From Wall Street hedge fund managers to armchair retail investors, many people in finance once viewed climate change as irrelevant to their decisions. Now many investors have started to become increasingly concerned about the risks that climate change poses—whether that’s physical risks to a company’s assets or transition risks posed by continuing business as usual in the face of increasingly stringent climate policies and regulation.
Board members who fail to take this trend into account could find themselves or their companies in court and, in some cases, personally on the hook.
The number of lawsuits concerning the financing of high emitting activities is rising. This trend—clear from the annual global audit of trends in climate litigation that I conduct with Joanna Seltzer at LSE—has major implications for pension holders, institutional asset owners, and C-suite execs. But it also has major implications for non-executive directors as well.
Climate activists are increasingly pursuing lawsuits. Many of the growing number of climate change lawsuits rely on constitutional rights and human rights. In the US, several such cases have finally moved to trial, filed by youth plaintiffs against state and federal governments, including Held v Montana. But these are just the tip of the iceberg.
A rising number of lawsuits involve consumer protection law, corporate law, and financial law. These take many different forms. One trend has been the explosion of greenwashing or “climate-washing” cases that has really taken off in the last three years. While the moral and legal case for companies to play a role in the transition to low carbon economies becomes ever stronger, the risks of overstating action and empty promises are increasingly significant.
Profit motives
There’s also another, perhaps more critical, strand of litigation that boards should be aware of. This includes cases that focus on what constitutes a reasonable investment strategy in a rapidly warming world. Should a company be putting money into new coal mines, say, or should that cash be going into new solar or smart grids?
Several of these cases concern the legal obligations of the people who manage companies and financial institutions. The cases ask what directors or trustees should do to protect firms, shareholders, investors and beneficiaries from the risks of climate change. Is it in a company’s long term interests to keep investing in drilling or logging for short term profits?
Early cases involving this type of legal question tended to focus on losses a company has already sustained due to mismanagement and failure to disclose climate risks. For example, in 2015, workers for Arch Coal sued the managers of their pension fund because it was heavily invested in company stocks. When the company lost value in the face of moves towards regulating the coal industry, the pensions lost value too. The workers argued that the fund managers should be held personally liable. That case was stayed in 2016 after the firm filed for bankruptcy.
Other early cases, such as McVeigh v REST, simply included requests for information about climate risk management processes from a pension holder to his fund. Had the fund considered climate change at all and, if so, how? The case settled with the fund agreeing to provide the information, after the Court suggested that it saw a significant “public interest” in the plaintiff’s request.
The more recent case of ClientEarth v Shell Board of Directors takes a different tack. This strategic suit focuses on how the directors of the company are responding to predicted future climate risks, including extreme weather events and stricter regulation of the fossil fuel industry by governments.
ClientEarth, which has bought activist shares in Shell, argues that continued investment in fossil fuel projects will lead to long-term losses, because these assets won’t be able to operate as long as predicted, due to regulation and extreme events to which the company is contributing.
The claimants are asking the Court to declare that the directors’ pursuit of new oil and gas is a breach of their legal responsibility to act in the best interests of the company and its shareholders—describing it as outside the range of “reasonable responses” to climate change. ClientEarth wants the courts to order the directors to make new plans fit for a low-carbon economy.
The ClientEarth case has so far had little success. Many scholars of corporate law are sceptical. There’s a very high legal threshold for any shareholder to challenge a director’s commercial decisions. Shareholders must prove that no reasonable manager would do the same, or courts won’t usually get involved. But, while this case might not win, it puts directors and investors on notice that they must balance short- and long-term risks.
Swiss lead the way
And the calculus may change, particularly in Europe. Here, the law around corporate climate responsibility and sustainable finance is developing fast. On 18 June, Swiss voters made history by approving the first ever law to mandate that corporations become net zero by 2050.
Swiss companies and others are likely to respond by looking into how to rapidly reduce greenhouse gas emissions in the next 25 years. Those who don’t plan to meet the new targets might find themselves on the receiving end of lawsuits for failure to address the “transition risks” the legislation creates.
Of course, litigation cuts both ways. Boards should also note the rise of ‘ESG backlash’ cases, particularly in the US, although with the current focus on collaborative climate initiatives, the risk for many companies focused on their own internal processes may be overstated.
What is clear is that as the debate about how to act on climate becomes more heated, more people will turn to the courts for resolution. Boards need to ensure corporate risk management systems account for the rapidly evolving field of climate change law and the reputational damage that litigation invariably brings with it.
By understanding the legal arguments and principles at play in different cases, boards can take steps to ensure that companies are adapting to changing social and legal expectations—before they are forced to do so.
Catherine Higham is policy fellow at the London School of Economics, coordinating the Climate Change Laws of the World project