Companies, directors, governments and professional services firms face a growing risk of litigation over their climate change disclosure and emissions reduction policies in 2021, experts predict, as concerned citizens turn to the courts to spearhead environmental action.
It builds on a trend of climate change litigation that culminated in the Retail Employees Superannuation Trust (Rest) settlement in 2020, which for the first time forced the super fund to recognise climate change was a financial risk, and stress-test its portfolio against the Task Force on Climate-related Financial Disclosures (TCFD).
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Mark McVeigh's climate change court case against his superannuation
fund, Rest, triggered a move by the pension industry to commit to
net zero emissions. AFR
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But to Mr McVeigh, the effort was worth it: "It’s a really powerful way to get the ball moving on climate action in these industries."
The deal he reached with Rest was "as good, or better, than the best case scenario" he was after as the fund agreed to consider climate risk into its financial decisions.
Before the settlement, documents lodged in the lawsuit showed Rest denied it was obliged to act in accordance with "stress-testing" or demonstrate compliance with TCFD recommendations.
In the lawsuit, Rest agreed to conduct scenario analysis to inform its investment strategy and strategic asset allocation, disclose its entire portfolio holdings, and advocate as investors in companies to comply with the goals of the Paris Agreement, which seek to limit global warming by 1.5 degrees.
Disclosure the next 'big story'
King & Wood Mallesons partner Will Heath, who specialises in corporate governance, said “there’s no doubt the big story for next year will be requirements related to climate disclosure ... [which are] only set to expand”.
President-elect Joe Biden has committed to mandating companies disclose climate risk – mirroring action already taken by the EU – and Australia has historically followed America’s lead on such reforms.
Company directors have also faced barrages of questions on emissions reduction commitments and climate change mitigation at recent annual general meetings, and Mr Heath said there may be cases brought seeking to hold them accountable for their responses.
But with climate change disclosure in its infancy, Mr Heath said, companies are stuck between a rock and a hard place in terms of whether or not they are full and frank with investors.
“Whether you're a fund or a director of a fund, we’re in a world where you're damned if you do and damned if you don't [disclose climate risk],” he said.
“If you don't disclose, you'll be hit with a Rest-like action … but if you do, then you have no defence [if you get it wrong].”
But how strictly compliance with climate disclosure obligations was enforced is yet to play out, he said: "We're right at the Neil Armstrong moment where we're landing on the moon and we don't know where we are yet."
Mr Heath also noted there is not currently any defence for misleading or insufficient disclosures by directors, even when they undertook due diligence or made an honest mistake.
However, a recent parliamentary inquiry into litigation funding recommended that plaintiffs should need to prove directors and company officers acted with "knowledge, recklessness or negligence" when breaching their disclosure obligations, which, if enacted, may act as a defence.
Litigation funders themselves are also starting to "sniff around" climate change actions, suggesting they see potential for cases of the same scale as the asbestos and continuous disclosure obligations class actions they have favoured to date, the head of Norton Rose Fulbright's Australian climate practice, Elisa de Wit, said.
Governments in the dock
"The actions aren't there yet ... but if we follow a similar journey to asbestos claims, it could be that eventually, when we have our first successful damages claim made, then we'll see them piling in."
Noel Hutley, SC, recently updated his opinion that directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence, to suggest that individual directors could also face personal liability for doing so.
It is not just company directors and trustees in the firing line.
Katta O’Donnell, a fifth-year law student at La Trobe University, is suing the Australian government for misleading investors in sovereign bonds for failing to disclose the financial risk caused by climate change.
Ms O'Donnell claims the government has breached its legal duty to investors by not informing them of the financial risk they face.
“The risk is both physical and transitional – we confront the physical impacts of drought and bushfires and we also face the financial risks of an economy overexposed to fossil fuels as the world transitions to clean energy,” said David Barnden of Equity Generation Lawyers, who is Ms O'Donnell's lawyer and also represented Mark McVeigh in the Rest case.
The action comes as Dutch not-for-profit Urgenda set the stage for more legal action against governments for both their action and inaction in response to climate change, said Ms de Wit, who is also chair of the Carbon Market Institute and a director of Beyond Zero Emissions.
"We could see more [actions arguing] that governments are not adequately disclosing the risks of climate change or factoring it into decisions about whether developments should be allowed to take place."
Countries that have signed on to treaties such as the Paris Agreement but are not taking sufficient action to comply with their targets could also face actions, she added.
Australia's poor track record on climate – which saw Prime Minister Scott Morrison excluded from December's COP 26 Ambitions Summit, which precedes next year's global summit on climate change in Scotland – may leave it vulnerable to litigation, Ms de Wit said.
"Australia could be a bit of a target there because there is some concern about what Australians are not doing."
Not just coal
The range of companies and directors that may face climate change litigation is also set to expand from just the "carbon majors" of big oil, coal and gas production, according to Ms de Wit.
The agriculture industry is an obvious pick, she said, pointing to a decision by the New Zealand High Court in March to allow a case against dairy giant Fonterra to proceed to trial.
While the plaintiffs were ultimately unsuccessful in the tort actions they pursued, the court decided that the recognition of a new tortious duty that makes corporates responsible to the public for their emissions should be explored at trial.
She also predicted that litigants could use human rights protections as a lever for legal actions instead of relying on private law.
"So far they've largely been public nuisance or torts types of actions, but now we may see human rights being used as an angle more," she said.
Trickle-down strategy
Climate change actions also increasingly target defendants where there will be "trickle-down consequences" for other businesses as part of a strategy to maximise the reach of any successful case, according to Mr Heath.
“In terms of who is being sued, it’s super funds and companies that have such influence in the market that there will be trickle-down consequences for other companies,” he said.
“The litigation will be focused on banks, it will be focused on super funds, all who hold a lot of wealth that will trickle down.”
In this, he said, the Rest case was a “double victory” as the super fund committed to push its investee companies to comply with the goals of the Paris Agreement.
It could also see the professional services that advise defendants on their climate change disclosure or adaptation obligations face action.
“It’s trying to focus cases on all the things [companies] do and touch, so if you get a law firm or adviser in the dock and they're the test case ... then that will spread that out and there's a trickle-down across the legal industry, the accounting industry, the environmental consultants," Mr Heath said.
Links
- (AU) 2020 Climate Year in Review: Legal Insights
- (AU) Woodside Faces Challenge Over Burrup Hub LNG Plans Amid Pollution And Rock Art Fears
- (AU) Energy Giant Loses Bylong Coal Mine Appeal In Win For Anti-Coal Groups
- (NZ) Climate Change Refugees: The Landmark Case Of Teitiota V New Zealand
- Climate Lawsuit In The Netherlands Looks To Accelerate Change
- Climate Change Litigation Update
- (AU) Torres Strait Islander Complaint Against Climate Change Inaction Wins Backing Of UN Legal Experts
- (AU) Suing For Climate Action: Can The Courts Save Us From The Black Hole Of Political Inaction?
- (AU) Rest Super Fund Commits To Net-Zero Emission Investments After Brisbane Man Sues
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