Expansion of the scope of climate litigation against companies
Until now, climate litigation involving companies concerned compensation for the environmental damage companies have caused. The Shell decision has broken new ground in this regard, as it is the first case that imposes a duty of care on a company’s business and operating model prospectively, rather than focusing on damages caused by past behaviour.
The case of a Peruvian Farmer against RWE for their contribution to global warming and inducing damage in the Andes (Saúl Lliuya v RWE AG) has been ongoing since 2015. The case hinges on evidence demonstrating the claimant’s property is threatened by flooding due to the increase in size of a glacial lake, and that RWE’s CO2 emissions have contributed to that risk.
Whilst the German court in Saúl Lliuya v RWE AG is still considering the evidence to answer whether the claimant’s property “is interfered with” according to the German Civil Code, the Dutch court found that Shell is subject to an unwritten standard of care based on applicable Dutch Civil Code. The Dutch ruling is expressly underpinned by the concept of “the best available science on dangerous climate change and how to manage it, and the widespread international consensus that human rights offer protection against the impacts of dangerous climate change and that companies must respect human rights”.
The court did not hesitate to rely on the UN Guiding Principles on Business and Human Rights, although not a legally enforceable instrument, and stated that “the responsibility of business enterprises to respect human rights, as formulated in the Guiding Principles, is a global standard of expected conduct for all business enterprises wherever they operate”.
The discussion of corporate responsibility and the protection of human rights has certainly gathered pace, and currently, the third draft on an international legally binding agreement on human rights and corporations is being considered by the UN Human Rights Commission.
Implications for insurers
Climate action has become a major financial risk. It is estimated that the required cuts in fossil fuel production could cost Shell US$6 billion a year.
Investors and shareholders recognise the high stakes at play. At Chevron, more than 60% of investors recently voted in favour of a climate resolution to force the company to reduce its emissions. The related cost of lowering production is significant. Exxon shareholders voted to oust at least two board members for failing to take seriously the transition to low-carbon energy.
Not only large polluters such as energy companies, but also airlines, steel producers and the like should be concerned about the climate-related costs and litigation risks, as even financial institutions have not been spared:
Most recently, on 13 April 2021, Client Earth filed a suit against the Belgian National Bank for failing to meet environmental, climate, and human rights requirements when purchasing bonds from fossil fuel and other greenhouse-gas intensive companies.
In McVeigh v Retail Employees Superannuation Trust an Australian pension fund member filed suit against his pension fund, alleging that the fund violated the Corporations Act 2001 by failing to provide information related to climate change business risks and any plans to address those risks.
A similar claim was brought by shareholders in Abrahams v Commonwealth Bank of Australia, for failure to disclose climate change-related business risks—specifically with respect to a possible investment in a controversial coal mine. The shareholders withdrew their suit after the Bank released a 2017 annual report that acknowledged the risk of climate change and pledged to undertake a climate change scenario analysis to estimate the risks to the Bank’s business.
No doubt the Shell decision is likely to increase climate litigation against companies, be it by environmental activists, or shareholder action. The legal basis for these claims has widened considerably, and moved away from compensation claims for environmental damages to a regulatory and rights-based approach.
Boards can be held responsible even without having caused any specific damage (as we discussed in our previous article). The protection of human rights and compliance with international standards has become an additional factor for companies and boards to seriously consider and bear heed, as failure to fulfil these obligations can result in claims, in light of recent legal developments.
This increase in risk and the need for insurers to assess a company’s ESG (environmental, social and governance) performance in the underwriting process in view of these developments is clearly self-evident.