Fighting climate change in courts – implications for corporations

Climate change is a heated issue. Today, litigants are knocking on the courts’ doors, seeking to impose duties to address climate risks and attribute liability for impacts of climate change. The United Nations Environment Programme’s Global Climate Litigation Report released in January 2021 found that climate litigation cases had nearly doubled over the preceding three years, with cases being filed across more regions around the world. Should this gather momentum, companies will need to add this to their long list of business risks.

International negotiations over the past decades have culminated in the establishment of the Warsaw International Mechanism in 2013 and the 2015 Paris Agreement under the United Nations Framework Convention on Climate Change. These demonstrate important acknowledgements relating to loss and damage associated with climate change. A breakthrough agreement to establish a loss and damage fund was reached at COP 27 in 2022. However, developed countries have generally resisted any imposition of liability or specific obligations to compensate for the loss and damage. As there may be limits to the progress that negotiations alone can achieve, and climate ambition around the world is said to remain inadequate, activists are increasingly turning to the courts to seek relief against states and corporations.

With more frequent climate lawsuits, arguments are refined, legal precedents are set and an increasingly coherent body of law is developed. Scientific advancements also enable claimants to better attribute a defendant’s emissions to climate change generally and link specific events (such as extreme weather events) to climate change. Attribution science plays a crucial role in climate litigation, for plaintiffs to meet their burden of proof to compel governmental action or hold corporations to account.

While most climate litigation to-date has been against public authorities, or has sought remedial action, claimants are increasingly pursuing financial pay-outs from private emitters. The potentially significant sums of damages involved incentivises for-profit litigation and attracts third-party funders. After Pogust Goodhead, a law firm specialising in environmental class actions, brought a landmark claim in the UK against mining firm BHP on behalf of victims of the Mariana dam disaster in Brazil, it received a £100 million investment from North Wall Capital to further pursue ESG-related cases.

Most climate lawsuits have so far been brought against government bodies, alleging failure to protect human rights and fundamental freedoms enshrined in international law and national constitutions, or failure to enforce national climate change commitments.

In Urgenda Foundation v. State of the Netherlands, the plaintiffs alleged that the Dutch emissions reduction policies were not sufficiently ambitious. The Supreme Court of the Netherlands ruled in favour of Urgenda, finding that the Dutch government was required, under Articles 2 and 8 of the European Convention on Human Rights (ECHR), to protect the right to life, and the right to respect for private and family life. The court concluded that the government had to take steps to reduce emissions consistent with limiting global warming to 1.5°C.

Cases that challenge government policies, while not directly seeking to hold private actors liable, do contribute to identifying the main tenets of climate transition and prompt new regulation of business activities contributing to greenhouse gas emissions. The Urgenda case led to the accelerated closure of Vattenfall’s coal-fired power plant in Amsterdam, and the imposition of stricter emissions caps on the remaining Dutch coal-fired power stations, which are targeted to close by 2030.

Claims against governments may also spawn further action against private emitters, which typically focus on compensation for harms caused by alleged tortious activities. On the back of the Urgenda ruling, Dutch environmental organisation Milieudefensie brought proceedings in the Hague District Court against Royal Dutch Shell plc (RDS), which was then headquartered in the Netherlands. Adopting the legal strategy in Urgenda, Milieudefensie argued that RDS breached its duty of care under the Dutch Civil Code and Articles 2 and 8 of the ECHR to take steps to meet the 1.5°C cap on global warming under the Paris Agreement, in its capacity as the ultimate holding company with responsibility for setting the Shell group’s corporate strategy.

Although RDS was not found to have breached any binding provision of law, the court held that RDS’ emissions reduction obligation derived from an “unwritten standard of care” laid down in Book 6, Section 162 of the Dutch Civil Code. The content and scope of such obligation can be assessed by reference to international human rights instruments, such as the ECHR, and international soft law, such as the UN Guiding Principles on Business and Human Rights (UNGPs).

The court held that RDS is responsible for Scopes 1 through 3 emissions, being (a) direct emissions from the Shell group companies, (b) indirect emissions from third parties from whom Shell purchased electricity, steam and heat, and (c) indirect emissions occurring in its value chain, including both upstream and downstream emissions. Emphasis was placed on Scope 3 end-user emissions, which was reported to account for 85% of Shell’s emissions. The court did grant RDS flexibility in allocating reductions across the group’s entire emissions from Scopes 1 through 3, provided that its total emissions are reduced by 45% in aggregate at the end of 2030, relative to 2019 levels. RDS has filed an appeal, but the decision remains provisionally enforceable.

Apart from the Netherlands, there may be other jurisdictions with flexible interpretative rules on corporate duty of care. France enacted the Duty of Vigilance Law in 2017, which requires large corporations to define and implement a ‘plan of vigilance’ to prevent serious violations of human rights, health risks or environmental damage. In 2019, several NGOs sued TotalEnergies under the Duty of Vigilance Law, seeking to suspend its oil projects in Uganda and Tanzania due to alleged negative impacts on the environment and local populations. While the claim was dismissed on procedural grounds in February 2023, it reflects the potential under the open-ended law for flexible interpretation of corporations’ duties vis-à-vis climate change. Similar claims relating to the Duty of Vigilance Law have been brought by NGOs against BNP Paribas for financing fossil fuel projects and against Danone for failure to adequately address plastic use in its vigilance plan, which are currently pending before the French courts.

The case brought by Milieudefensie against RDS also demonstrates increasing judicial willingness to look behind the corporate veil in relation to multinational corporations. The broad reading of parent company liability on the part of RDS might impact future litigation seeking to hold parent companies accountable for environmental and human rights impacts caused by foreign subsidiaries. This resonates with the UK Supreme Court’s landmark dismissal of a jurisdictional challenge in Vedanta Resources plc v Lungowe (2019). The claimant had initiated proceedings in the UK against UK-based Vedanta and its subsidiary, KCM, a Zambian public company that owns the Nchanga Copper Mine, which was alleged to have caused severe pollution affecting surrounding agricultural and fishing villages.

The Supreme Court held that the principles regarding a parent company’s duty of care are the same as would apply in relation to any third-party consultant advising the subsidiary. Such duty may arise where the parent has in substance taken over management of the relevant activity in place of or jointly with the subsidiary’s management, or where the parent has given advice on how the subsidiary should manage particular risks. Even where group policies set by the ultimate parent do not in and of themselves give rise to a duty of care, the parent may be accountable if it takes active steps, by training, supervision and enforcement, to see that the policies are implemented by the subsidiaries. As Vedanta had held itself out in published materials as exercising a certain degree of supervision and control over KCM, the court found it arguable that a sufficient level of intervention may be demonstrable at trial, after full disclosure of relevant internal documents. Following the dismissal of the jurisdictional challenge, Vedanta and KCM agreed to settle the claims by the Zambian claimants.

While climate litigation continues to be concentrated in more developed countries, the Global Climate Litigation Report notes recent cases filed in the Global South, including Colombia, India, Pakistan, Peru, South Africa and the Philippines. Growing interest in climate litigation is expected in ASEAN, which is home to some of the most climate-vulnerable countries in the world.

In the Philippines, Greenpeace Southeast Asia and the Philippine Rural Reconstruction Movement filed a petition with the Commission on Human Rights. They requested an investigation into the responsibility of 50 major fossil fuel producers (the so-called ‘Carbon Majors’) for human rights violations resulting from climate change and ocean acidification. This petition built on studies that trace anthropogenic emissions to specific corporations, and largely relies on the UNGPs.

The Commission’s report published in May 2022 found that the Carbon Majors had early notice of their products’ adverse impacts on the environment and yet continued to engage in acts to obfuscate climate science. The report concluded that all such acts to delay, derail, or obstruct the climate transition may be bases for liability, and may even be grounds for legal liability in other countries. The Commission also found that a state has a duty to regulate the conduct of non-state actors. While the Commission does not have enforcement powers, these findings could inform judicial understanding in future litigation, and contribute to the development of laws in relation to climate protection and corporate obligations.

Apart from private emitters, financial institutions are also under fire for alleged failures to align policies with climate and environmental norms in OECD guidelines. In the Netherlands, several NGOs filed a complaint with the Dutch OECD National Contact Point (NCP), alleging that ING Bank violated disclosure, environment, and consumer interest provisions under the OECD guidelines. The NCP concluded that the guidelines require the bank to establish concrete emissions targets to progressively align with Paris Agreement objectives.

The NCP rejected the bank’s argument that there is a lack of reliable data or international standards to measure emissions of its lending portfolios. The NCP stressed that financial institutions need to seek measurement and disclosure of environmental impacts even in areas where reporting standards are still evolving, particularly in relation to greenhouse gas emissions. ING eventually agreed to adopt certain methodologies for measuring, setting targets, and steering the bank’s climate impact, reduce its coal exposure to close to zero by 2025, and refrain from financing new coal-fired power plants.

It is evident that financial institutions will need to view climate due diligence as a central feature of their business processes. The Office of the United Nations High Commissioner for Human Rights (OHCHR) has clarified the applicability of the UNGPs to the financial sector, in response to a request by an NGO, BankTrack. The OHCHR made clear that a bank can be found to contribute to an adverse impact either directly alongside other entities or through another entity. For instance, this could be by providing financing for a project that entails known risks without taking any steps to get its client to prevent or mitigate these risks.

Claims are also being brought for non-disclosure of climate risks. In O’Donnell v Commonwealth, investors alleged that the Australian government failed to disclose climate-related risks in bond issue documents for two classes of exchange-traded bonds. The Federal Court refused to strike out the claim of misleading or deceptive conduct, which raised allegations that physical and transition risks are material to bondholders and that non-disclosure of climate risks is misleading or deceptive under the Australian Securities and Investments Commission Act. The case is now pending before the court.

In the Australian case of McVeigh v Retail Employees Superannuation Pty Ltd (2019), the pension fund was sued by a member for breach of its duty to disclose climate change risks and any plans to address those risks. The case was settled with the fund acknowledging the financial risks of climate change and agreeing to implement a goal of achieving a net-zero carbon footprint by 2050. The fund also committed to reporting climate progress in line with the Task Force on Climate-related Disclosures recommendations, ensuring investee climate disclosure, and publicly disclosing portfolio holdings.

ClientEarth also filed an OECD complaint in the UK alleging that oil giant BP’s advertising campaign misled the public about the scale of renewal and low-carbon energy in BP’s portfolio, contrary to the OECD’s Guidelines for Multinational Enterprises which require provision of accurate, verifiable and clear information to enable consumers to make informed decisions on the environmental attributes of products and services. BP subsequently withdrew its advertisements, pledging that it would discontinue corporate reputation advertising and redirect resources to promote progressive climate policies.

These challenges will mount pressure on companies to assess and disclose risks accurately, and review the veracity of any environmental claims going forward.

The climate is changing for businesses and the law is almost definitely responding. In the current environment where appetite for action and enforcing responsibility is on the rise, we can expect increased climate litigation in the years to come. Claims brought against the likes of RDS, Vedanta and even financial institutions reflect a growing expectation for those with direct responsibility for, or who have indirectly contributed to, emissions to take action to address the climate crisis. This expectation will inform the interpretation of what constitutes reasonable standards of conduct.

An international group of legal experts comprising judges, advocate-generals, professors and barristers have put together the Oslo Principles on Global Climate Change Obligations, which articulates a series of climate-related obligations drawn from international and domestic laws around the world. This includes obligations for enterprises to:

• Reduce emissions to the extent such reduction can be achieved without additional cost;

• Refrain from starting new activities that cause excessive emissions;

• Take available reduction measures if the costs thereof will be offset through future savings or financial gains;

• Assess properties and assets for vulnerability to climate change; and

• Publicly disclose relevant information.

Businesses that do not take notice of climate-related developments, either by failing to adopt earnest long-term strategies, or by failing to make serious efforts to achieve their targets once set, may find themselves increasingly at risk of litigation. All businesses, regardless of size and sector, should have in place continuous, iterative processes for identifying and addressing their actual and potential climate-related impacts within their evolving operating contexts. They should also be demonstrating efforts to remediate any harm and improve processes in the future. None of this is easily accomplished, but the alternative of failing will have disastrous consequences for any business.