More greenwashing and other climate-related class actions on the horizon in Australia

What you need to know

• Australia has the highest per capita rate of climate-related litigation in the world, and is second only to the United States in total volume of climate-related litigation.
• Australia is also one of the most developed class action markets in the world.
• Over the last few years, activists have brought several climate-related class actions against the Commonwealth Government.
• The increasing volume of climate-related litigation, and in particular greenwashing claims, means that class actions against private companies will likely form part of the next wave of climate-related litigation in Australia.

What you need to do

• Organisations and directors must be alive to the risk of climate-related class actions.
• Ensure that robust policies and procedures are developed to adequately identify, manage and disclose the risks (and opportunities) presented by global climate change.

In this article, we explore:

• the suitability and difficulties of climate-related class actions;
• some bases on which climate-related class actions have arisen, and might in the future arise, in Australia;
• practical means by which organisations can seek to mitigate their risks.

The suitability and difficulties of climate-related class actions

There are several reasons why class actions may be seen as an effective legal avenue for advancing the agenda for action against climate change.

First, the alleged impacts of conduct relating to climate change will typically affect a large class of people, whether as result of impact on the environment, or financial and marketing disclosures to the public.

Secondly, the evidentiary work to demonstrate both the environmental and economic effects of the conduct may be too burdensome for a single applicant. A class, particularly where supported by a litigation funder, might be better placed to bring this sort of claim.

It follows that, in circumstances where the conduct is alleged to have harmed a broad class of people but no single claimant could economically bring a single claim, class actions offer an avenue to pursue organisations for claims that might otherwise go unredressed.

Of course, using a class action to target climate-related conduct would not be without its challenges. A key challenge in any case where damages are sought is the requirement to demonstrate that there has been some economic or financial loss suffered by the claimant or class as a result of the conduct. Potentially the easiest way for a claimant to seek to establish harm or loss is to demonstrate that the impugned product is so environmentally harmful that it will cost the buyer more to use and/or operate, or that the product simply cannot be used at all (i.e. because it is illegal). Alternatively, claimants could seek to demonstrate that, had they known how environmentally deficient the product or service was, they would have paid less for it or not paid for it at all. However, this type of loss may be more difficult to quantify.

Nonetheless, there remains significant legal, scientific and economic obstacles to any climate-related claim, and this is why almost all such claims in Australia have sought declarations of law and injunctions as relief rather than damages.

A brief history of climate-related class actions in Australia

To date, the most notable climate-related class actions in Australia have all been brought against the Commonwealth Government, on the basis of alleged duties of care owed to sub-sections of the Australian population or alleged misleading or deceptive conduct.

In Sharma v Minister for the Environment [2022] FCAFC 35 (Sharma), the Full Court of the Federal Court unanimously held that the Commonwealth Minister for Environment did not owe a duty to avoid causing personal injury to Australian children when deciding whether to approve plans to extend an open-cut coal mine in New South Wales, thereby overturning the Federal Court's decision at first instance.

However, it is unlikely that the Sharma decision will be the final word on a duty of care for climate change-related decisions. There is, after all, another novel duty of care class action with distinct facts currently in the Federal Court: Pabai & Anor v Commonwealth of Australia (Pabai), concerning the impacts of climate change on the Torres Strait Islands.

Separately, a third Federal Court class action was recently settled by the parties. In O'Donnell v Commonwealth of Australia and others (O'Donnell), a class of government bondholders alleged that the Commonwealth Government had engaged in misleading or deceptive conduct by failing to disclose climate change risks to investors in bond issue documents. The case settled in October 2023, with the parties agreeing to the Government publishing a statement containing various acknowledgements, including that:

• climate change is a systemic risk that presents significant risks and opportunities for Australia’s economy, regions, industries and communities; and
• achieving Australia’s emissions reduction commitments and realising the opportunities that accompany the transition will require significant investment by governments and the private sector.

It is evident from the above cases that long standing legal principles are being adapted for use in climate-related class actions against governments, with mixed success to date.

As explained below, companies and directors are already facing similar risk through traditional claims, and it is likely only a matter of time before class actions follow.

Climate-related class action risks for the private sector

Climate-related litigation against companies operating in Australia is now well established. There are numerous examples of individuals, not-for-profit organisations, and regulators bringing claims against companies in a wide range of industries including oil and gas, energy and financial services.

Having regard to the individual claims that we have seen to date against companies, and the class actions that have been brought against government, we anticipate that the following types of claims may be a focus for class actions against companies in the future:

• Duty of care or nuisance claims by sections of the general public: Sharma and Pabai provide a potential blueprint for similar class actions against companies. Although such duty of care cases are yet to succeed against the government in Australia, there has been a measure of success in foreign jurisdictions including the Netherlands and New Zealand.
• Consumer claims: representations made to consumers are by their very nature intended to influence a large audience, and consumer class actions in the context of other mis-disclosures about the nature or quality of products are common in part due to the broad application of Australia's prohibitions against misleading or deceptive conduct. The prospect of class actions in this area is heightened by the present intensity of regulatory guidance and enforcement activity.
• Shareholder claims: shareholder class actions have been a dominant force in Australia over the last decade. Although they rarely proceed to a final hearing, there have been many substantial settlements in circumstances where it is alleged that a non- or mis-disclosure to the market have resulted in investors overpaying for shares acquired in a public company during the period between the disclosure and a subsequent correction. Shareholder claims of this type may face difficulties in proving loss, as claimants are, on one approach to causation, required to establish four distinct elements: first, that a misleading statement was made concerning "green" credentials; secondly, an increase in the price of shares based on the misleading statement; thirdly, that they acquired shares based on the misleading statement at the inflated price; and lastly, that there has been a discovery of the misleading statement that caused the share price to fall.

The above types of claims predominantly relate to companies that are engaged in emissions intensive operations or making climate-related disclosures.

As a subset of disclosure risks, we anticipate claims against financial advisers or asset managers who are alleged to have engaged in greenwashing by making misrepresentations about the "greenness" of companies.

Further, the general trend towards using litigation as a tool to address climate change suggests that directors also face the risk of allegations that they have breached their duty to act with due care and diligence in relation to climate change risks.

Tips to avoid or mitigate class action risks

Unsurprisingly, there is no easy way to manage the risk of climate-related class actions.

Understanding, managing and appropriately disclosing the risks and opportunities presented to a business by global climate change is incredibly complex.

In some respect, proposed new climate-related financial disclosure laws will assist companies by providing greater clarity as to expectations regarding public disclosures. However, these laws will also require most companies to provide a greater level of disclosure than has previously occurred, and there are various potential pitfalls.

Here are four general principles to keep in mind:

• Ensure a clear understanding of the regulatory frameworks at play – in order to mitigate the risks of greenwashing or failing to make adequate disclosures in relation to climate change, company directors should ensure they have a sound understanding of the regulatory and legal compliance requirements in relation to their company's climate change strategy.
• Decide on an appropriate response – our previous publication provides further details on how to identify and prioritise climate change risks to your business.
• Act on the decision – there remains a significant risk of climate change related enforcement action or litigation where a company pays 'lip-service' to the risks posed by climate change by designing an appropriate response, then failing to actually implement it.
• Report or disclose the risks appropriately – identification and compliance with applicable reporting obligations is critical, and more broadly it is important to avoid any vague or aspirational disclosures without a reasonable basis capable of being evidenced.

Authors: James Clarke, Partner; Matthew Blycha, Partner; and Stephanie Douvos, Associate.