Preparing for climate litigation and shareholder action
Increasing climate litigation expected
There is a growing volume of climate-related legal actions globally, particularly against energy companies, financial firms and governments.
Climate litigation is taking a number of forms, across multiple jurisdictions. In Australia, a wave of climate activism and interest has given rise to increased litigation and regulatory action. Of the extensive actions in Australia and across the globe, pertinent cases include:
- Shareholder and investor litigation: shareholder and investor action has been prolific in the United States. In Australia, litigation is on foot between superannuation fund REST and one of its members in relation to the disclosure and provision of information concerning climate-related risks. If the case proceeds to trial, it may provide judicial guidance on the scope of superannuation trustees’ duties to obtain and disclose information about climate-related risks.
- Tort claims: tort claims are emerging as a key means of recourse against corporates. These claims are often novel, relying on untested application of laws on nuisance and negligence to allegations of harm arising from localised emissions. In Germany, a Peruvian farmer has filed a claim against RWE in general nuisance under the German Civil Code. The plaintiff is suing for damage caused by environmental change that he alleges arises (in part) from RWE’s percentage of global emissions since industrialisation. A number of claims have been filed in the US in public nuisance against large emitters. In Australia, plaintiff advocates are working to formulate claims against Australian- based companies, and so we believe such actions are imminent.
- Human rights complaints: many judicial and non-judicial complaints are formulated as human rights harms arising from climate change impacts. A particularly interesting one is the Philippines Human Rights Commission, which has been hearing allegations that 51 major emitters, including a number of companies with a significant Australian presence, have collectively contributed to climate change, and as a result violated Filipinos’ basic rights.
- Regulatory investigations: Regulators are also taking more interest, and a number of investigations and actions are on foot. In 2019 ExxonMobil successfully defended proceedings in the New York courts concerning whether it had misled investors on the climate change-related costs associated with its business operations.
Claims against governments and regulatory agencies are another growing trend. In New South Wales, a group of bushfire survivors has recently issued proceedings against the Environmental Protection Agency to try to prompt the Agency to use its statutory powers in relation to climate change, including setting limits on greenhouse emissions and enforcing them.
Asset-specific litigation and public law challenges are also becoming more common (see Climate Change and Project Approvals for more information), as are complaints under soft law mechanisms (see Voluntary Schemes and Soft Law for more information).
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Many commentators, including former Chief Justice French, have predicted a continued rise in climate change litigation in Australia.
The key drivers in Australia for climate change litigation against companies are:
- Dissatisfaction amongst the public interest sector in the Federal Government’s strategy to mitigate climate change, making climate litigation an attractive avenue to attempt to drive change;
- Increasing cost to cities and states of climate adaptation and mitigation measures;
- Developments in event attribution and a better understanding of the causal links between emissions sources and climate-related loss and damage;
- Appetite among private plaintiffs (such as investors and NGOs) for litigation focused on corporate accountability for climate change;
- Better resourcing of public interest litigants, some of which are now able to, eg provide security for costs; and
- extreme weather events, such as bushfires, causing property damage.
In this environment, we consider there to be a significant risk of organisations discounting the possibility of climate-related litigation affecting their businesses, or (noting the broad range of causes of actions and forums available to litigants to prosecute climate-related cases) to misapprehend their greatest sources of climate litigation risk.
Asking the right questions
An assessment of climate litigation risk should involve considering the following questions:
- Has your organisation identified its legal duties, both common law and statutory, in relation to the full spectrum of climate-related risks? Where are the vulnerabilities, and what is the potential quantum of exposure (to the extent this is known)?
- Has your organisation identified potential litigation pathways against it in relation to climate risk, and (noting the creativity displayed by public interest litigants) is it thinking broadly when doing so?
- Are your corporate governance and compliance management frameworks for climate-related risks in line with recent guidance?
- How is the business talking to stakeholders about climate risk mitigation?
- When compared with industry peers, is there a risk of standing out as a ‘laggard’ (and therefore possibly a target for public interest litigation)? Is your organisation comfortable that its responses to stakeholder inquiries about climate change are robust and, where appropriate, subject to legal review?
- Do you have continuous improvement processes in place to ensure you periodically assess your response to climate-related risks against regulatory requirements and community expectations, and against available data and modelling frameworks? The targets of litigation are more likely to be those considered out of step or lagging.
Shareholders are becoming increasingly aware of climate change risks.
Since early 2017, both Australian and foreign companies have faced a wave of climate change-related shareholder activism. Ceres maintains a Climate and Sustainability Shareholder Resolutions Database, which at February 2020 showed around 1,068 resolutions that had been put to companies worldwide since early 2017.
In 2020, advisory resolutions requiring energy companies to set scope 3 emissions targets have attracted close to, or over, 50% support from investors and funds.
The 2015 Federal Court case of Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia, and its subsequent appeal, demonstrate the limits of shareholder activism in Australia. Shareholders cannot propose resolutions that seek to ‘usurp the powers’ of directors, nor can shareholders propose advisory resolutions. This means shareholders typically cannot propose resolutions, eg expressing the opinion that the directors are failing to adequately account for climate change risk. Where shareholders can propose a resolution, it is open to — and indeed incumbent upon — directors to comment on the merits of the resolution (or lack thereof). This means directors may advise the general meeting that the proposed resolution is not in the best interests of the company.
During the 2019 AGM season, superfunds were present in pushing companies to act on climate change, while activist shareholders doubled down on the call from regulators to ensure disclosures align with the TCFD recommendations.
Shareholder resolutions were brought by Market Forces and the Australasian Centre for Corporate Responsibility (ACCR) against a number of companies.
In light of the decision in ACCR v CBA above, both Market Forces and the ACCR proposed special resolutions to amend the constitutions of these companies to allow shareholders by ordinary resolution at an AGM to express an opinion, make a request or ask for information about the way in which a power of the company vested in the directors had been, or should have been, exercised.
At the same time, Market Forces and the ACCR proposed ordinary resolutions contingent on the amendment of the company’s constitution. The ordinary resolutions included:
- 'Transition planning disclosure’ – that companies disclose strategies and targets to reduce exposure to fossil fuel assets in line with the Paris Agreement, including eliminating exposure to thermal coal in OECD countries by 2030 (Market Forces).
- ‘Lobbying inconsistent with the goals of the Paris Agreement’ – that the companies suspend memberships of industry associations where a major function of that association is to undertake lobbying that is, on balance, inconsistent with the goals of the Paris Agreement (ACCR).
- ‘Paris goals and targets’ – that the board disclose details of how the company’s capital expenditure is aligned with the Paris Agreement; targets for reductions in the company’s emissions; and details of how the company’s remuneration policy will incentivise progress against the targets (ACCR).
- ‘Exposure reduction targets’ – that the company disclose targets to reduce investment and underwriting exposure to coal, oil and gas assets, along with plans and progress to achieve the targets (Market Forces).
As none of the special resolutions were passed, the ordinary resolutions above, which were contingent on the amendment, could not be put. However, the voting data is still available. The resolutions put by the ACCR relating to lobbying attracted the greatest support, receiving between roughly 15% and 30% support. The resolution put by Market Forces to a number of companies relating to ‘transition planning disclosure’ also attracted 30.33% support in one instance, but less than 10% support from the shareholders of some other companies.
‘In 2018 there were 17 shareholder resolutions submitted to shareholder meetings, of which 14 related to disclosure of climate risk, emissions or targets.’
Governance Institute of Australia, Climate change risk disclosure: A practical guide to reporting against ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (February 2020)
While relatively few resolutions have been successful in Australia to date, some have resulted in changes to climate change practices, and shareholder support for such resolutions is increasing.
Shareholder resolutions can be a signifier of general interest in a company’s activities, and can be a precursor to more sustained activism, including judicial and/or non-judicial complaints. Unless managed appropriately, shareholder activism can also have adverse reputational and commercial impacts.
Asking the right questions
- Has your organisation mapped out its stakeholder profile and assessed the likelihood that any stakeholder constituency might raise concerns about your organisation’s current approach to managing climate change-related risk?
- Does your organisation have a strategy for engaging with your stakeholders (such as investors and civil society) ahead of AGM season, and how effective is that strategy?
- Does your organisation assess likely resolutions to be put, and questions to be asked, and have appropriate responses?
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