Surging Climate Litigation Calls for Better Disclosure

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The number of climate change-related litigation cases filed globally saw a dramatic increase between 2017 and 2020, with more than 1,800 court cases filed across 40 countries as of May 2021. As the effects of climate change become harder to ignore, corporates are being held increasingly accountable for their actions – or lack thereof – when it comes to mitigating the crisis.

Investors are likely already aware of the growing body of cases and may be pondering how the trend could affect the value-at-risk in their portfolios. While to date no rulings have resulted in materially large pecuniary damages, there is a growing consensus that court orders for corporates to decarbonise more quickly could lead to greater financial and reputational risk – as well as bringing their strategic planning into question.

Indeed, there have already been several significant preliminary rulings that could have wide-reaching implications for corporates across the board. Moving forward, we expect the volume of climate litigation cases, as well as the impact of associated judicial decisions in the policies, commitments and finances of affected organisations may continue to grow.

Improving climate attribution science will be pivotal

While climate cases typically proceed under a variety of legal theories, one element that unites many is causation. In other words, claimants may have to prove that a defendant committed harmful environmental acts that had climate-related repercussions, and that said harm experienced by the claimant could not have happened but for the actions of the defendant.

Climate change attribution science aims to provide evidence of this – highlighting the link between the harmful environmental acts of a defendant and climate-related repercussions. While some legal scholarship, including a 2020 note in the Columbia Journal of Environmental Law, posits that the current state of this science may be sufficient for establishing causal connections for some adjudications, scientists face the challenge of strengthening the link between certain actions – such as emissions – and worsened climate change, particularly in a courtroom setting.

The number of climate change-related litigation cases filed globally saw a dramatic increase between 2017 and 2020.

Nevertheless, as the datasets that support climate change attribution science continue to improve, scientists may be able to more to definitively tie extreme weather events to climate change. In time, this may fuel the emergence of further climate-related litigation cases.

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The issue with net zero claims

In addition to being held increasingly accountable for their role in causing climate change, corporates with perceived insufficient or inadequate decarbonisation plans are also at increased risk of litigation – especially as companies increasingly choose to adopt their own net zero targets.

As of early 2021, it was reported that 21% of the world’s 2,000 largest publicly listed companies had set net zero commitments. Yet some neglect to cover the full spectrum of Scope 1, 2, and 3 emissions, and often do not cover the entirety of their organisational operations. What is more, many organisations fail to disclose interim targets, which can lead to potential issues of credibility among investors and other stakeholders. This lack of adequate disclosure and incomplete coverage could leave companies and countries exposed to legal challenges regarding the efficacy of their commitments.

A notable example is the landmark case brought against Royal Dutch Shell in 2019. The case – which was filed by several Dutch NGOs and more than 17,000 Dutch individuals – called for the courts to recognise Shell’s failure to reduce its greenhouse gas (GHG) emissions as unlawful act under tort law. The claimants requested Shell be forced to reduce its carbon dioxide (CO2) emissions by a net 45% relative to 2019 levels by year-end 2030. Despite Shell’s rebuttal, the trial court ultimately ruled in favour of the claimants after finding that the company’s transition strategy and associated targets were “intangible, undefined, and non-binding plans for the long term (2050)”, stating that Shell owed a duty of care to reduce its CO2 emissions across its entire global range of activities.

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While this case only represents a single judgement within the Netherlands – and one that Shell intends to appeal – it could serve as a bellwether for legal action against corporates and motivate similar actions in a wider range of jurisdictions.

Corporates with perceived insufficient or inadequate decarbonisation plans are also at increased risk of litigation – especially as companies increasingly choose to adopt their own net zero targets.

Transparency in corporate reporting key

Similarly, issues surrounding disclosure are exposing corporates to litigation risk. Investors, regulators, customers, and key stakeholders are increasingly calling for transparency into organisations and countries’ climate-related risks – including both transition and physical risks – and opportunities. This has seen corporate reporting become a priority for many organisations, with 90% of S&P 500 companies having published a sustainability report in 2020 – up from just 20% in 2011.

Across Europe, many businesses have opted to use an integrated reporting framework in which they disclose sustainability-related information alongside traditional financial disclosures. Meanwhile, the US Securities and Exchange Commission recently announced a proposal for new rules on mandatory climate change disclosure.

This appears to indicate that the volume of sustainability-related disclosure is likely to increase over time. Simultaneously, stakeholders are increasingly requesting high-quality disclosures that highlight significant financial exposures in the face of climate change.

As a result, there is a growing body of litigation globally that cites securities law in an attempt to encourage issuers of securities to be more transparent regarding their climate-related risks and opportunities. The litigation includes several legal arguments that range from fraud or misrepresentation – whereby an issuer knew about climate-related risks and chose not to disclose them or their disclosures were viewed as misleading or false – to allegations that an issuer did not go far enough in measuring, and then disclosing, its climate risks.

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Undoubtedly, stakeholders including regulators and investors will continue to demand more transparency around disclosures. The adoption of standardised global reporting frameworks for climate-related issues, such as the Task Force on Climate-related Financial Disclosures (TCFD), could be crucial in mitigating exposure to litigation.

The bottom line

As more extreme and acute weather events continue to arise as a result of climate change, the worldwide focus on the actions of both nations and corporations will likely continue to sharpen. While we have not yet seen a scenario in which climate litigation has had a material impact on an issuer’s creditworthiness, we expect the rise of climate litigation may be one of many mechanisms by which transition and physical risks crystalise for issuers, carrying with it potential for reputational and financial risks.

Thomas Englerth, Associate Director

S&P Global Ratings

55 Water Street, New York, New York 10041

E: [email protected]

S&P Global Ratings, a subsidiary of S&P Global, is a leading provider of independent credit ratings. With more than 1 million credit ratings outstanding on government and corporate entities and securities, S&P’s ratings are essential to driving growth, providing transparency and helping educate market participants to make decisions with confidence.

Thomas Englerth has been part of S&P’s sustainable finance group for more than five years. An experienced ESG professional, Thomas has worked on the development and launch of the ESG Evaluation as well as initiatives with regards to further integrating ESG into credit rating analysis.

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