‘Climate litigation risk’ is a rapidly growing business risk for companies. We explore five key reasons why company directors in all sectors should be thinking about – and acting on – climate litigation risk.

Climate litigation against companies is growing rapidly, indicating the urgent need for greater action from businesses.

Achieving net zero requires ‘the largest transformation of society since the Industrial Revolution in less than half the time’ according to The MSCI Net-Zero Tracker. Yet it is estimated that globally only 11% of listed companies align with 1.5°C, and total net greenhouse gas emissions have increased since 2010 across all major sectors globally.

It’s time for businesses to put climate litigation risk on their agenda – here are our five reasons why…

1. It’s already happening and it’s expanding across sectors

Climate change litigation against corporates is on the rise. The majority of climate court cases to date have been brought against governments around the world. But since 2015, we’ve seen a new wave of climate litigation against corporates emerge, seeking to hold businesses to account for the negative impact of their activities on the climate.

The first targets of this new wave were the so-called ‘oil majors’ like ExxonMobil and Shell. But now, climate lawyers are bringing claims in a broad range of sectors including against supermarkets, car manufacturers, and financial institutions, applying a wide range of legal arguments.

This diversity reflects the urgent need for rapid and deep emissions reductions in all sectors. In the face of the growing climate emergency, large businesses must be held accountable for the negative impact that they have in the pursuit of profit – and climate lawyers are seeking to ensure that happens.

2. Climate litigation is getting personal

It’s not just companies as corporate bodies at risk – directors themselves are in the firing line too, for matters ranging from disclosure failures to mismanagement of climate risks. Claimants are looking to establish the personal liability of directors for their actions on climate change (for example, in ClientEarth’s case against the directors of Shell).

*ClientEarth’s case against the directors of Shell*

In the UK, directors have a duty to promote the success of the company, having regard to a range of factors including the environmental impact of their operations. This duty cannot be discharged by merely paying lip service to environmental factors.

Court enforcement of this duty is rare because the duty is owed to the company and the directors (as the company’s representatives) are highly unlikely to sue themselves.

However, there is another route where shareholders can bring claims in what is known as a ‘derivative action’. Here, the shareholders act on behalf of the company to bring claims against the directors for breach of duty. Directors need to be aware that shareholders are increasingly likely to seek to hold them to account for their actions on climate change.

And it’s not just the risk of being taken to court – it’s also the bad press is generates. As a director in the Bank of America’s EMEA equity capital markets team put it, the thought of being on the front of the FT is ‘almost scarier’.

3. It highlights the significant risks climate change presents to businesses

Climate change poses significant risks to businesses. These include:

‘Physical risks’: For example, the threat of extreme weather events to assets and supply chains.
‘Transition risks’: Such as the risk of regulatory and market changes in the transition to a decarbonised economy, and the risk of being left behind by more nimble, forward-thinking competitors.

A key aspect of the shareholder claims mentioned above is that failure to properly respond to these climate risks will harm the company’s future success, possibly causing huge write-downs of stranded assets and ‘handbrake turns’ in business strategy.

In short, it makes sound business sense to act now on climate change.

Corporate climate litigation simultaneously draws out these risks to companies whilst creating a third category of risk, ‘litigation risk’.

This risk can be costly for companies. However, it isn’t just the potential cost of the litigation and/or compliance with the court order that should be causing directors concern, but the wider impacts climate litigation risk can have on a company. This can range from reputational damage to share price impacts (even potential litigation can reduce a company’s share price).

4. It’s expanding to supply chains

Directors also need to think about climate litigation risk in the context of their supply chains and the indirect impacts of their business operations around the world.

The French duty of vigilance law has been used to target Total’s failure to adequately assess human rights and environmental impacts of an oil project in Uganda and Tanzania, and the Casino supermarket’s supply chain deforestation in Brazil and Colombia.

*France 24 reports on a lawsuit filed against the Casino Group.*

Such claims are likely to continue to grow and expand to other jurisdictions in light of the proposed European Corporate Sustainability Due Diligence Directive. The proposed Directive requires EU Member States to impose obligations of due diligence on certain large companies regarding actual and potential human rights and environmental adverse impacts. This will include those in respect of their subsidiaries and value chain operations carried out by established business relationships.

This could catalyse a whole new area of climate litigation risk for companies. As a result, directors will need to ensure they have undertaken appropriate due diligence across their company’s value chain.

5. Climate litigation is calling out greenwash

As consumers and investors grow increasingly climate-conscious, companies are seeking to emphasise their sustainability credentials. But directors need to ensure that there is substance to their climate statements. Climate lawyers are scrutinising these statements – as a result, ‘greenwashing’ claims against wrong or misleading statements are increasing.

Greenwashing claims can take many forms, from court action against directors for misleading disclosures in corporate filings or securities information, to non-judicial complaints to advertising regulatory bodies for misleading adverts.

Increasing regulatory activity in this space (for example, the Green Claims Code in the UK and the EU’s proposed Green Claims Directive) suggests this will continue to be a focus point for legal action. Greenwashing claims also bring reputational and financial risks for a company that is shown to have misled its investors and/or consumers.

We need better corporate leadership

Climate litigation should be on the board’s agenda. Even so, the best way for directors to mitigate litigation risk is by taking proper, proactive action on climate change.

The risks of climate change are catastrophic and, in many cases, irreversible: the extinction of species, droughts, floods, malnutrition, death, and widespread displacement of people. We need better corporate leadership.

Directors need to take proper action on climate change; and until they do, climate litigators will continue to use the law to hold them to account.