Any companies that thought they didn’t need to worry about being sued for their environmental behaviour should think again after the Shell case on 26 May.
In a landmark ruling, a Dutch court told the energy giant to substantially increase its carbon emissions cuts, as it had a duty to protect people’s human rights by doing more to tackle climate change.
The decision could have implications on all organisations, legal experts argue, as their environmental track record and their plans to deal with climate change could now be scrutinised in a courtroom.
For many companies, the threat of climate litigation figured fairly low on their list of big risks, as legal experts thought that apportioning blame to individual firms for global warming would be tricky. But the Shell case has turned previous assumptions on their head, said Denise Eastlake, head of the climate change desk at DAC Beachcroft. “The court in its judgment took it as read that Shell is causing environmental damage. Also, it said Shell’s behaviour impinges on people’s human rights – the first time a company, rather than a government, has been held responsible for upholding human rights.”
Ms Eastlake said she’s surprised that climate litigation risk hasn’t figured higher in companies’ thinking before now. “For me, it’s comparable to tobacco or mesothelioma litigation. Looking back, these were obvious. I think that’s how we’ll come to view climate litigation. It’s so large and therefore the costs are going to be massive.”
Companies’ first priority, if they haven’t already done so, should be to analyse how global warming will affect their operations. “Risk managers need to assess their assets’ exposure to climate change. It’s easy to think it won’t affect you but that needs to be sense-checked within the organisation, because opinions may differ,” said Ms Eastlake.
The risk of being left with ‘stranded assets’ – whose value slumps due to climate fears – has jumped after the Shell verdict. The court was unimpressed by Shell’s optimistic forecast of how long it could continue some of its most polluting activities, concluding that they would be rendered obsolete much faster than the company envisaged in the transition to a low-carbon economy.
The string of climate cases against governments will have a knock-on impact on companies, said Nigel Brook, who leads Clyde & Co’s global Resilience and Climate Change Risk campaign. “Both the Netherlands and Germany have already been forced to increase their planned emissions cuts. It’s likely cases brought in other countries will have the same outcome, while some governments may try to get out ahead of this, [by increasing their planned emission cuts] to reduce the likelihood of being taken to court. Their decisions will have consequences for companies. If assets are potentially becoming stranded much quicker than companies had thought, then they might get caught out. If they’re forced to write down assets, then that will lead to disputes.”
The potential range of climate-related lawsuits companies may face is extremely broad, explained Mr Brook. “It could be their role in emissions, or it could be for ‘greenwashing’ – exaggerating their green credentials or misleading investors about the climate risk the enterprise faces.”
But some climate litigation isn’t necessarily obvious, said Mr Brook. “You might be held responsible for not doing enough in the changing conditions. We’ve already seen claims against power companies for causing wildfires on the US west coast by not maintaining their equipment properly, while there were claims against architects and engineers following Hurricane Harvey because their designs couldn’t withstand more extreme weather.”
Companies might also be held accountable in courtrooms for the actions of others. Shell was told it must also work to make its customers and suppliers be greener. A draft directive was adopted by the EU parliament in March, which could become law within two years, that would require companies to monitor whether their operations harm human rights and the environment. This would include a company’s suppliers and customers, and failure to do so might result in hefty fines. Although now outside the EU, the UK has a similar, but less ambitious, law before parliament. “The direction of travel is clear: a company’s duty of care will soon extend much further than it did previously,” said Mr Brook.
The good news is that those companies that get to grips sooner with their climate risk are likely to fare better. “This is a unique challenge for boards,” acknowledged Mr Brook. “But companies that have good climate governance will have a lower risk of getting sued.”
Ms Eastlake drew the comparison with how businesses coped during the Covid-19 crisis. Those that had already included pandemic risk within their business planning prospered, while the unprepared were left floundering. “If you’re ahead of the transition to a low-carbon economy you’ll be able to exploit the opportunities, whereas if you’re not it will take you longer to get there, you’ll have had to work a lot harder and that will cost you more.”