This article was written by Edwina Kwan, Darren Roiser, Gu Jieyu, Holly Blackwell, Erin Eckhoff and Sati Nagra
Findings likely to heighten global climate change litigation risk for government and businesses
The comprehensive and devastating findings set out in the Intergovernmental Panel on Climate Change's (IPCC) report carry implications for businesses economy-wide, intensifying the risks of climate change litigation.
The 3949 page report – the IPCC's sixth since 1990 – delivers the clearest message to date that the globe is heating to dangerous levels and humans are responsible; declaring it "unequivocal" that "human influence has warmed the atmosphere, ocean and land", affecting weather extremes in every region.
The findings add fuel to the climate change litigation fire which is blazing in courts in Australia and around the world and may contribute to narrowing the causation gap that has long been a hurdle for climate change litigation.
Claimants are becoming more creative, presenting courts with diverse arguments incorporating themes such as greenwashing and fiduciary duty breaches in their causes of action.
At the same time the targets of actions are widening, increasingly capturing large corporations across the private sector as well as government. Courts are increasingly receptive to the evolving and broadening bases of claims (see more details here).
Regulators are also acknowledging the foreseeability of climate-related financial risks and the need for companies to address those risks through governance & disclosure practices. In Australia this includes:
the Reserve Bank of Australia describing climate risks as "likely to have first-order economic effects";
the Australian Securities & Investment Commission characterising climate change as a "systemic risk that could have a material impact on the future financial position, performance or prospects of entities";
the Australian Prudential Regulation Authority emphasising that climate risks should be managed like any other risk, in line with existing prudential risk management standards, including its new Prudential Practice Guide CPG 229 on Climate Change Financial Risks.
"Climate shocks will increasingly disrupt what has bound the world together with huge consequent legal, political and societal changes." – Darren Roiser, KWM Partner, London
In the UK, our London partners report a similar trend of litigation moving beyond the early targets of governments and energy companies. Disputes are now being driven by:
activist NGOs (with funding),
shareholders (through material non-disclosure claims), and
consumers (through possible class actions).
All are applying closer scrutiny to wider business activities.
One of the key issues that has gained prominence in the UK recently is that directors should be considering climate change issues when making decisions or they risk future claims for failing to fulfil their duties.
London-based partner Darren Roiser links the trend to the effects of Covid-19. "The pandemic has given us a first glimpse of what the world looks like when globalism breaks down," he says. "The system of global commerce and cooperation is fragile."
Australian partners have noted the disruption caused by Covid-19 in the climate change litigation space, increasingly used to catalyse governments and business into action.
Globally, the United States, Australia and the United Kingdom have the highest recorded level of filed matters and the volume of cases has grown dramatically in the past few years. The US has the lion's share: 1000 cases filed, more than three quarters of the world total. Australia comes in second and in light of findings such as those in the IPCC report, the number of climate change cases in Australia is predicted to grow.
In one week in June, three significant judgments were handed down across Europe and Australia and two transnational oil corporations stepped up their commitments to shareholders.
Partners in China anticipate a global acceleration of climate-related policy changes mandated by, for example, governments, international organizations, activists, investors, financial institutions, and consumers. China is committed to becoming a global leader in climate mitigation and renewable energy technologies as it targets carbon neutrality by 2060.
Shanghai-based partners Gu Jieyu and Holly Blackwell anticipate continued regulations to promote clean energy generation and consumption and commercial opportunities aligned with these policies – including the market development of China's carbon trading scheme, increased renewable energy investments, and the increased expansion of China's EV market (which is booming).
Even in jurisdictions where climate-related policies are not prioritized, investors may be driven by home country or activist shareholder mandates when considering and making investments in third countries
Businesses must take notice
Climate change litigation – an umbrella term for legal disputes relating to climate change – has emerged as a strategic tool used to press for climate change action from a variety of actors. Yet the issue of climate change action is no longer one reserved for climate activists. The rapidly increasing cases demonstrates that it is becoming a mainstream issue supported by a widening range of players including institutional investors.
The response from global leaders and the public at large to the IPCC's report, released on 9 August, shows the momentum surrounding this issue. The report adds to the existing body of evidence supporting the impacts of human-caused greenhouse gas emissions on climate change.
Many corporations are proactively responding. In Australia, ASX50 companies are voluntarily reporting on climate change risk in line with global frameworks and standards. In the PRC, climate-related commitments are increasingly required by financial institutions and lenders – along with a push for more government action, this will necessarily drive lenders and borrowers to commit to heightened ESG practices.
Businesses need to be aware of the existing litigation risk and the heightened importance from the IPCC's work.