Climate litigation - including ’greenwashing’ claims - is increasingly a risk for Board consideration
Greenwashing has consumers in a lather. More and more, customers are holding companies to account as they threaten to turn away from brands that publicise misleading or unproven environmental and climate-related disclosures and claims.
As supply-chain disruption and economic turbulence keep business leaders up at night, greenwashing now presents an additional liability and reputational risk for companies.
New climate-related legislation requires businesses to ramp up reporting on climate-related risks and performance, which has the potential to expose firms to litigation. This is viewed by some as paradoxical. Others see it, simply, as highlighting the gaps between what companies say they will do versus the reality of what is being done to reduce carbon emissions.
NGOs take a stand
Last year, a judge in the Netherlands ruled against Shell in a landmark case. The NGO Milieudefensie took the company to court, demanding that the oil giant align its business goals with the Paris Agreement.
And in March this year, another group, ClientEarth, in a first-of-its-kind legal challenge, has sued the directors of Shell for failing to arm the company with an effective net-zero strategy.
NGOs are taking strategic aim at these large corporations with the focus not on pursuing damages but on legally strong-arming them to change their business models.
Despite launching an appeal, Shell must now implement the series of rigorous targets set out by the judge in the first case, including a 45 per cent reduction in carbon dioxide emissions by 2030.
The case against the directors is pending but, if successful, will force a significant change in direction for the company, in line with the Paris Agreement.
This is far from being an isolated case. According to the London School of Economics’ Grantham Institute, the cumulative number of climate-related cases has more than doubled since 2015. A little over 800 cases were filed between 1986 and 2014 while over 1,000 cases have been brought in the last six years.
While many of these lawsuits are being brought by NGOs businesses are also coming under increased scrutiny from their investors.
In 2019, the federal district court for the Northern District of Texas ruled that an evidentiary hearing would take place in a class-action suit against oil giant Exxon Mobil. The case was the first climate-change related securities class action against a major oil and gas company, alleging that the firm misled investors about the value of oil and gas reserves through its failure to account for climate-related costs.
Legal challenges like this not only have the potential to sharpen investor focus on how businesses are presenting their green credentials but also sets a precedent for individuals to initiate legal action of their own.
Not all cases impact businesses directly. Community action groups have started to hold governments to account for a failure to act sufficiently on climate change. If successful, these cases will have important implications for climate policy and the landscape in which businesses operate.
In 2015, a group of 21 young citizens teamed up with an environmental organisation and ‘a representative of future generations’ to pursue legal action against the United States Government. The end goal of Juliana vs. United States was to seek an order that would require the government to produce a plan to phase out fossil fuels and reduce carbon emissions.
The case asserted that the United States Government violated rights under the US constitution. Despite the Court of Appeals of the Ninth Circuit rejecting the claim in 2020, the case continues as the plaintiffs pursue further action in district court, with varied success.
This action led to documentary being made for Netflix, Youth v US, and a global wave of constitutional climate change cases being taken up by youth-led climate-action groups.
In Australia, a group of children won a class-action suit against the approval of a coal mine expansion project in 2020. The case established a novel duty of care that protects children ordinarily resident in Australia from personal injury or death resulting from the commencement of proceedings arising from emissions of carbon dioxide into the Earth’s atmosphere.
While an injunction to prohibit the project was not issued, the responsibility has been placed directly on the shoulders of Australia’s Minister for the Environment should the decision be made to put the project in motion.
And in Germany, another group of young people won its claim in the German Constitutional Court. It successfully argued that the annual emission amounts allowed under the German Federal Climate Action Act until 2030 were, in fact, not compatible with fundamental rights as they lacked specificity for emission reductions beyond that date.
The response from the German Government was to update the Climate Change Act with a more ambitious plan.
Taking a risk-based approach
Strategic and highly targeted litigation can come from many angles, with NGOs, investors and community action groups successfully holding companies and even governments to account for failing to action a clear and data-led plan.
Whether directly marked for legal action or running into liability from the fallout of constitutional cases, risk from litigation is a clear and present danger for businesses.
Annual financial and director reports, along with required disclosures, need substantive rigour, and organisations must be transparent in their proposals and actions.
Companies must get serious about climate-related risk and how to mitigate it by taking a science-based approach to decarbonise their own business model. Failure to do so could see the gavel come down on them.
Dr Andrew Coburn is CEO of Risilience