Going Green: The Growing Impact of Climate Change Litigation on Business Strategy
Climate change litigation has long been used by activist groups as a form of protest against the emissions of companies and governments. It aims to pressure fossil fuel companies in particular to develop more aggressive climate strategies and strives to encourage an acceleration towards cleaner forms of energy. It is a trend within the energy practice area that has seen a surge in recent years, particularly as governments continue to push for legally-binding carbon emission goals within their own jurisdictions and businesses themselves recognise their duty to encompass environmental obligations in their corporate strategies. According to the London School of Economics, the total number of climate change lawsuits issued globally almost doubled between 2017 and 2020. Moreover, as the effects of climate change increase in the future, it is likely that disputes will also become more prevalent. New developments and techniques will continue to shape climate change litigation and influence legal and business strategies. This will also raise interesting questions about the direction of the commercial energy sector and broader business aims for years to come.
In 2017, judges in Germany accepted a case brought by Peruvian farmer Saúl Luciano Lliuya against RWE AG, Germany’s largest electricity provider. Lliuya demanded US$ 20,000 (approximately GBP 15,000) for the costs of preventing damage from a potential flood from the retreating Palcaraju glacier which is currently melting into Lake Palcacocha. A flood from the lake would trigger a deadly landslide onto the city of Huaraz in the Peruvian Andes, threatening the lives of 120,000 people. Such climate litigation cases often struggle to produce a favorable verdict for activists and claimants. The complex structure of the energy sector makes it difficult to prove direct causation between the emissions of a single energy company and climate change impacts on a particular area as supply chains and consumer choices all create numerous breaks in the chain of causation. A groundbreaking study published last month by the University of Oxford could change this and set a new precedent for climate change litigation. It established, for the first time, a direct link between human-made greenhouse gas emissions and the retreat of the Palcaraju glacier, and was accepted as evidence in the case of Lliuya v. RWE.
The Oxford study, by establishing a full set of "links", gives greater weight to the argument that RWE has contributed to the risk of glacial lake flooding in Peru and so should be held financially liable for the cost of preventative measures. Should the judges rule in favor of Lliuya using this scientific evidence, it would set a significant precedent for future claims against major emitters of fossil fuels. Oil and gas companies will be under increasing pressure to compensate affected communities for alleged climate-related damage or be beholden to imposed limitations on, for example, their greenhouse gas emissions. This particular case has shown that there is a huge potential to use scientific evidence to create high-impact legal arguments to hold private companies liable for climate change-related impacts. Falling foul of climate change litigation means that big oil and gas companies, such as BP and Total Oil, could be forced to preemptively change their operations and corporate strategies in order to comply with court-mandated CO2 reductions, and could, as in RWE’s case, result in the paying of fines and damages. This new trend of using scientific evidence in climate-related court cases gives greater credence to liability suits against fossil fuel companies, stimulating further climate change disputes, and bringing the environmental and social practices of corporations under greater scrutiny.
In a business world thus increasingly concerned with social and environmental responsibility, the rise of climate change-related disputes certainly places even more pressure on companies to examine the rates of carbon emissions produced by their business structures and operations. Litigation could further arise by companies failing to disclose to their investors and shareholders climate-related risks attached to projects and developments. Shareholders argue that corporate action that ignores climate change threatens their best interests and have demonstrated that they are increasingly willing to commence proceedings to hold corporations accountable for misrepresenting their investment decisions. This would mean that litigation could expand beyond fossil fuel companies to include banks, investment funds, infrastructure companies, and even state governments. Last year, an Australian citizen filed a lawsuit against the Australian government, arguing that the government breached its duty of disclosure by failing to disclose the risks climate change poses to investors in government bonds. Thus the implications of the climate crisis will continue to shape the investment decisions, strategies, and business operations of all institutions. Inadequate integration of sustainable practices is therefore increasingly likely to result in legal challenges.
Both businesses and law firms know that change is coming. Climate litigation is just one factor in the acceleration of a broader trend of the transition towards cleaner forms of energy. Ultimately, companies and institutions that do not adapt will be at risk of struggling to survive while those who embrace this change will see greater opportunities for growth. Those that lag behind will find themselves in costly situations down the line, burdened with litigation and regulation issues. Those that take initiative will have access to more exciting opportunities with greater returns; Goldman Sachs, for instance, has predicted that renewable energy projects could secure funding at 5 percent or less while oil projects will be more expensive at 20 percent. Boris Johnson recently declared his intention to make the United Kingdom the “Saudi Arabia of wind” with a plan to quadruple offshore wind capacity by 2030, indicating the increasing potential for opportunities for investment in renewables in the future.
Climate change represents a very real and fundamental challenge to business practices across all jurisdictions, and climate change-related litigation has only underscored the significant impact of environmental obligations on businesses today. As it evolves to encompass a wider range of issues and disputes and becomes more effective through the integration of scientific evidence, companies and financial institutions must be prepared to take preliminary action to pursue cleaner energy goals in order to limit their exposure to climate change-related claims and to take advantage of the exciting arena for change a wider transition to renewable energy is creating in the energy sector.