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Climate change liability risk vastly underestimated by businesses

12 December 2018 – This opinion piece is based on a speech Alice Garton, Senior Lawyer and Head of Climate Programme, ClientEarth, gave to the European Refining and Technology Conference in November 2018. It highlights the need for business leaders to understand the full potential of liability risk – alongside the more often discussed ‘physical risks’ and ‘transition risks’ – in driving the transition to a net zero economy.

Last week, depressing news confirmed that global emissions are on the rise. This followed a report from the UN Office for Disaster Risk Reduction which concluded that in the last 20 years there has been a dramatic 151 per cent rise in direct economic costs associated with climate change. Extreme weather accounted for 77 per cent of these losses, amounting to $2.2trillion. These destructive events will become more frequent and intense as the climate continues to warm.

For the private sector, our collective failure to manage this existential risk means one thing with certainty: an increase in climate-related litigation. The courts’ primary role is to redress loss and damage and they will increasingly be called upon by citizens, governments and the private sector to determine the vexed question of "who should pay for the impacts of climate change?". The fossil fuel sector is in the cross-hairs at the moment – but the blame will not stop there.

In our experience, liability issues associated with climate change are vastly underestimated by most businesses. It is vital for business leaders to understand the full potential of liability risk – alongside the more often discussed ‘physical risks’ and ‘transition risks’ – in driving the transition to a net-zero economy.

There are three broad trends in climate change litigation which have emerged:

  • climate change as a rights-based issue
  • climate change as a financial issue
  • increasing oversight and enforcement of existing laws.

Climate change as a rights-based issue

Where governments fail to act to protect the rights of citizens, courts step in. That is a fundamental premise of the rule of law. And that is precisely what is happening.

In the Netherlands, the Hague Court of Appeal has upheld a 2015 decision of the District Court that found that the country’s current generation of citizens will be confronted with loss of life and disruption of family life because of climate change and ordered the government to cut emissions by at least 25 per cent by 2020 (they are currently at 13 per cent). The court said it was irrelevant that Netherland’s global contribution to climate change was only 0.5 per cent of emissions. They should still act to protect their citizens.

In the United States, 21 youth plaintiffs aged 12 to 21 are suing the US government for breaches to their constitutional rights to life, liberty, and property. The case has so far survived numerous attempts by the current US administration to block it. The plaintiffs are seeking legally binding, science-based policies to mitigate the impacts of climate change.

Climate change as a financial issue

In relation to the second trend, this evolution of climate change from an environmental or ethical issue to squarely a financial concern has huge implications for legal liability. It opens the door to litigation risk arising from breaches of tort, consumer, corporate and financial risk management laws.

In particular, these claims will arise under three broad categories:

1. Claims for failing to mitigate impacts of climate change under public and private nuisance, negligence, failure to warn, trespass and unjust enrichment laws. An example of these cases are those launched in the US by cities and states against oil majors, seeking compensation for the costs of adapting to climate change. Many of the US claims have yet to be successful but this is not unusual in the early days of new liability issues. Philosopher and jurist Jeremy Bentham observed that ‘the power of the lawyer is in the uncertainty of the law’. It is very capable of adapting to new factual scenarios.

2. Claims for failing to adapt to the impacts of climate change. Company directors and trustees have duties to act in the best interests of their company or members, and must adapt their business strategies to take into account the risks and opportunities of climate change. ClientEarth has been leading the field on financial risk litigation. We have recently launched a case (as a shareholder) against a Polish energy company in relation to the company’s proposal to build a new coal-fired power plant, which countless analysts have said will be a financial disaster (in other words, a stranded asset). This category would also include claims against engineers, architects and other professional services for breach of their duties of care, such as failure to design infrastructure compatible with future climate conditions.

3. Claims for failure to disclose climate-related risks to shareholders. In Australia, a retail shareholder took the Commonwealth Bank to court for failing to disclose climate-related risks in its annual report, and the New York Attorney General has recently launched a lawsuit against Exxon for allegedly deceiving its shareholders in relation to its proxy price on carbon, amongst other things.

Increasing oversight and enforcement of existing laws

Finally, the third broad trend in climate litigation: we are also seeing increasing oversight and enforcement of existing environmental laws. Dieselgate is a classic example of this. Non-compliance with emissions standards is no longer an acceptable way of doing business. Regulators will not be turning a blind eye anymore. And CEOs who leave their environmental compliance reading in the bottom of their file for weekend reading will end up in court (as happened with the CEO of Volkswagen).

Act now to avoid liability risk

The only safeguard against climate liability exposure for directors will be a proactive, dynamic and considered approach to the impacts of climate change in the unique context of each company. Our partner organisation, the Commonwealth Climate and Law Initiative, has launched a comprehensive climate risk reporting primer to assist boards and their committees on the journey.

As the Energy Transitions Commission recently concluded – a zero carbon economy is both technically feasible and affordable. It is the best legal interests of your company, your employees and your shareholders to act ahead of time.


How are we going to achieve a net zero emissions future by 2050? Visit our climate change knowledge hub.

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About the author

 

Alice Garton

Alice Garton is Senior Lawyer and Head of Climate at ClientEarth.

Alice joined ClientEarth in April 2015 as Company and Financial Project Leader. Prior to joining ClientEarth, she worked as a litigation lawyer at Olswang (in London) and Clayton Utz (in Australia), and as a company lawyer at Brookfield Multiplex, where she managed the complex Wembley Stadium dispute.

In parallel to her litigation practice, Alice developed and implemented corporate social responsibility programmes at Clayton Utz and Brookfield. At Brookfield she also advised the Board of Directors on the UK and EU climate change regulatory regimes, including identifying strategic business opportunities in the green economy. Alice has researched and written about various issues in international environmental law through her work at Chatham House in 2006 and in her other roles.

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Guest articles on the blog do not necessarily represent the views of, or endorsement by, the Institute or the wider University of Cambridge.