The net is tightening - Court cases on climate change

Directors are accustomed to differentiating a snapshot from a trend-line. Earnings over a given financial year, for example, might not adequately portray the position of the company to generate earnings over the subsequent decade.

The legal risks posed for companies and directors by the climate crisis can be looked at through the same two lenses. Except in this case, both the “state of play” and the “direction of travel” reveal a similar story: a tightening net.

The state of play

The utility company Pacific Gas and Electric is generally considered the first corporate casualty of climate change, bankrupted by its legal liabilities for the 2018 Californian fires. While the success rate of climate lawsuits has been relatively low, when they succeed the consequences can be severe.

A survey late last year counted a cumulative global total of 1,400 climate-related litigation cases, with a sharp uptick in case volumes occurring in 2007 and jumping further again from 2016. More than 1,000 of those cases have been filed in the US, with – at last count – 18 here in New Zealand and another 104 in Australia (the second highest number globally).

The vast majority have targeted governments and their agencies either directly or for approval of/consent to business projects. Businesses have been directly targeted in 135 cases, predominantly against operators in the energy and natural resources industries. Typically, the claims launched against business can be characterised as making one or more of three broad demands:

1. Greater disclosure from a business on its climate risks and how they have been taken into account in its strategies or decisions.
2. Cancellation or changes to specific projects to avoid “locking in” future emissions or introducing new climate risks (for the business or for other groups within society).
3. Compensation for historical emissions (including, in some cases, the future impacts they will cause).

The litigants in these cases consist of a dazzling array of stakeholders, including some surprising ones.

Perhaps most expected are individuals and groups directly affected by company actions, including customers. In 2018, for example, Mark McVeigh launched a lawsuit against his Australian superannuation provider, REST, for “failing to have, and failing to disclose, strategies to deal with climate-related risks” relevant to his retirement savings.

Against a backdrop of increasing shareholder activism, shareholders have also extended their efforts on to this legal front, as have NGOs including the environmental law firm ClientEarth.

Local and regional governments have felt moved to litigate against business. The State of New York has recently and repeatedly sued Exxon Mobil, for example, initially seeking compensation to fund New York City’s adaptation costs against future climate impacts such as storm surges, hurricanes and sea level rise.

Some lawsuits have been even more surprising, such as Saul Luciano Lliuya, a Peruvian farmer, targeting the giant German energy company RWE. The farmer sued RWE for its 0.47% share of cumulative historical emissions, which threaten to cause flood damage to his farm by melting the glaciers above it. The case was ruled admissible, opening a door for further cases between distantly correlated business and affected parties.

These cases may not seem overly threatening for NZ companies and directors. Case numbers remain fairly low, and their success rate – in a legal sense – isn’t overwhelming.

But even when businesses are not the direct target, the intent of many climate lawsuits is to exert pressure on business strategies, projects and activities. It may soon, or may already, be the case that the mere threat of legal action changes the pliancy of insurers and banks in business projects, further shaping and constraining corporate behaviour.

All in all, it pays to beware a jury still out.

The direction of travel

Even if the specific legal strategies have not yet been locked in, the intention to use the law to challenge previous, current and future corporate activity is clear.

Globally, courts are in a period of legal testing, with litigants pursuing multiple potential vulnerabilities in companies and, to a lesser extent, directors. Successful cases will likely unleash a host of “chaser” lawsuits leveraging any new precedents.

It’s important to realise that the evolving backdrop to this legal action – societies grappling with climate trajectories, risks and action – provides an ever-more conducive setting for these lawsuits.

For example, scientific understanding of current and future climate impacts, and its ability to discern climate signal from noise, is increasing. Likewise, regulatory moves and investor and shareholder demands are increasingly clear and well-supported. These trends favourably affect the prospects of future lawsuits finding purchase.

Business needs to understand that climate change is shifting from being an ethical issue to a financial issue. As NZ directors will perceive, that shift cues various legal obligations on both companies and directors.

We can look to Australia for a glimpse of the legal territory New Zealand might soon be headed for. The update last year of a landmark 2016 legal opinion, written by leading NSW barrister Noel Hutley SC and Sebastian Hartford Davis, chronicles relevant developments from the last three years. Hutley and Davis point to:

• the emergence of a striking degree of alignment amongst Australia’s regulatory bodies’ on climate risk and disclosure,
• significant changes in financial reporting frameworks, including the appearance of the Taskforce on Climate-related Financial Disclosures (which the NZ Government has proposed making mandatory for NZX-listed companies)
• notable developments in the state of scientific knowledge, enabling more accurate attribution of severe weather or climatic events to climate change (for which companies contribute a calculable proportion).

Taken together, these developments are tightening the net on what is expected of businesses in relation to climate risks. As Hutley and Davis concluded in 2019: “Regulators and investors now expect much more from companies than cursory acknowledgement and disclosure of climate change risks.”

Bringing it home

Directors, whose responsibilities go hand in hand with the material and financial risks of the companies they oversee, are clearly implicated in these developments.

Australian directors will be familiar with Hutley and Davis’ conclusion last year that: “It is increasingly difficult... for directors of companies of scale to pretend that climate change will not intersect with the interests of their firms. In turn, that means that the exposure of individual directors to ‘climate change litigation’ is increasing, probably exponentially, with time.”

The legal context differs here in NZ, with the result that – for the time being – directors appear to have slightly freer rein.

In October last year, reporting to the Aotearoa Circle, Chapman Tripp conclusion was that: “Directors must assess and manage climate risk as they would any other financial risk.” The law firm expanded to state that, where the company has public disclosure obligations, directors also need to ensure they are disclosing material financial risk due to climate change as they would disclose other material business risks.

Yet any flexibility inherent in this conclusion seems unlikely to endure. Adrian Orr, the Governor of the Reserve Bank of New Zealand, is famed for his attention and advocacy on this issue, while the government has proposed making climate reporting mandatory for NZX-listed companies (if not others too). That proposal received strong support from the business community, with a handful of leading members already moving to disclose their climate risks and strategy.

Again from Australia, Geoff Summerhayes, an executive board member of the Australian Prudential Regulation Authority, stated his organisation’s position unequivocally: “Climate change risks are no longer a future or non-financial problem and that many of these risks are foreseeable, material and actionable now.”

It seems that anyone - directors included - tempted to downplay the impacts of climate change on business has another river to cross, and a new legal front to watch.

This article is featured in the August/September issue of Boardroom magazine