for the UK’s largest companies and financial institutions to report on their climate-related risks and opportunities.
Activist claimants in the UK, supported by institutional investors, therefore potentially have greater ability than in other jurisdictions to hold corporates to account. They can closely scrutinise disclosed metrics and net zero transition plans with reference to the impact on agreed international targets. This risk is at its highest for high-emission corporates. However, prospective claimants could target any sector, particularly those directly or indirectly financing carbon intensive companies, but also a wider array of industries including, for example, financial services, retail, agriculture, and transport.
Loss and damage claims
Arguably, climate litigation (like Client Earth v. Shell) relates to the effect of corporate actions on climate change on a global scale. However, outside of the UK, there has been a growing trend of claims seeking compensatory damages for the direct and indirect impacts of climate change at the macro level of property and investments. For example:
- The German case of Lliuya v. RWE AG, in which a Peruvian farmer has sued RWE (Germany’s largest energy producer) for the costs of constructing flood protection measures in his village in Peru, which he claims that emissions released by RWE in Germany contributed to. The case is ongoing, but importantly, a German Court of Appeal has already found that, in principle, a polluter can be liable for the impacts of climate change.
- In Four Islanders of Pari v. Holcim,four inhabitants of an Indonesian island have sued a Swiss buildings materials company for proportional compensation for climate change-related damages to the island, as well as seeking a reduction of Holcim’s future CO2 emissions and a financial contribution to adaptation measures.
Loss and damage were also the headline issue at COP27, with the conference resulting in an agreement to establish funding to support developing countries suffering the impacts of climate change. The acknowledgement that high emitters have a responsibility to financially compensate for damage caused to developing countries that are disproportionately impacted by climate change aligns exactly with the Lliuya and Holcim cases, and could well incentivise more expansive activist litigation in the future.
The English courts are a popular forum for international litigants, assuming claimants can establish jurisdiction, particularly given other developing factors. The outcomes of Lliuya and Holcim will be closely watched by climate activists. If the actions are successful, they may set a powerful precedent in the English courts.
As noted, prospective claimants will have increased access to published metrics to support the attribution of climate change to carbon-producing companies. This may be bolstered by the rapidly expanding field of “attribution science”, which, by seeking to accurately measure the causative connection between climate change and individual environmental events, provides a further evidentiary basis for claimants bringing claims against corporate actors.
Furthermore, English courts are already dealing with complex group actions for loss and damage in relation to other environmental issues and the overall trend is favourable towards complex actions involving questions of science, attribution and quantum:
- The Court of Appeal decided last summer that the group action Muncipio de Mariana v. BHP Group Plc should continue, despite its complexity and multi-jurisdictional nature, surviving BHP’s attempted strike outs. Of note is the Court of Appeal’s reasoning that the English courts can and should seek to manage complex claims involving difficult and uncertain quantum issues.
- The English courts also continue to manage ongoing “Dieselgate” claims, which began with the 2015 Volkswagen emission-cheating scandal and are now ongoing against multiple car manufacturers. One of these claims has already resulted in a £193 million settlement.
Whilst data drives claims, it need not be perfect to succeed, at least in terms of quantum. With the English courts’ demonstrating an increased willingness to hear such vast and complex disputes, and potential claimants spurred by recent successes, there will only be an increase in class actions related to climate change.
With wider access to company information and related disclosure requirements, as well as increased consumer pressure, companies are at more risk than ever of greenwashing claims. Actions related to greenwashing in England and Wales typically require the claimant to bring a claim for misrepresentation, requiring reliance on misleading statements, which can be difficult to prove. However, increasing sustainability disclosure obligations for public companies offer an alternative route, as claims for misstatement or publication of misleading disclosures can be brought against companies by investors.
Whilst there have not been any notable greenwashing legal cases in the UK, regulators are ramping up their focus on misleading and unsubstantiated claims by companies about their environmental impact. For example, in September 2021, theCompetition and Markets Authority (CMA) introduced a new Green Claims Code to clarify the responsibilities that consumer protection law places on businesses and the making of environmental claims. This resulted in a large-scale CMA investigation into a number of major fashion companies. If breaches of consumer protection legislation are identified, the CMA can commence litigation.
Similarly, in October 2022, HSBC was challenged in the UK as to whether statements made in advertisements accurately reflected the company’s true portfolio. The Advertising Standards Authority held that HSBC had misled consumers by making unqualified claims and omitting material information about its green credentials in two high street adverts in the run up to COP26 in Glasgow. There will undoubtedly be more regulatory scrutiny of similar marketing endeavours by other companies making climate-related statements and advertisements in 2023.
Insurance – the sting in the tail
One means of mitigating the risk of direct corporate claims is through tailored insurance programmes. However, the sting in the tail is that the same growth in risk of exposure to climate litigation has also resulted in increased demands for insurance coverage for such risks, limited available capacity, and greater scrutiny from insurers at placement and renewal – with the resulting risk of a policy coverage disputes. The English courts, as a key forum for such insurance disputes, will have to grapple with these issues more frequently.
Insurers will increasingly expect that their insureds accurately disclose the risks they face from climate change, particularly in light of climate litigation trends, which are expected to focus on the liability of corporates to assess, manage and disclose their vulnerability to a changing environment, economy, and customer expectations, in addition to the traditional physical risk exposures.
Insurers will likely focus on the following areas:
- The increased likelihood of insureds claiming on liability policies as a consequence of claims related to climate change.
- Management and governance claims in respect of climate change, where directors and officers could be held personally liable for failing to consider climate impacts in their decision-making.
- Failures to properly measure and report company exposure to climate-related risks (as required by the TCFD). For directors and officers, the new reporting obligations could lead to personal accountability.
Insurers expect to be informed about a company’s ESG awareness and related programmes, as well as the implementation of those programmes and policies. In particular, D&O underwriters have been eager to understand what disclosures and commitments insureds have made to the public, and whether there are any underlying claims relating to such disclosures – for example, whether the directors have made claims about the diversity of the company’s board of directors or climate change statistics.
In summary, the English courts remain a popular forum for international litigants and novel claims. As climate activists potentially switch to direct targeting of corporates, we may find that the Client Earth v. Shell claim is just the first of many similar litigations in the near future. In part, this is driven by the step change in the availability of corporate data related to climate change, an area in which the UK is a world leader. Whilst publication of this data may mitigate issues of corporate liability and is mandatory in order to meet regulatory requirements, it also opens up consequent risks for corporates and opportunities for strategic activism.