Preparing for Climate Litigation: What Board Members Need to Know

Climate change and ESG-related litigation cases have more than doubled worldwide since 2015, and around 300 cases have been filed in 2021-2022 alone with broad geographical scope: 39 new cases in the US, and the remaining 122 cases in 43 countries and 15 international or regional courts. As of December 2022, the total number of historical cases has grown to 2,180. 

More than 50% of climate cases have direct judicial outcomes that can be understood as favorable to climate action.  

As a result, Climate and ESG litigation has influenced, directly and indirectly, companies’ abilities and incentives to offer products and services, or even adopt certain business models. With the heightened risk this poses, corporate boards must understand the dynamic landscape to better anticipate emerging risks and alter business strategies.  

Children and youth, women’s groups, local communities, advocacy organizations, and Indigenous Peoples, among others, are taking a prominent role in bringing these cases and driving climate change governance reform in more and more countries around the world.  

New legislative frameworks spur litigious action 

As the Securities and Exchange Commission (SEC) levels up its Climate disclosure requirements, businesses face intensifying regulatory pressure for transparency and accountability related to their GHG (greenhouse gas) emissions and other social and environmental impacts.  

To add to this pressure, last October California Governor Newsom signed a series of state laws that require many US companies to make broad-based climate-related disclosures starting as early as 2026. These laws will have a profound impact on companies doing business in California and the US market at large. The California bill’s disclosure requirements exceed the requirements of the SEC’s proposed climate-related disclosure rule as well as the current practices of most public companies. 

Businesses in the US are not alone in feeling the pressure, in fact, they would benefit greatly from studying the playbooks from their European, Australian, Canadian, Singaporean, and other counterparts as the global effort to decarbonize accelerates and manifests in widening and deepening regulation.   

When it comes to industry, oil and gas is the primary target of an increasing number of climate activists, environmental lawyers, and legislators who seek penalties for damages attributed to these companies’ responsibility for historic carbon emissions. Accordingly, the oil industry is facing a wave of litigation from municipalities that contend that the oil industry should be held liable for damages resulting from climate change. From an ESG perspective, companies face increasing legislation around not meeting corporate targets and misleading the public on progress across ESG criteria.  

Understanding the Types of Climate and ESG litigation 

As we’ll explore, the ever-increasing variety of litigation mirrors the expansiveness of the corporate Climate and ESG spectrum. These topics included, but are not limited to: climate change, pollution, environmental degradation, racism, food safety, human rights and trafficking violations, support to authoritarian states, sustainable farming, diversity in the board and senior management, and more. Currently, Climate and ESG litigation can be segmented as follows: 

1. Disclosure-based litigation: A company’s statements about a Climate or ESG issue are challenged for allegedly being misleading or deceptive 
2. Conduct-based litigation: A company’s underlying activities are directly challenged for allegedly violating a law addressing a Climate or ESG issue 
3. Governance-based litigation: A company’s leadership is challenged for allegedly failing to satisfy fiduciary duties and other obligations attendant to its role in managing the business and affairs of the business enterprise with respect to a Climate or ESG issue  

ESG-related enforcement actions by the SEC 

In March 2021, the SEC announced the creation of a Climate and ESG Task Force (Task Force) within the Division of Enforcement that is tasked with developing initiatives to proactively identify ESG-related misconduct and focus on material gaps or misstatements in issuers’ disclosure of climate risks under existing rules (SEC: SEC Announces Enforcement Task Force Focused on Climate and ESG Issues). Since then, the Task Force has brought multiple ESG-related enforcement actions. 

In one high-profile example, the Task Force brought an enforcement action against Vale, S.A., a Brazilian mining company, for securities fraud following the collapse of one of its mines, which resulted in numerous deaths and extensive harm to the environment. The SEC claimed that Vale had manipulated its safety audits, obtained fraudulent stability certificates, and misstated to investors that its mines met safety standards. 

US Supreme Court increasing Climate and ESG litigation risk  

These discussions around Climate litigation have already ascended to the US Supreme Court, which has rejected a bid by Chevron Corp, BP Plc and other major oil companies to have the court weigh-in on their attempts to keep lawsuits over their contributions to climate change in federal court.  

The high court did not explain its reasoning for denying the oil companies’ petition for review of a 9th US Circuit Court of Appeals ruling in the climate change cases (brought by Oakland and San Francisco). The companies had petitioned the justices in January 2021 to grant review in the event defendants did not prevail in a case involving similar allegations, BP Plc v. Baltimore. The Supreme Court ruled in favor of the oil companies in the Baltimore case in May of that same year. Needless to say, this is just the start of a wave of anticipated climate litigation in the US.
 

Greenwashing and “Climatewashing” actions ramp up 

Preventing accusations of greenwashing and climatewashing has become an increasingly challenging area for businesses across every sector and jurisdiction. This is an area of particular risk given the requirements (both regulatory and emanating from a range of stakeholders) to clearly set out corporate decarbonization and other ESG aspirations. As a result of a European Commission screening exercise in 2021, their report revealed that 42% of websites contained environmental claims that were false, deceptive, or exaggerated and could qualify as unfair commercial practice under EU regulations. Moreover, in 59% of cases, the trader has not provided easily accessible evidence to support its claim.  

On the litigation front, there is a material shift in focus in claims away from overt misstatements about a business’s decarbonization credentials or expectations, towards misrepresentations based on omissions or implicit misstatements. Such claims also increasingly involve scrutiny of the scientific evidence behind corporate claims, such that their attainability can be directly challenged. For example, in Australasian Centre for Corporate Responsibility (ACCR) v. Santos, the claimant alleges that Santos’s projection in its annual report – that it would achieve net zero emissions by 2040 – relies upon carbon capture and storage technologies that do not yet exist or the viability of which have not been tested, and also on offsets that Santos has yet to seek to procure (and are therefore not guaranteed).  

Similarly, another recurring theme is for claimants to leverage definitions of terms like “net-zero” in independent frameworks such as the Greenhouse Gas Protocol (GHGP) or the Science Based Targets initiative (SBTi) to test and evaluate businesses’ use of these terms. 

Climate attribution sciences makes waves 

In addition to the legal and market pressures, major advances in science are spurring new climate-specific action. Recent scientific developments related to climate attribution science have drawn significant public attention; climate attribution science makes evidence-based connections between increasingly frequent weather events and greenhouse gas emissions. Connections have been made to California heat waves and Midwest flooding, and the warming of Earth’s climate, which makes all such events more likely.  

This domain of attribution science, known as extreme event attribution, may have the power to quantify the contribution of individual companies to climate change.  

Source attribution has been progressed by many scientists, and Richard Heede, in particular, is leading the effort. He has dedicated years to compiling a database of historic greenhouse emissions, which has resulted in a 2014 report that traced two-thirds of industrial carbon dioxide emissions, and 43% of total atmospheric carbon increase, to just 90 companies.  

More recently, Chief Climate Scientist at the Union of Concerned Scientists advanced Heede’s research to its next step of translating these 90 companies’ emission into climate impacts. As a result, scientists concluded that the companies’ emissions drove three inches of sea level rise, nearly half of the seven inches of total sea level rise during the 130-year span.
 

Attribution science as evidence for climate and environmental damages  

As could be imagined, potential climate litigants are now anxious to understand the extent to which source attribution can provide evidence in cases that seek reparations for climate damage.  

The challenge climate litigators will face, much like the legal history of action against tobacco companies, is that climate attribution is a probabilistic discipline and not deterministic. In simpler terms, scientists can show how climate change may have created conditions that make a drought, flood or fire more likely. However, scientists cannot say emissions were the definite cause of a specific instance of extreme weather.  

As was the case with Tobacco litigation, the societal significance of such damages will likely be key for climate damages. Nevertheless, it will be an uphill battle for those making the cases.  

However, if a company, as in the instance of Exxon, fully understood the climate danger posed by its business, a company will be more vulnerable. This is why Massachusetts and New York’s efforts to access Exxon’s internal records are so fraught and why the company has pushed back hard as it has to keep the records hidden.  

More than half of total cumulative emissions happened after 1986, which was after the oil industry (including Exxon) understood the impact of oil, gas and coal emissions. Many existing lawsuits cite investigative reporting that Exxon Mobil Corp. privately knew in the 1970s that burning fossil fuels would cause catastrophic climate impacts.  

Oil companies as canaries in the coal mine  

As oil and gas companies face more legal scrutiny for their role in causing climate change, environmental lawyers are turning their attention to another leading sources of planet-warming emissions – the auto industry. Recent investigation found that scientists at Ford Motor Co. and General Motors Co. knew as early as the 1960s that car emissions caused climate changes; in the following decades, however, these companies still decided to ramp up the production of less fuel-efficient trucks and SUVs and lobbied against national and international climate policy.  

These actions speak to the broader trend of climate action lawsuits against both governments and corporations have spread across 65 countries. A 2019 London School of Economics study revealed that more than 1,300 legal actions concerning climate change have been brought since 1990. The US is the leader in climate litigation, with 1,023 cases (at the time of the study). Co-author of the report, Joana Setzer, summarized the trend well “People and environmental groups are forcing governments and companies into court for failing to act on climate change, and not just in the US. The number of countries in which people are taking climate change court action is likely to continue to rise.”

Legal reform in the EU opens doors for new climate litigation  

US multi-national corporations are familiar with the Brussells Effect and should be prepared for more. In October of last year, the EU Parliament gave its final approval to a landmark reform of EU access to justice laws. It lifted the main barriers preventing NGOs and people from challenging environmental wrongdoings in court.  

The legal basis of the activity in the EU is the Aarhus Convention, which is an international treaty signed in 1998 by all EU member states as well as the EU in its own right, which enshrines the public’s right to access environmental information, public participation in environmental decision making and access to justice. In 2006 it adopted an EU access to justice law called the Aarhus Regulation, which created an internal review mechanism designed to allow NGOs to ask EU institutions to reconsider their own decisions on the basis that they break the law and bring the matter before the EU Courts if the institution refused to do so.  

Climate and ESG litigation costs will be both direct and indirect 

As more case law precedent is being established globally, there are two principal types of costs associated with litigation:  

• Direct costs stem from payment of legal fees, penalties, settlements, and any other form of cash for the purpose of pursuing or defending against litigation 

• Indirect costs include opportunity costs, for example associated with the cash an issuer keeps on its balance sheet to hedge against the financial impact of an unfavorable ruling or the amount of time management spends on preparing for trials, as well as intangible costs, such as the impact on a business’ reputation from being named as a defendant in climate-related lawsuit  

To see this play out let’s examine the case of Milieudefensie v. Royal Dutch Shell, in which a Dutch court ruled in 2021 that Shell had to reduce greenhouse gas emissions by 45% relative to the 2019 levels. The allocations of scopes 1, 2, and 3 emissions in the 45% is flexible. However, a certain amount must come from scope 3, which accounts for nearly all of oil and gas companies’ greenhouse gas emissions. How does this affect Shell? What will its associated litigation costs be? If the ruling is confirmed, it will have an immediate operational impact and require that its oil and gas operations be reduced. Also, it may affect Shell’s value chain because of legacy suppliers and the competition they will face from suppliers with less-emissions-intensive offerings. Finally, this will likely impact Shell’s expansion decisions by making certain fossil fuel projects less attractive and, ultimately, lucrative for shareholders.  

What happens next? Companies enter a phase of action and litigation readiness  

As more of these impacts are felt by oil and auto companies, second- and third-degree impacts may come quickly. Businesses with heavy carbon assets must consider downstream impacts and litigation risk and begin due diligence. For those without this type of asset portfolio, a review of partnerships, upstream and downstream carbon emissions and the sustainability of current operating models are all important steps. 

Moreover, any organization with public or voluntary ESG, Sustainability disclosure reporting must also take action and evaluate their readiness.
 

Key takeaways for board members:  

For the foreseeable future, Climate and ESG litigation will only become a larger legal risk for companies. Directors still must oversee the creation of value, even while navigating more turbulent waters and the potential for personal liability. This will take multi-dimensional approaches and consistent effort.  

We suggest the following practical steps to be better equipped for this challenging responsibility: 

• Directors should understand the specific legal risks presented by various forms of Climate and ESG litigation. They should seek out counsel from in-house legal and compliance departments, corporate management, and outside counsel and advisors on an ongoing basis 

• Given the diversity of types of Climate and ESG litigation, directors should engaged with counsel to inventory and address risks across the spectrum: (i) disclosure-based litigation, (ii) conduct-based litigation, (iii) government-based litigation 

• Keeping informed of developments and trends in Climate and ESG litigation and how it affects their market, competitors and customers will be critical 

• The board should determine whether risk management relating to Climate and ESG litigation should be overseen by the full board of directors or a dedicated board committee 

• Companies should complete an annual risk assessment of Climate and ESG litigation 

• Implement controls to ensure you have individuals in the right roles assigned to monitor and report on progress. They should have regular testing mechanisms like other compliance and financial areas 

• Board directors should integrate identified and prioritized Climate and ESG litigation risks into the corporation’s enterprise risk management process 

• Regular trainings and education should be offered to corporate directors to ensure sufficient familiarity and expertise 

• Risks should be evaluated on the short-, medium-, and long-term insurability, given the dramatic shifts in the corporate insurance landscape 

Questions for the board room: 

• Do we understand our current climate and ESG litigation exposure? If not, how do we get there as soon as possible? 

• What modifications do we need to make to our governance process and structure to identify, mitigate, and manage Climate and ESG litigation risks? 

• How do will we track this growing roster of case law and what it means for our business?  

• Who in our value and supply chain, potential partners and clients are impacted by Climate and ESG litigation risk? 

• What will the potential liability be for both management team and corporate directors? 

• How does our risk exposure modulate by jurisdiction? 

• What are the projected direct and indirect costs associated with the top risks identified? 

Additional Telesto resources: 

Find additional information on how to get started with ESG, build topical familiarity with our ESG Glossary as well as Telesto’s ESG Maturity Model. Continue your learning with additional Telesto resources: SEC Climate Ruling, California Climate Disclosure Requirements, CSRD, ESG and Cyber, Sustainability Trends, and more.