Law and climate disorder

The volume of climate litigation is stepping up. Since the Rio Earth Summit in 1992, a large body of climate legislation has developed around the world (see Figure 1), with assorted stakeholders and pressure groups prepared to test it.

Cases have almost doubled from 884 to 1550 since 2017.⁶ Most litigation (79 per cent) has been in the US; just 10 per cent has been directed at corporates. The majority of the 135 businesses facing challenges are energy and natural resources companies, with litigation concentrated in six areas: the rights to life and a clean environment, the need to keep carbon in the ground, areas of corporate responsibility, enforcement of climate targets, adaptation impacts and climate disclosures.

At this stage, the financial consequences are unclear. “Our understanding of the potential costs arising from climate change litigation is very poor,” wrote Javier Solana, a lecturer at University of Glasgow’s School of Law, in an academic paper last year.⁷ “Contrary to popular understanding, not all direct costs will arise at the end of legal proceedings.” Ultimately, total costs may be much higher than headline fines or court orders, particularly if litigation results in negative publicity and long-lasting reputational damage.

The action is testing the role of the judiciary and reflects important social questions around values and expectations. “There is a definite generational shift underway,” says Paul Pritchard from sustainability consultant Iken Associates. “People have been talking about climate for 25 years, but it is only recently that views have started to crystalise. The younger generation wants to see more action; they are taking this much more seriously. They will reflect their values and choices in their behaviour: where they work, where they invest their money and so on.”

Figure 1: Climate-related litigation: Total cases 1986-2019

Figure 2: Climate-related litigation: Cases against companies 1986-2019

So, how do experts view Cox’s latest crowdfunded challenge? Taking legal action against a company using tort is not straightforward; the nature of the law is different, as are the targets.

“It is challenging because the commitments a company makes are soft commitments,” says Joana Setzer, assistant professorial research fellow at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (read a detailed interview with Setzer here).

“They are voluntary, and it is questionable whether they could be enforced in court. The Shell case in the Netherlands is important, because it is asking whether Shell is going to deliver on its targets. Those bringing the case are saying: ‘It does not look as if you are doing that’, and really calling on Shell to change its core business model.”

The key analytical tool that might prove pertinent is climate attribution. This rapidly evolving science allows human impacts on climate change to be assessed (within certain data constraints), right down to the individual company level. By taking a pre-industrial climate scenario, then comparing it with one that takes man-made emissions into account, it may be possible to define the human contribution in a particular scenario. These developments are significant because until recently it was not possible to be definitive about causative relationships: to establish that a single company’s actions might have contributed to a particular weather event.

“Because of the causation issues, quantifying damages for acceleration of climate change may be difficult,” noted law firm Norton Rose Fulbright.⁸ The evolution of climate attribution has gripped the legal profession; a judge hearing a case in the US is reported to have asked for a relevant ‘teach-in’, to help him prepare.⁹

“This is where the work of Dr. Friedereike Otto, Richard Heede and others has made a real difference,” Setzer says (read more about Otto’s work here). “They have developed attribution science, but they are also producing science that is useful for courts. We had science produced prior to that, but lawyers couldn’t readily use it. Now the lawyers and scientists are talking, the scientists are producing information that is purposeful and this is already making a difference.”

One important consideration in legal action is whether greenhouse gas emitters can be shown to have known about environmental risks but pressed ahead regardless. If evidence like this coexists with information from an internationally recognised body like the Intergovernmental Panel on Climate Change, companies may find it harder to have the cases against them dismissed.

“If they rule against Shell in this case, it could be game changing,” says Sora Utzinger, senior environmental, social and governance (ESG) analyst at Aviva Investors. “It would potentially open the door to similar action elsewhere. Prior to now, most of the behaviour change related to climate has come about from top-down regulation. More governments have announced plans to reach net zero, and companies have changed their behaviour accordingly, to reflect what society wants to achieve. This is different; it would make their commitments binding.”

Meanwhile, environmental consultants warn of oversimplifying the analysis, making it all about the few. “One concern I have is about the need for quite a simple narrative, about good guys and bad guys,” says Pritchard. “It is not particularly helpful to demonise a small group of companies. The oil majors are not the only ones involved here.

“They might be supplying a product, but lots of others are using it, and perhaps those individuals could be doing more to look for alternatives themselves,” he adds. “I hope the discussion becomes broader. There are companies that need to be held to account, but hopefully that does not lead to the conclusion that only a handful are the problem. It is much bigger and more complex than that. We need to be asking more questions, like who burns the gas and puts the aviation fuel in the planes?”

Meanwhile, in Germany, another climate case is being played out. A small-scale Peruvian farmer, Saul Luciano Lliuya, is taking on the German utility RWE, backed by the sustainable development organisation Germanwatch.¹⁰ To clarify, RWE is in the dock for impacts in Peru, although it has no operations there at all.

RWE is one of Europe’s largest carbon dioxide emitters, giving out around 100 million tonnes of CO₂ annually from fossil-fuel fired power stations and other assets. It has plans to phase out coal and be carbon neutral by 2040.

“German regulations require an end to coal-fired energy generation by 2038,” says Charles Devereux, ESG sector analyst at Aviva investors. “RWE plans to use one of the dirtier fuels right up to that regulatory deadline. Other European peers seem to be moving faster in the energy transition, although generally they are all ahead of their equivalents in the US.”

Lliuya lives in the Andes, about 280 miles north of Lima, where rising temperatures have led a glacier to retreat. The melting ice is feeding a glacial lake, which threatens to burst. If it does, it will affect Lliuya and the lives of thousands of other local residents.

“This is the first lawsuit in Europe where a person affected by the hazards of climate change has sued a private company,” Germanwatch says.¹¹ Lliuya is seeking damages from RWE to compensate for the investment he has made to protect his home. The amount itself is not vast – less than half of one per cent of the total cost incurred by himself and the local authorities. That’s the same percentage as RWE’s estimated contribution to global greenhouse gas emissions since industrialisation began.¹² If Lliuya’s legal team is ultimately successful using a ‘general nuisance’ clause in the German Civil Code, it potentially opens the floodgates to countless other claims.

“Litigation like this presents both a risk and an opportunity from an ESG perspective,” says Devereux. “Companies can differentiate themselves through the progress they make as they move towards an effective low carbon transition. But we should not underestimate the risks. These cases could set quite wide-ranging precedents in terms of establishing a company’s liability towards society, not based on a specific locale.”

In a story of many twists, RWE has now taken legal action against the Netherlands in a Є1.4 billion corporate/state dispute. It is looking to offset the cost of retiring a coal-fired power station early;¹³ that decision came about after Cox’s successful case against the state. RWE is the subject of climate litigation and also using it.

So, what does this imply? “We see the right to environment emerging globally,” says Laura Burgers from the Amsterdam Centre for Transformative Private Law at the University of Amsterdam.¹⁴ “We see the environment as a foundation of society, as a necessary condition of constitutional democracy, as a condition to be able to exercise the other rights you have.”

Because environmental issues transcend national boundaries, there is an obvious governance challenge. “It is interesting that many defendants in climate cases point out they are not responsible, but it is rather a global responsibility,” she says. “And they are right — climate change is a global issue that can only be addressed effectively if everyone is on board. At the same time, it means we all should actually be on board!”

The analytical framework that has developed to encapsulate the changing environment involves an intricate web of physical, transition and litigation risk. “As physical risks become larger, so does the litigation risk,” Setzer says. “But transition risks also increase litigation risk. This is why it is important for private actors to track cases against states, not just cases against companies they invest in or insure.”

Important implications flow from this. Recent analysis by the UN Environment Programme points to six key areas where litigation may step up, shown in Figure 3.

Where might these various risks present? What mechanisms might be lightning rods for risk transmission?

No clear answers emerge. A high-profile case could prove a tipping point, but Pritchard believes a more likely outcome is that litigation will “pick up laggards, rather than drive change fundamentally”. Perhaps controversially, he suggests attention is being directed at climate risk “because it has universal metrics; it can be measured in terms of greenhouse gases”.

In his view, other nature impacts connected with climate change, such as biodiversity loss, need attention too. “In some ways, a focus on nature-related impacts rather than greenhouse gases might afford an easier route to litigation, not least through geographic dependencies that allow cause-effect pathways to be constructed,” he says.            

There is plenty of stakeholder tension to contemplate as well. If carbon-heavy businesses accelerate towards transition, will their return on capital fall? Could that leave emitters open to criticism from climate change activists as well as disgruntled shareholders, with risk on both counts?

“They are, in a sense, damned if they do and damned if they don’t,”¹⁵ as law firm Freshfields Bruckhaus Derringer puts it.

“Climate transition risks are being taken much more seriously by the oil majors,” Utzinger says. “They are factoring them into the capital budgeting process, resulting in a higher cost of capital. Those on the path to net zero know they have to de-risk their traditional upstream business; that’s why they talk about ‘advantaged resources’, where there is a sweet spot between low break-even prices and lower emissions intensity.

“Of course, returns on invested capital (ROIC) vary across hydrocarbon and low-carbon energy sources,” she adds. “We think companies should not just focus on ROIC but on the underlying risk profile – ultimately knowing where to play and understanding where established capabilities can create value in the low carbon space is going to be a critical component of strategy.”

Figure 4: Assessing litigation risk

All this suggests an environment that requires thoughtful handling, particularly as there is little consistency with carbon disclosures yet. Ultimately, best practise means companies that could be targets of climate action need to inform their shareholders, build provisions, and ensure material risks are reported in annual reports. In the background, they need to recognise the potential to be challenged in jurisdictions in which they do not operate.

Institutional investors also need to think carefully about their duties to clients, how their risk exposures are being presented and their ability to verify any claims being made about their environmental credentials. Cases to bear in mind include McVeigh versus REST, where a 25-year old member of an Australian pension scheme won a case after suggesting the scheme was not doing enough to protect his savings.¹⁶ Ultimately the scheme agreed climate change implied a “material, direct and current financial risk”, to align its portfolio to net zero by 2050 and report using the guidelines agreed by the Task Force on Climate-related Financial Disclosures.

Insurers also need to prepare for detailed scenario analyses with forensic scrutiny of underwriting decisions and assets, to help mitigate the uncertainty. 

These changes reflect the complex way the environment is changing; how environmental protest has become global and how climate action is part of an evolving social debate. “Litigation is being used in every direction, and we are going to see more of it,” Setzer warns. “The terrain becomes complex, risks and uncertainty are high, and the players involved are powerful. It will be a hard fight.”