Climate-related litigation risk management
18 October 2023
18 October 2023
Businesses should prepare for and implement a risk-based approach, identifying their highest climate-related compliance risks, and prioritising the development of controls, policies, and procedures to mitigate the risks of climate-related litigation.
Climate-related litigation is increasing globally and growing rapidly, not only in terms of the volume of cases initiated, but also the legal arguments used, and the diversity of parties. The significance of this risk is expected to continue to increase in coming years, not only with respect to climate change related matters, but also broader environmental and nature-related considerations including biodiversity and human rights. For example, Amazon indigenous communities and international NGOs have sued supermarket giant Casino over alleged deforestation and human rights violations under French law.
CLR is a complex risk that warrants special consideration by businesses, and a heightened awareness and nuanced understanding of the key risk drivers and implications of an inappropriate response:
Although the overwhelming majority of CLR takes the form of climate-aligned litigation, there is also an emerging trend in the growth of the "anti-ESG movement", the rise of non-climate-aligned litigation, and concerns that, for example, climate collaboration amongst the financial sector could be treated as an anti-trust violation.
The financial and reputational implications of climate-related litigation can be substantial, and unpredictable. Climate-related litigation cases have the potential to impact many different business types, including financial institutions. Notably, climate-related litigation does not have to be successful for costs to materialise; a credible threat of litigation or even unsuccessful litigation can have serious reputational and financial consequences for businesses, and impact future business practices, while "green-hushing" (choosing not to actively promote environmental achievements or credentials due to a concern about "greenwashing" allegations or other potential legal challenges) risks depriving customers of information about more attractive options and choices.
Climate-related litigation can lead to direct or indirect consequences for businesses, although data and methodology challenges can make it difficult to quantify litigation losses or assign the probability of occurrence:
"Greenwashing", the term used to describe situations where disclosures, statements or commitments are made to give the impression that the company or certain procedures, policies or products are environmentally friendly or sustainable when this impression may be misleading or untrue, is a specific type of climate-related litigation risk. Greenwashing is an emerging focus for enforcement action across many jurisdictions, and the potential penalties for greenwashing have increased substantially in recent years. Regulators have identified that they are targeting conduct such as (i) net zero statements and targets; (ii) use of terms such as "carbon neutral", "clean" or "green" (or images, colours and "trust marks" that give that impression), and (iii) the scope and application of investment fund exclusions and screens.
Allegations may also be made against directors that they should be found personally liable for greenwashing or for failing to discharge their duties with care and diligence.
Overall, CLR is an emerging risk and awareness, understanding, response to, and regulatory supervision of this risk is at an early stage of development. However, it is certain that businesses should be considering CLR as a distinct risk category, separate from general litigation risk. This is supported by supervisory bodies' (eg the Australian Competition and Consumer Commission and Australian Securities and Investments Commission) close monitoring of CLR with the expectation that the businesses they supervise will understand, assess, and act on CLR by taking a risk-based approach.
Applying a risk-based approach should support regulated businesses to meet or exceed the expectations of supervisory entities who, depending on the context, may respond to businesses' management of CLR with a range of low to high intensity supervisory options, drawing from a "toolbox" that could include: exercises raising thematic awareness of CLR, risk mitigation and transfer considerations, establishing governance and risk management expectations to be assessed in prudential reviews, climate-related litigation disclosures, and testing resilience through scenario analysis and regulatory capital considerations.
Businesses should immediately start taking a more proactive, risk-based approach in order to anticipate and reduce CLR to as low as reasonably practicable.
This risk-based approach should include:
The NGFS reports expose climate-related litigation as an emerging risk, with evidence of litigation continuing to increase globally. The focus on this issue continues from various stakeholders, including supervisory bodies. There should be continued focus on this as a significant risk to business activities, and to proactively seek assistance in developing processes, systems and frameworks to manage this emerging risk as a priority.
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This material is current as at 18 October 2023 but does not take into account any developments to the law after that date. It is not intended to be a comprehensive review of all developments in the law and in practice, or to cover all aspects of those referred to, and does not constitute legal advice. The information provided is general in nature, and does not take into account and is not intended to apply to any specific issues or circumstances. Readers should take independent legal advice. No part of this publication may be reproduced by any process without prior written permission from Ashurst. While we use reasonable skill and care in the preparation of this material, we accept no liability for use of and reliance upon it by any person.