By Monique Westcott
Read Monique Westcott's in-depth analysis of climate litigation against corporations and the current rules and regulations regulating the space.
In an era defined by the urgent need to combat climate change, the intersection of law and corporate responsibility has become a focal point of global attention. With Australia ranking as the 14th largest emitter globally in 2020, the imperative to address climate-related issues is more pressing than ever before [1]. The emergence of corporate climate litigation stands as a testament to the growing recognition of the responsibility of businesses in mitigating the impacts of climate change.
International law is adapting to combat multifaceted issues of climate change globally. The International Panel on Climate Change (‘IPCC’) and United Nations (‘UN’) World Meteorological Organisation (‘WMO’) determined that human activities are the main driver of climate change [2]. Further, the main sources for emissions by sector, as identified by the Kyoto Protocol, include energy, manufacturing industries, and fugitive emissions from fuels [3]. Under the UN Framework Convention on Climate Change (UNFCCC) and Paris Agreement, Australia has committed itself to holding the increase of Earth’s temperature well below 2°C and pursuing efforts to limit temperature gain to 1.5°C. These frameworks use a national approach, attributing emissions to individual countries. In turn, Australia’s domestic law is changing, although not always consistently [4]. Close consideration is being given particularly to the Corporations Act 2001 (Cth) (‘Corporations Act’) and the ways in which companies with climate change risks should foresee, mitigate, disclose or adapt to material climate related risks [5].
Against this backdrop, the surge in climate change litigation is exponentially increasing both domestically and internationally [6]. Climate-related cases have more than doubled since 2015, with over 1,000 new cases brought in the past 6 years globally [7]. There have been several proceedings instituted to push current legal frameworks, although most have not reached final adjudication. The causes of action relied on to establish liability are varied including directors’ duties, duty of care, and consumer law claims. Actions are brought equally from climate activists but also shareholders concerned with climate change financial impacts. These claims often ask for corporations to financially contribute in the response to climate change, compensate for damage, or set injunctions prohibiting actions.
Reporting
Companies are obliged to provide financial and risk statements to the market. As climate awareness grows, more pressure has been placed on companies to report their exposure to climate risks [8]. Just as importantly, compulsory reporting forces a company to make commitments and enact changes to demonstrate it is doing what it said it would do [9]. Subsequently, corporations may face claims of “greenwashing” where they may be insufficient disclosure of climate change related risks [10]. Greenwashing can also involve companies falsely claiming they have or will save emissions without credible plans to do so.
The emergence of this issue can be seen in 2017 when two Commonwealth Bank of Australia (‘CBA’) shareholders filed in the Federal Court against the CBA for misleading shareholders over the risks of climate change in their annual report. The shareholders alleged CBA did not give a ‘true and fair’ view of its financial position, impacting the shareholder’s abilities to make informed investment decisions. While this case was a world first in pursuing a bank for climate change disclosures, CBA released an annual report prior to the court’s deliberations, acknowledging the risks and pledging to undertake an analysis. Subsequently the shareholders withdrew the suit. [11].
However, this case did begin a trend that resulted in regulatory changes such as in 2018 when the Australian Securities and Investments Commission (‘ASIC’) issued new regulatory guidance that all listed entities must disclose any material business risks, including climate-related risks affecting the business’ operating and finances in accordance with paragraph s229A(1)(c) of the Corporations Act [12]. Further, the Federal Government recently introduced mandatory climate related financial disclosures through the Treasury Laws Amendment Bill 2024 that mandates new reporting requirements in the Corporations Act. This will help investors understand how companies are addressing climate change and the risks associated with their businesses. This amendment will be staged across three years from 1 July 2024 to 1 July 2027 affecting large companies covered by Part 2M of the Corporations Act, asset owners with over $5 billion in funds, and companies that must report under the National Greenhouse and Energy Reporting Act 2007 (Cth) regardless of their size. This will align Australian corporate expectations with other jurisdictions such as Europe, UK, New Zealand, and Japan [13].
Duty of Care
There is increasing risk that companies pursuing national projects will face litigation from third parties on the basis that the government owes a fiduciary duty of care to the public to refuse projects that have negative consequences for climate change [14].
Corporations that fail their duty of care may be liable under negligence. For these claims, the company must owe a duty of care where the harm is foreseeable, there is proximity, and there is a significant gravity of harm and vulnerability, as well as there being a breach of this duty and causation [15]. Today it would be very difficult to argue that climate change related risks and emissions are not a subject of material interest for stakeholders [16].
For example, in the Sharma case, the Full Federal Court unanimously held that the Commonwealth Minister for Environment did not owe a duty of care to Australian children in the decision to extend an open-cut coal mine in New South Wales [17]. This case was unsuccessful, but it is unlikely to be the only case of its kind in Australia. There is a current class action before the Federal Court which concerns retail bondholders who allege that the Australian Government has engaged in misleading or deceptive conduct by failing to disclose climate change risks. They also risk allegations that the directors have breached their duty to act with due care and diligence [18].
While there have been no successful domestic claims, international cases suggest that this may be a legitimate claim [19]. For instance, in 2021 a Dutch court ordered Royal Dutch Shell to reduce its global emissions by 45% in 9 years otherwise it would be in breach of its duty of care to prevent dangerous climate change [20].
Due Diligence
Noel Hutley SC and Sebastian Hartford-Davis submitted their opinions to the Centre for Policy and Development on company directors’ duties and climate change, which has significantly influenced the perception of corporate climate change litigation. They discussed the rising bar for directors amidst increasing global action on climate to highlight the legal risks of misleading or deceptive conduct associated with “greenwashing”. They recommend that directors take these responsibilities seriously as part of their compliance with their care and diligence duty under section 180(1) of the Corporations Act [21].
The recent 2019 case of McVeigh v Retail Employees Superannuation Pty Ltd involved a member alleging that the Retail Employees Superannuation Trust (‘REST’) violated the Superannuation Industry (Supervision) Act 1993 (Cth). McVeigh alleged that the trustees did not act with care, skill, and diligence and failed to perform their duties and exercise their powers in beneficiaries’ best interests in failing to provide information regarding climate change business risks. As many other cases, the parties settled in late 2020 and REST made several commitments including achieving a net zero carbon fund footprint by 2050 and increasing its consideration of climate change risks publicly [22].
Internationally, Germany has begun to enact legislation changes to reflect this shifting tide, such as the new version of the German Corporate Governance Code published in 2022. This new legislation explicitly highlights that social and environmental factors are to be considered, accompanied by extended due diligence and reporting obligations. Corporations that do not fulfill these obligations face fines up to two percent of their annual revenue [23].
Subsequently, directors of listed companies in particular will need to continually reassess climate-related risks as climate-related issues are being highlighted legally and targeted as a way of lowering emissions of large corporations.
Human Rights
Climate change litigation in Australia has not targeted human rights law. The first domestic case to try to link climate change and human rights is currently ongoing in Queensland. It involves Waratah Coal who applied for a mining lease and the license to build a thermal coal mine. The objectors argued that granting this application would be incompatible with the right to recognition and equality before the law, right to life, property rights, right to not have a person’s privacy or family unlawfully or arbitrarily interfered with, rights of children, and the cultural rights of Aboriginal and Torres Strait Islander peoples [24]. Therefore, this has the potential to be a landmark case in Australia or be added to the cases that have failed to create meaningful changes in company responsibilities.
Conclusion
The realm of corporate climate litigation encapsulates the intricate interplay between legal frameworks, corporate conduct, and environmental imperatives, both globally and domestically. As the world grapples with the escalating threat of climate change, the significance of addressing corporate accountability in mitigating environmental harm cannot be overstated.
On one hand, climate claims present an opportunity to create precedents which could lead to significant changes in the industry. Moreover, these claims can raise awareness, even when unsuccessful, which puts pressure on corporations to change their behaviour [25]. Additionally, the implementation of measurement is also a step towards accountability, laying the groundwork for meaningful progress.
However, the efficacy of litigation as a strategy for combating climate change remains contentious. The sparse number of cases yielding tangible emissions reductions underscores the challenges inherent in translating legal action into meaningful environmental outcomes [26]. Some corporations also use aggressive techniques to intimidate those who try to hold them accountable, leading to long-standing claims that create strong barriers to achieving justice through the courts [27].
Nevertheless, the significance of corporate climate litigation extends beyond its immediate legal ramifications, resonating with generalised calls for environmental sustainability and corporate accountability. In an era characterized by escalating climate crises and heightened public consciousness, the imperative to hold corporations accountable for their environmental impact has increased. By targeting the connection of corporate interests and environmental imperatives, climate litigation serves as a potential evolving tool that if wielded right, may contain great power.
Monique Westcott is a fourth year student studying Law and Global Studies, specialising in International Relations. She is a past editor of The Reasonable Observer. Monique has a passion for international human rights law, particularly the topics of First Nations justice and how all lawyers are responsible to act in accordance with sustainability and equality.