The threat to corporates and D&Os from climate litigation

Climate litigation has been around for some time but has largely focused on activists taking action against governments with the aim of forcing a change in climate strategy. But the focus may be shifting to corporates with claims relating to emissions targets, greenwashing and transition costs. And directors could start to find themselves in the firing line. Victoria Gama, senior analyst at risk intelligence company Verisk Maplecroft, says the great bulk of climate change cases are still looking to force states to deliver on their emissions commitments, which has only indirectly affected corporates in the form of additional regulation. The corporate threat However, the threat to corporates from climate litigation is rising. “In the coming years, we expect to see an increase in the success rate of plaintiffs bringing cases before national and international courts, which will give impetus to more cases being brought by activists’ litigants,” she says. “Activists’ moves to target corporates directly is already impacting companies’ reputation, with estimates pointing to trillions of dollars in damages should a settlement with oil and gas majors takes place.” She points out that despite few cases managing to successfully make their way through courts, the increase in the number of cases being brought forward, the rapid advancement of scientific research as well as the newly recognised ‘right to a healthy environment’ would likely make for more successful outcomes for plaintiffs. Nigel Brook, partner, Clyde & Co, says climate litigation is now widely acknowledged as a real and imminent threat to governments and public bodies, and to companies – particularly those in carbon-intensive sectors like energy and heavy industry. But he says most climate lawsuits to date have targeted governments and public bodies – challenging the implementation or ambition of climate targets or policies, or claiming that a state’s actions violate its human rights obligations. He notes that in the US, the Securities and Exchange Commission (SEC) has proposed comprehensive rules for all registered companies that require ‘consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk.’ He adds that it is generally expected that lawsuits arising from ESG issues will increase. With climate leading the way, sweeping ESG regulatory changes have already been implemented around the globe and new US regulations are expected to come later this year – likely resulting in a significant increase in regulatory and shareholder pressure on companies and their directors and officers, says Brook. He believes shareholder lawsuits related to ESG will increase, noting that in recent years, activists and shareholders have closely scrutinised whether boards have sufficiently addressed ESG issues and brought cases regarding board diversity and corporate positions on racial inequality. Directors at risk So what does all of this mean for directors? Brook says that to date there have been very few climate claims against directors, but says two recent cases are noteworthy. In the first, Californian utility PG&E was driven into bankruptcy after its equipment started several major wildfires, and in a derivative action the former directors were accused of breaching their fiduciary duties to the company by failing to adapt its operations to increasing fire risk (climate change was a significant factor). Brook notes that D&O insurers funded a $117m settlement last year. Secondly, in February of this year, ClientEarth filed a derivative action against Shell’s directors, alleging that they breached their duties by adopting an energy transition strategy that does not align with the Paris Agreement and fails to comply with the Dutch court’s order in Milieudefensie, which requires Shell to reduce its Scope 1, 2 and 3 emissions by 45% by 2030 (compared to 2019 levels). However, the High Court refused permission for the action to proceed, though ClientEarth has been granted a hearing to request the court to reconsider its dismissal. Nevertheless, Brook says that while the bar for a derivative action is a high one, it is widely expected that there will be more climate-related cases against directors. According to Brook, there are high-profile cases against oil majors in the US seeking damages for the costs of adapting to climate change caused by greenhouse gas emissions from use of their products. In a few cases, he says, the claimants seek to force companies to adopt more ambitious emission reduction targets. And there has been an increase in lawsuits about greenwashing, alleging overstatement of the green credentials of a company or its products. He adds that there have also been several biodiversity-related cases against states and a few against corporations, suggesting that these areas may become the next frontier for environmental litigation. Grounds for litigation Gama says claimants have taken two different roads for climate change litigation against companies, either through tort litigation or consumer protection law. Through a claim for damages, companies are being sued for how their contribution to climate change has resulted, or could potentially result, in some sort of damage to the claimants’ livelihood, such as their health or housing conditions. She points to RWE, for example, which faces a case in Germany brought by Peruvian farmers who are demanding the company pays for flood defences against a nearby glacier that is melting due to fossil-fuel driven global heating. Litigation over misleading climate claims using public disclosures is also becoming a significant trend, says Gama. In 2017, Volkswagen agreed to a guilty plea before a US court and paid $9.5bn to consumers related to using a software designed to mislead the US Environmental Protection Agency and US consumers about vehicle emissions. As for defences, Gama says companies have produced three different types of defences in the few cases that have gone before trial so far. First, companies have claimed they have produced fossil fuels for the common good and advancement of humanity and, hence, they shouldn’t be blamed but society as a whole. Second, companies have claimed there is a lot of scientific uncertainty in the climate change models that makes it very hard to establish causality between companies’ actions and their contribution to climate change. And third, companies have attacked the credibility of scientists (for instance, they have highlighted that the major carbon study was commissioned by Greenpeace). D&O cover As a general rule, D&O insurance should cover climate litigation, says Gama, noting that insurers are funding Shell directors’ defence of the current claim being brought against them by ClientEarth. “There can be exclusions, such as for pollution, that could be applicable for climate change litigation if they are broadly worded, and there are rumours that some D&O insurers are introducing climate exclusions,” she says. “A key implication of this growing trend for climate litigation is that insurers are increasingly seeking more details and disclosures on how their clients are monitoring and managing climate risks.” Brook says D&O insurance is likely to be one of the business lines most affected by climate litigation in the future (as identified during the Bank of England’s CBES exercise in 2021, published last year). “Directors’ duties around climate risk are evolving and standards of care are rising. There are already examples of climate claims being made against fiduciaries for investment decisions, disclosures or climate risk management. Many liability policies contain pollution exclusions, and insurers might seek to rely on these. More generally, there are indications that D&O insurers are increasingly taking account of the potential for climate lawsuits in their underwriting decisions,” he says. In an interesting twist, TotalEnergies is suing Greenpeace France and climate consulting firm Factor-X over a report claiming the French oil company massively underestimated its 2019 greenhouse gas emissions. According to Reuters, the civil complaint seeks a ruling that the report contains ‘false and misleading information’, a judicial order to withdraw the publication and cease all references to it. A first procedural hearing will take place in September.

The threat to corporates and D&Os from climate litigation

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