The effects of climate change are becoming more palpable, and various stakeholders – including non-governmental organisations, investors, and communities – are increasingly turning towards climate litigation. Consequently, the number of climate change-related lawsuits filed globally has dramatically risen, with the number of cases filed nearly doubling between 2017 and 2020.
Until now, no case has had a material impact on an issuers’ creditworthiness. However, an increase in climate litigation could serve as one of the levers that makes transition and physical risks crystalise sooner.
The rise of climate change attribution science is key here. One element that unites many climate cases is causation. In other words, a plaintiff must be able to prove that harmful environmental acts committed by a defendant had a direct impact on climate change which in turn caused harm to the plaintiff. While there is a growing body of scientific literature – including the August 2021 Intergovernmental Panel on Climate Change (IPCC) report – that attempts to strengthen the causal link between extreme weather activity and anthropogenic climate change, the reality of proving such a link within a courtroom is highly complex.
Climate change attribution science seeks to, among other things, attribute shares of emissions – and the associated harmful climate impacts – to responsible parties through the use of research and modelling. While today’s science is still relatively new and in need of funding, datasets that support climate attribution science are becoming more robust, and scientists may soon be more able to more definitively tie extreme weather events to climate change, which could form the basis of more climate-related litigation in the future.
An important factor to watch is the adequacy, or lack thereof, of issuers’ decarbonisation targets. While many companies have adopted net-zero targets in line with national ambitions, an increasing number of businesses are being criticised for their failure to specify interim targets, cover Scope 1, 2 and 3 emissions, or account for the entirety of their organisation’s operations. Others are challenged by stakeholders who simply believe the targets are not aggressive enough.
The landmark case brought against Royal Dutch Shell in 2019 exemplifies how this issue could play out in a courtroom setting. Several Dutch NGOs and over 17,000 Dutch individuals filed suit against Shell, requesting the court to recognise the company’s failure to reduce its greenhouse gas (GHG) emissions as an unlawful act under tort law.
Although Shell argued that it already had a net-zero by 2050 commitment in place, the court ultimately rejected the defendant’s rebuttal on the grounds that it owes a duty of care to reduce its global CO2 emissions. Consequently, the plaintiffs’ request was granted, and the trial court mandated that Shell reduce its carbon dioxide (CO2) emissions by a net 45 per cent relative to 2019 levels by year-end 2030.
While Shell intends to appeal the ruling, this case demonstrates that the courts are mandating more aggressive emissions-reduction policies, the which could inspire further legal action.
Similarly, disclosure practices viewed as insufficient, substandard, or greenwashing are fuelling legal action. Indeed, while sustainability reporting has become a key priority for many organisations, stakeholders are increasingly calling for greater transparency into companies’ climate-related risks and opportunities that clearly outline significant exposures to climate change.
Looking ahead, as disclosure comes under greater scrutiny, we expect this to become a growing litigious area, especially for issuers with aggressive climate-related external messaging that could be viewed as misleading. In our view, the adoption of standardised global reporting frameworks for climate-related issues, like the Task Force on Climate-related Financial Disclosures (TCFD), could serve to temper issuers’ exposure to litigation of this type.
As the world continues to contend with more extreme and unpredictable weather owing to climate change, the actions of nations and corporations will come under increasing scrutiny. Regardless of whether they are successful, such cases may not only serve to raise awareness about the impacts of climate change, but could also shine the spotlight on those with inadequate climate disclosure or unsustainable operations, adding strength to global decarbonisation efforts.
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