Climate Change Litigation: Corporate and Board Members At Risk

With the effects of global warming becoming clear around the globe, it is no surprise that climate change-related litigation has skyrocketed.

As of May 2021, more than 1,800 climate change cases have been brought globally, three-quarters of which in the U.S.
Climate Change Litigation Cases to May 31 2021. Source: LSE Grantham Institute’s Climate Change Laws of the World database (CCLW) and Sabin Center data
Chart: Total Cases Over Time to May 2021. Note: Due to the high volume of litigation in the U.S., U.S. and non-U.S. data are shown separately.Source: Authors based on CCLW and Sabin Center data.

The first wave of this litigation was primarily directed toward state and federal governments over their alleged failure to take appropriate action to curb the harmful effects of climate change. These claims have largely been based on alleged constitutional or human rights violations and tort law theories such as nuisance and failure to warn.

In a landmark ruling in 2019 in the Urgenda case, the Supreme Court of The Netherlands found that the Dutch government had obligations to urgently and significantly reduce emissions (setting a 25% target by the end of 2020 compared to 1990 levels), in line with its international human rights obligations. This trend has continued apace, and in October 2021, the Paris administrative tribunal found the French State in breach of its obligations to fight climate change, ordering the government to take all necessary measures by the end of 2022 to make up for the harm caused by its failure to meet emissions targets between 2015 and 2018.

As climate change litigation has come into greater focus around the world, environmentalist plaintiffs have broadened their legal theories to also include corporate defendants, with fossil fuel companies at the top of the list. Other industries with a heavy environmental impact – such as aviation, steel and pharmaceuticals – are expected to be future targets.

33 ongoing climate cases worldwide against carbon majors as of July 2021

But the threat of climate change litigation is not limited to particular companies or industries. Corporate investors and stakeholders as well as regulators around the world are increasingly demanding more disclosures in connection with environmental risks and opportunities.  While a lack of disclosure regarding climate risks may lead to claims, disclosure may also form the basis of claims, whether as a basis for establishing liability, or in complaints about alleged “greenwashing”.  Companies should closely monitor these issues and ensure accurate, careful disclosure, with a view to potential liability risks.

Shell: A Game-Changing Ruling?

On 26 May 2021, The Hague District Court made a ground-breaking ruling against Royal Dutch Shell plc (“Shell”), ordering the company to reduce its worldwide CO2 emissions by 45% by 2030 (compared to 2019 levels), in line with targets set out in the UN Paris Agreement.

Paris Agreement to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels

This was the first time any court in the world had imposed a duty on a company to do its share to prevent climate change. Shell is appealing the ruling, but in the meantime, it is required to start complying with it.

The class action lawsuit was filed against Shell in 2019, brought by Milieudefensie (Friends of the Earth Netherlands) and six other Dutch nongovernmental organisations, plus around 17,000 individual co-claimants.

The claimants argued that Shell had not done enough to reduce emissions generated by its entire group. They asserted that this breached the “tortious act” provision in Article 6:162 of the Dutch Civil Code, as further informed by Articles 2 and 8 of the European Convention on Human Rights: the right to life, and the right to respect for private and family life.

Dutch Court Orders Shell to Reduce Emissions in First Climate Change Ruling Against Company In a groundbreaking judgment delivered on May 26, 2021, The Hague District Court ordered Royal Dutch Shell plc (“Shell”) to reduce its worldwide CO2 emissions by 45% by 2030 (compared to 2019 levels). Based on an unwritten duty of care in Dutch tort law, the Court recognized that Shell has an “obligation of result” to reduce CO2 emissions resulting from the Shell group’s activities, and a “best-efforts obligation” to reduce emissions generated by its business relations, including suppliers and end-users.  While Shell was not yet found to be in violation of its reduction obligation, the Court held there was danger of “imminent breach” because it considered Shell’s climate policies insufficient.

Shell acknowledged that emissions should generally be cut, but disputed that it was under an individual, enforceable obligation to reduce these through its group-wide policies. The Court rejected Shell’s arguments, including its assertion that there was not enough of a causal link between Shell’s own emissions and global climate change; and that the financial burden on the company was too great, and that an obligation to reduce emissions would harm the “level playing field” between Shell and its competitors in the oil and gas market.

The Shell ruling was based on the Dutch Civil Code and principles of Dutch law, and while it could certainly affect companies with a presence in that jurisdiction, it is possible that other European courts, particularly in civil law jurisdictions, will be influenced by the decision of The Hague District Court.

In the U.S., the impact may in principle be more limited considering differences in U.S. law and policy. More generally, claimants in the U.S. have struggled to overcome threshold hurdles such as jurisdiction and standing, and the courts have generally been reluctant to wade into climate change issues for fear of intruding into the realm of the political branches.

That said, such a high-profile victory in the Dutch courts may give environmental activists fresh impetus to try and push the boundaries of tort law in the U.S. as well. The CEOs of Exxon, BP, Shell and Chevron appeared before the U.S. House Committee on Oversight and Reform on 28 October 2021 (just before the start of the UN’s COP26 summit in Glasgow), with lines of questioning and document requests from the House Committee focusing on the extent to which energy companies are alleged to have supported misleading campaigns questioning the severity of climate change, and lobbied against climate legislation.

This scrutiny could mark the beginning of a transformative “tobacco” moment for the fossil fuel industry and transform the way in which courts see corporate financial responsibility for climate change

Shell acknowledged that emissions should generally be cut, but disputed that it was under an individual, enforceable obligation to reduce these through its group-wide policies. The Court rejected Shell’s arguments, including its assertion that there was not enough of a causal link between Shell’s own emissions and global climate change; and that the financial burden on the company was too great, and that an obligation to reduce emissions would harm the “level playing field” between Shell and its competitors in the oil and gas market.

The Shell ruling was based on the Dutch Civil Code and principles of Dutch law, and while it could certainly affect companies with a presence in that jurisdiction, it is possible that other European courts, particularly in civil law jurisdictions, will be influenced by the decision of The Hague District Court.

In the U.S., the impact may in principle be more limited considering differences in U.S. law and policy. More generally, claimants in the U.S. have struggled to overcome threshold hurdles such as jurisdiction and standing, and the courts have generally been reluctant to wade into climate change issues for fear of intruding into the realm of the political branches.

That said, such a high-profile victory in the Dutch courts may give environmental activists fresh impetus to try and push the boundaries of tort law in the U.S. as well. The CEOs of Exxon, BP, Shell and Chevron appeared before the U.S. House Committee on Oversight and Reform on 28 October 2021 (just before the start of the UN’s COP26 summit in Glasgow), with lines of questioning and document requests from the House Committee focusing on the extent to which energy companies are alleged to have supported misleading campaigns questioning the severity of climate change, and lobbied against climate legislation.

Parent Company Liability

Another key ruling against Shell in the past year could also have far-reaching implications for companies with subsidiaries around the globe. In February 2021, the UK Supreme Court in the Okpabi case gave Nigerian communities the green light to sue the English parent entity of the Shell group in the English courts, even though the pollution was allegedly caused by the operations of Shell’s Nigerian subsidiary. The UK Supreme Court held that the Nigerian claimants had an arguable case against Shell, which is now proceeding. 

A few weeks earlier, a Dutch Court of Appeals found that Shell owed a limited duty of care to the claimants, four Nigerian farmers (bringing the claim alongside NGO Milieudefensie).

Whether parent companies can be sued for the actions of their subsidiaries is a crucial question for global corporations. The greater the degree of management and control that the parent company has over its subsidiary, the more likely it is that a duty of care may be found to arise.

A key ruling on this issue was given by the UK Supreme Court in 2019, in Vedanta. The UK Supreme Court held that some 1,826 Zambian villagers had an arguable claim against UK mining company Vedanta Resources Limited and its Zambian subsidiary, Konkola Copper Mines plc. This was because the parent company had not only published group-wide policies and guidelines relating to standards of environmental control, but had actually implemented these through training, monitoring and enforcement. The court therefore ruled that there was a good arguable case that the parent entity owed a duty of care to the claimants, allowing the case to proceed on the merits.

Parent companies seeking to impose environmental standards on their subsidiaries face a difficult balancing act if they are to avoid being sued in their home courts for the actions of their subsidiaries. While from a business and environmental standpoint, they may wish to take a more pro-active approach to ensuring that group-wide policies are properly implemented, the liability principles set out in Vedanta may have a chilling effect on any pro-active approach.

Whether parent companies can be sued for the actions of their subsidiaries is a crucial question for global corporations

Another key ruling against Shell in the past year could also have far-reaching implications for companies with subsidiaries around the globe. In February 2021, the UK Supreme Court in the Okpabi case gave Nigerian communities the green light to sue the English parent entity of the Shell group in the English courts, even though the pollution was allegedly caused by the operations of Shell’s Nigerian subsidiary. The UK Supreme Court held that the Nigerian claimants had an arguable case against Shell, which is now proceeding. 

A few weeks earlier, a Dutch Court of Appeals found that Shell owed a limited duty of care to the claimants, four Nigerian farmers (bringing the claim alongside NGO Milieudefensie).

Whether parent companies can be sued for the actions of their subsidiaries is a crucial question for global corporations. The greater the degree of management and control that the parent company has over its subsidiary, the more likely it is that a duty of care may be found to arise.

A key ruling on this issue was given by the UK Supreme Court in 2019, in Vedanta. The UK Supreme Court held that some 1,826 Zambian villagers had an arguable claim against UK mining company Vedanta Resources Limited and its Zambian subsidiary, Konkola Copper Mines plc. This was because the parent company had not only published group-wide policies and guidelines relating to standards of environmental control, but had actually implemented these through training, monitoring and enforcement. The court therefore ruled that there was a good arguable case that the parent entity owed a duty of care to the claimants, allowing the case to proceed on the merits.

Parent companies seeking to impose environmental standards on their subsidiaries face a difficult balancing act if they are to avoid being sued in their home courts for the actions of their subsidiaries. While from a business and environmental standpoint, they may wish to take a more pro-active approach to ensuring that group-wide policies are properly implemented, the liability principles set out in Vedanta may have a chilling effect on any pro-active approach.

Disclosure-Based Claims

Companies are under increasing pressure from regulators, investors, and the public at large to be more open about how their activities affect the environment. Indeed, many environmental organisations now encourage their members to invest in public companies and to vote their representatives onto the board, in a bid to improve corporate social responsibility. 

Companies are under increasing pressure from regulators, investors, and the public at large to be more open about how their activities affect the environment

In the U.S.

The Securities and Exchange Commission (“SEC”) is considering creating rules on climate change disclosures and is seeking public comment on the topic. This recently prompted some of the biggest U.S. corporates to file a joint letter asking the SEC to keep climate change reporting out of public filings. The companies stressed that they were committed to fighting climate change and willing to provide such disclosures, but they feared that being required to do so by law would put them at undue risk of litigation, in particular for material misstatements or omissions.

In the EU

So-called “large public-interest entities” (such as banks and listed companies) must already comply with obligations to report the impact of the company’s activity on climate change, as well as the impact of climate change on the company – for example, its exposure to climate-related extreme weather events, sudden market changes, or reputational risk. The number of EU companies subject to ESG disclosure requirements will more than quadruple in 2023, under new draft rules.

In the U.S.

The Securities and Exchange Commission (“SEC”) is considering creating rules on climate change disclosures and is seeking public comment on the topic. This recently prompted some of the biggest U.S. corporates to file a joint letter asking the SEC to keep climate change reporting out of public filings. The companies stressed that they were committed to fighting climate change and willing to provide such disclosures, but they feared that being required to do so by law would put them at undue risk of litigation, in particular for material misstatements or omissions.

In the EU

So-called “large public-interest entities” (such as banks and listed companies) must already comply with obligations to report the impact of the company’s activity on climate change, as well as the impact of climate change on the company – for example, its exposure to climate-related extreme weather events, sudden market changes, or reputational risk. The number of EU companies subject to ESG disclosure requirements will more than quadruple in 2023, under new draft rules.

Under the EU’s new rules, the number of firms obliged to report sustainability data will shoot up from 11,700 to 49,000 covering three quarters of all EU-based companies

But even without regulatory requirements, there is now societal pressure on companies to make voluntary disclosures relating to climate change. All this has led to a new category of climate change litigation, based on voluntary disclosures made to shareholders or the wider public. As discussed, in Vedanta, a sustainability report published by the parent entity that included general statements about the corporate oversight by the parent’s board of its subsidiaries in ESG matters was held to be indicative that the claimant had a good arguable case that a duty of care was owed by the parent entity.  

This is an area that reaches well beyond the fossil fuel or other high-polluting sectors, to include any business that makes environmental statements.

"Greenwashing"

There has been a rise in lawsuits brought by state and local regulators in the U.S., as well as private individuals and shareholders, which claim that environmental disclosures were fraudulent, or inadequate. In particular, many claims accuse companies of “greenwashing” by over-emphasising or exaggerating the environmental benefits of their products or underplaying the climate change risks of their activities.

There has been a rise in lawsuits brought by state and local regulators in the U.S., as well as private individuals and shareholders, which claim that environmental disclosures were fraudulent, or inadequate

For example, a food processing company faces litigation in the Superior Court of the District of Columbia over allegations that it made deceptive sustainability and animal welfare claims about its products. The food company recently lost a motion to dismiss the claim, which is now pending.

Meanwhile in May 2021, shareholders filed a securities class action in the Eastern District of New York, accusing Danimer Scientific of making material misstatements or omissions about the biodegradability of its plant-based plastics, as found in straws. The lawsuit followed an article in The Wall Street Journal questioning how quickly the products break down in the ocean.

40% of websites analysed by the International Consumer Protection Enforcement Network were found to include misleading environmental claims

Similar disclosure-related lawsuits have been filed throughout the U.S., alleging that companies have violated state unfair trade practices acts, consumer fraud acts, and other legislation.

Such litigation is also becoming more common outside the U.S., and one case in particular shows how the net has widened for this type of claim, which can now even include actions against banks: Abrahams v. Commonwealth Bank of Australia (2017).

In the Abrahams case, two shareholders sued the bank, alleging that its annual report did not adequately disclose the risks that climate change posed to its financial stability. In particular, the claimants professed concern that the bank had not refused to invest in a controversial coal mine in Australia, which had faced widespread protests.

The two shareholders withdrew their action when the bank agreed to include a disclosure acknowledging the risks of climate change and denied investing in the mine. But the shareholders clearly kept a watching brief.

On 27 August 2021, they filed a fresh action in Australia’s Federal Court seeking authorisation to inspect the companies’ records in relation to seven oil and gas projects. The shareholders say they are concerned that the bank does not have the internal systems needed to ensure its compliance with its own policies.

Risks in the Boardroom

In addition to claims against corporations and parent entities, board of directors are unlikely to escape scrutiny. The number of climate claims brought against private defendants is currently small, compared to that against corporations or states.

Chart: Non-U.S. Climate Claims by Defendant. Source: Sabin Center for Climate Change Law

That said, various legal frameworks may permit claims against directors. Some have considered the risk of potential liability under section 172 of the UK Companies Act 2006, for example, which requires company directors to have regard to the impact of the company’s operations on the community and the environment in their decision-making. Breaches of directors’ duties can lead to derivative claims brought by shareholders on behalf of the company, as well as civil and, in some circumstances, even criminal liability. In the U.S., following wildfires across California in 2017 and 2018, various claims were brought against directors of utilities company Pacific Gas & Electric, in particular derivative actions by shareholders alleging that PG&E directors breached their fiduciary duties, including the duty of oversight in connection with the alleged role of PG&E’s power transmission equipment in the wildfires. Claims of this sort against directors, which are pending, may well proliferate.

Pressure on boards may also come from activist investors. In May 2021, activist investor Engine No. 1 sent shockwaves across the energy sector with its proxy battle with ExxonMobil, electing three directors to ExxonMobil’s board.

Breaches of directors’ duties can lead to derivative claims brought by shareholders on behalf of the company, as well as civil and, in some circumstances, even criminal liability

In addition to claims against corporations and parent entities, board of directors are unlikely to escape scrutiny. The number of climate claims brought against private defendants is currently small, compared to that against corporations or states.

Chart: Non-U.S. Climate Claims by Defendant. Source: Sabin Center for Climate Change Law

That said, various legal frameworks may permit claims against directors. Some have considered the risk of potential liability under section 172 of the UK Companies Act 2006, for example, which requires company directors to have regard to the impact of the company’s operations on the community and the environment in their decision-making. Breaches of directors’ duties can lead to derivative claims brought by shareholders on behalf of the company, as well as civil and, in some circumstances, even criminal liability. In the U.S., following wildfires across California in 2017 and 2018, various claims were brought against directors of utilities company Pacific Gas & Electric, in particular derivative actions by shareholders alleging that PG&E directors breached their fiduciary duties, including the duty of oversight in connection with the alleged role of PG&E’s power transmission equipment in the wildfires. Claims of this sort against directors, which are pending, may well proliferate.

Pressure on boards may also come from activist investors. In May 2021, activist investor Engine No. 1 sent shockwaves across the energy sector with its proxy battle with ExxonMobil, electing three directors to ExxonMobil’s board.

Breaches of directors’ duties can lead to derivative claims brought by shareholders on behalf of the company, as well as civil and, in some circumstances, even criminal liability

Conclusion

As the proliferation of rulings in the last year shows, climate litigation is moving quickly. Court rulings in one jurisdiction can quickly open the floodgates, as courts in other jurisdictions may borrow from findings, especially where legal frameworks overlap. Courts, particularly in the EU, are exercising their jurisdiction increasingly broadly, a trend described by some as a form of “judicial activism”. Courts in the U.S., and globally, may well follow suit.

Jeff Rosenthal
Partner

New York
T: +1 212 225 2086
jrosenthal@cgsh.com
V-Card

Roger A. Cooper
Partner

New York
T: +1 212 225 2283
racooper@cgsh.com
V-Card

Maurits Dolmans
Partner

London
T: +44 20 7614 2343
Brussels
T: +32 2 287 2000
mdolmans@cgsh.com
V-Card

Laurie Achtouk-Spivak
Counsel

Paris
T: +33 1 40 74 68 00
lachtoukspivak@cgsh.com
V-Card

Boaz S. Morag
Counsel

New York
T: +1 212 225 2894
bmorag@cgsh.com
V-Card

Clara Cibrario Assereto
Associate

Rome
T: +39 06 6952 2225
ccibrarioassereto@cgsh.com
V-Card

Kylie Huff
Associate

New York
T: +1 212 225 2703
kmhuff@cgsh.com
V-Card

Robert Garden
Associate

Paris
T: +33 1 40 74 68 00
rgarden@cgsh.com
V-Card