Climate change litigation as a business risk

The amount of climate change litigation worldwide has increased dramatically in recent years. This results in litigation risks and liability risks for companies from numerous industries. Supervisory boards should be aware of the risk.

What is climate change litigation?

The term "climate change litigation" is generally used as an umbrella term for a wide range of legal proceedings in which climate protection plays a role.

Climate change litigation is a current and a global phenomenon.[1] While the first climate litigation cases were filed in the late-1980s, the number of climate related claims has increased dramatically since the conclusion of the Paris Climate Agreement in 2015. Between 2020 and today alone, around 500 climate litigation cases have been registered worldwide – that is a quarter of the total number of completed and ongoing climate litigation cases recorded.[2] Approximately three quarters of the climate litigation cases on record originate from the USA.[3] In addition, Australia, the UK and the EU member states, as well as increasingly the so-called Global South, are regions where a significant number of climate litigation cases have been brought.[4]

There is no such thing as a prototype climate claim. Climate litigation cases differ, amongst other things, in their objective, the type of plaintiff and defendant, and the legal basis on which the claim is based.

Aims of climate action

The strategies pursued by litigants in climate change cases are diverse. Many cases seek to advance climate action, and these are often referred to as "pro-regulatory" cases. There are also, however, many recorded cases in which litigants challenge the introduction of regulations or policies that would lead to "positive" climate outcomes, such as a reduction in greenhouse gas emissions ("anti-regulatory" cases). In this article, we will focus on those pro-regulatory actions that aim to advance climate-friendly or climate-protection measures, or to restrict climate-damaging behaviour, as well as actions that seek compensation for alleged contribution to climate change damage.

Excluded for the purposes of this paper are claims of failure to adapt (that challenge a defendant for failure to take the impacts of climate change into account when developing policies or facilities) and failure to disclose risks related to climate change, which include claims of greenwashing.

Lawsuits for more climate protection

Most climate change litigation seeking increased climate protection is directed against states. The lawsuit filed by the Dutch non-governmental organisation ("NGO") Urgenda against the Netherlands played a pioneering role. The Dutch government had planned to reduce emissions by 17 percent by 2020 compared to 1990 levels. In a lawsuit filed in 2015, Urgenda, together with numerous citizens, demanded that the Netherlands reduce emissions by 25 percent by 2020. The plaintiffs relied, among other things, on their human rights (the right to life and well-being of residents of the Netherlands). The judgment granting the claim was upheld by the highest court in the Netherlands (the Dutch Supreme Court) in 2019.

In Germany, the Federal Constitutional Court required the German legislature to amend the Climate Protection Act in March 2021. The court considered the climate protection measures laid down in the law to be insufficient to protect future generations from the risks of climate change, and thus found the law to be unconstitutional in this respect. The ruling has received a great deal of attention, as the Federal Constitutional Court has in principle assumed a constitutional duty of the state to protect citizens from the dangers of climate change and has thus made climate protection actionable, at least to a certain extent.

Increasingly, plaintiffs are also seeking to compel companies to meet certain climate targets through private law actions. In May 2021, the District Court of The Hague issued a widely publicized ruling, which garnered much attention, in response to a class action lawsuit filed by several environmental organisations and thousands of private individuals, ordering the oil and gas company Shell to reduce its emissions by 45 percent by 2030 compared to 2019. It is noteworthy that the court not only looked at Shell's own emissions, but also assumed a best-efforts obligation on Shell to work towards a reduction of emissions in business relationships with suppliers and end users. Shell has appealed against the ruling.

Following the Shell ruling, the main plaintiff in the case, the NGO Milieudefensie, has since called on 30 other companies including the airline KLM, the bank ABN Amro and the consumer goods manufacturer Unilever to submit a climate plan to track the reduction of their emissions.

In Germany, four climate claims were filed in 2021 that attempt to follow up on the argumentation of the Federal Constitutional Court and make a right to climate protection usable in relation to companies as well. The lawsuits, which were filed by the NGO Deutsche Umwelthilfe ("DUH") and Greenpeace, are directed against BMW, Mercedes and Volkswagen, demanding that the automobile companies commit to a tighter carbon emissions budget, and discontinue worldwide sale of cars with internal combustion engines by 2030. A climate change claim has also been filed against the gas and oil producer Wintershall Dea, to prevent it from developing any new natural gas or oil production after 2026.

On 13 September 2022, the Stuttgart Regional Court dismissed the action against Mercedes (Case No. 17 O 789/21) at first instance. The court referred to the lack of tangible proof as to how the plaintiffs' personal rights would be impacted in the event of the continued sale of vehicles with internal combustion engines. In addition, the court emphasized the constitutional division of duties between the legislature and the courts, which prohibits the courts from taking legislative decisions. The DUH has said it plans to appeal the decision.

The Dutch court in the Shell case based its decision on a general clause from Dutch tort law. According to this far-reaching general clause, a breach of an unwritten standard of care (in this case, among other things, knowledge about climate change) can also give rise to liability towards third parties. German tort law does not have such a far-reaching general clause. Rather, the plaintiffs in a German claim must show that they have suffered damage to a legal interest protected under Section 823 (1) of the German Civil Code (BGB). The plaintiffs will then need to prove a causal link, that without the contribution of these companies, the alleged disruption would not exist. In addition, the defendant companies would have to be found liable even though they are complying with applicable law. These hurdles are unlikely to be easily overcome.

Actions for compensation of damages

The best-known climate litigation in Germany for the consequences of climate change that have already occurred is Saúl Lliuya's lawsuit against RWE. Saúl Lliuya lives in the Peruvian town of Huaraz below a glacial lake. He claims that climate change has caused increasing glacial melt, which has led to a significant rise in the water level of the glacial lake. In order to protect the city of Huaraz and Saúl Lliuya's house from flooding, protective measures have to be implemented. Saúl Lliuya is seeking a declaration that RWE will contribute to the costs of the protective measures. The lawsuit claims that the share of the costs to be paid by RWE must be based on the share of greenhouse gas emissions caused by RWE worldwide since the beginning of industrialisation, which is claimed to amount to 0.47%.

In contrast to the court of first instance, the Higher Regional Court of Hamm considered the action to be conclusive in principle and has entered into the evidentiary stage. At the end of May 2022, hearings in relation to the taking of evidence took place in Peru.

Among other things, it remains to be seen whether German courts will accept evidence of a scientific causal chain between carbon dioxide emissions, climate change and the occurrence of damage, and how the courts will deal with the aforementioned objection that the emitter acted within the framework of applicable law.

Diversification of defendants

Constitutional claims against governments and states are still the most common type of climate change litigation. However, climate change claims against companies are on the rise, and it is no longer just companies from the fossil fuel sector that are affected. Companies from the transport, food and agriculture, plastics and finance industries are also increasingly on the defendant side.

Litigation risks must also be considered globally. The Dutch NGO Milieudefensie, for example, has announced its intention to hold even those companies with a small presence in the Netherlands accountable for their global emissions in Dutch courts.

A recent international development is that of climate change litigation being brought against board members. For example, the NGO ClientEarth, as a shareholder, is taking action against Shell's Board of Directors (in the United Kingdom) by way of a so-called derivative action on behalf of the company. ClientEarth accuses Shell's board members of having breached their duty to act in the best interest of the company by failing to develop and implement a climate strategy in line with the goals of the Paris Agreement.

Conclusion

Climate change litigation is increasing, and climate claims against companies are a real risk. It is expected that claims for the compensation of damages will increase in the future, including with regards to extreme weather events and their consequences such as floods, heatwaves and forest fires. Climate claims pose significant risks to a company's strategy, as well as financial and reputational risks. Climate protection should therefore always be considered when assessing corporate governance measures. The existence of a plan on how a company intends to make an appropriate contribution to achieving the Paris climate goals (a transition plan) can help limit climate change litigation risk.

[1] A comprehensive overview of climate change litigation worldwide is provided by the Climate Change Laws of the World database of the Grantham Research Insititute on Climate Change and the Environment at the London School of Economics and Political Science at https://climate-laws.org/, which currently contains around 2,100 cases, and the Climate Change Litigation Databases of the Sabin Center for Climate Change Law at Columbia Law School at http://climatecasechart.com/, which currently counts almost 1,500 cases with a U.S. focus and around 615 cases worldwide.

[2] Setzer/Higham, Global trends in climate change litigation: 2022 snapshot, Policy report, June 2022, p. 9.

[3] Ibid.

[4] Setzer/Higham, p. 9 - 10.