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Speaker
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Transcript
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Jonathan Nicoll, Solicitor (Johnny)
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[music] Hello and welcome to Risk Rewired, a fortnightly podcast by the Energy Disputes team at Burges Salmon. I'm Johnny, a solicitor in the Dispute Resolution team,
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Christopher Wenn, Senior Associate (Chris)
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and I'm Chris a senior associate in the Dispute Resolution team, advising on energy disputes.
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Johnny
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Over the series we'll be joined by industry professionals and our expert energy disputes team delivering invaluable insights and practical solutions for managing risks and resolving energy disputes.
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Chris
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In today's podcast will be discussing climate change litigation.
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Johnny
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So, Chris to get the ball rolling today please tell me, what is climate change litigation?
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Chris
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Good question Johnny, so climate change litigation embraces a number of different claims which are brought by individuals, activist groups, or shareholders of companies in different courts. The challenges embrace different types of claims under public law, various kinds of civil claims in the regulatory space, and I suppose what all of these claims have in common is that they employ litigation as a tool to force companies and governments to act on various environmental matters and hold them to account.
So there's different types, or categories, of disputes. Those in which climate change is the central issue, through to those in which it might be a peripheral point, and a third one being those in which there's no specific climate change framing but where the outcome might have an impact on climate mitigation or adaptation.
Claims can also be differentiated on the basis of whether they either look to the past, so seeking reparation for the impacts of climate change so that's the kind of common polluter pays principle, or they're more forward-looking, so these claims here are trying to hold people to account for failing to take action on climate change, so not taking steps to achieve publicly stated climate goals for example.
Most closely aligned with the second area is this growing area of greenwashing or environmental mis selling claims, where companies provide the public and investors with information that's false or misleading about the environmental impact of their operations.
And thinking about the energy sector specifically in this podcast, oil and gas has been a key target for litigation but that's changing over time. Claims have been brought against a variety of energy companies including those working in the renewable sector and the nature of the claims that are being brought will change as the sector and associated regulations rapidly evolve over time.
And it also looks like climate change litigation is on the rise, the recent report from the LSE entitled; Global Trends in Climate Change Litigation a 2024 Snapshot, points out that about 230 climate aligned lawsuits have been initiated against corporations and trade associations since 2015, with more than two thirds filed since 2020.
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Johnny
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Thank you for setting that out Chris, it's clear the number of cases is ramping up in this area, what kind of outcomes are we seeing in these cases?
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Chris
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Okay, so in the UK in terms of the outcomes to climate change litigation the cases haven't largely been successful for the claimants, however, what success really looks like depends on the strategy behind the litigation and activist claimants are trying different types of claim against multiple different types of defendant and are unlikely to stop until they find a route to success in the claims themselves.
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Johnny
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That does sound rather ominous, can you give me some recent examples of these claims?
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Chris
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Of course, so, on the side of activist company law claims, I suppose that's the first category that we need to think about, and one of the key veins or areas of climate change litigation that we've seen in the UK is this trend for activist shareholders bringing derivative actions against a company's directors which tried to hold them to account for action on climate change. So in this context a derivative claim is one which allows shareholders to bring claims on behalf of a company, where the shareholders believe that those controlling the business are not acting in its best interests. So just to put a bit of meat on the bones I suppose, the key cases to consider here that I was wanting to pick out were:
One - ClientEarth and Shell, so in this case ClientEarth held 27 shares in Shell plc at the time of their claim and they sought to bring a derivative claim under the Companies' Act 2006, and ClientEarth argued that Shell's directors breach their statutory and other incidental duties, in taking certain decisions, which they argued were not in the long-term interest of Shell to be Net Zero by 2050. And in this context the high court ended up dismissing ClientEarth's claim and rejected the existence of these incidental or extra duties placed upon Shell's directors and the court stated that ClientEarth didn't have a case to bring the claim, meaning that they weren't satisfied that there was enough evidence to continue those proceedings. And that lack of evidence meant there was no real basis upon which the directors could reasonably conclude that the actions that they had taken and not been in the interest of Shell and the court of appeal later upheld the decision of the High Court.
And the second case is this case of McGaughey & others. So this case involved members of the University Superannuation Scheme, which is a really large pension scheme in the UK which is worth about 90 billion, bringing a claim against the directors of the corporate trustee of the scheme to hold them to account to their commitments on climate change. Essentially the argument advanced was that the investments in fossil fuels were at odds with a commitment to be Net Zero by 2050 and the claim failed at first instance, as there was no case of loss in relation to the claim, and the claimants then appealed and that appeal also failed with the court of appeal holding that the procedural mechanism of the derivative action is not intended to enable would-be-claimants to avoid other procedural hurdles. As more companies make climate commitments and disclosures we fully expect continued run on company law claims.
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Johnny
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Okay thank you for setting those out, but what about public law claims that have been brought?
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Chris
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Yes, this is a really interesting area, and just to pick another couple of examples of key claims in the public law space, the first example is again ClientEarth's attempt to judicially review the FCA and the JR related to a submission by a company called Ithaca Energy plc, which is a large North Sea oil and gas operator, of their prospectus for approval by the FCA as part of the process for listing the company on the London Stock Exchange. So ClientEarth argued that the FCA's decision to approve Ithaca's prospectus was unlawful because it didn't comply with this regulation called the Prospectus Regulation, and specifically ClientEarth said that the FCA's approval of the prospectus due to the inadequate disclosure of Ithaca's assessment of materiality of climate related financial risks was wrong in law, so that's the first basis, and then the second one was the FCA's conclusion that the prospectus was sufficient and provided investors with an informed assessment of the risks and financial position of the company was rationally unsustainable, so the key decision that came from this case was that the Judge decided that those grounds were unarguable. So it was considered outside of the scope of the FCA's authority to provide an analysis whether a prospectus impacts climate change, promotes consistency with Net Zero, or promotes climate change mitigation. And this decision is important because it highlights the purpose of that regulation is to ensure companies such as Ithaca make disclosures which properly inform investors, however the court said that the obligation is not akin to one to protect or regulate the environment despite the existence of the Paris Agreement, or other environmental legislation.
So fast forwarding a bit to a more recent decision, it is an important decision called Finch and Surrey County Council. So this was a case brought against the council following their decision to permit expansion of an onshore oil well. So the case was based upon an alleged failure by the council to assess the environmental impact of the downstream greenhouse gas emissions from the oil extracted from that site, rather than just the greenhouse gas emissions from the site; construction, production, decommissioning, and subsequent restoration to the original state that it was in, as part of an environmental impact assessment. So the environmental impact assessment is important because it's a major component of the planning application and the case proceeded to the Supreme Court which, in a very recent ruling, determined that the environmental impact assessment was required to, but in this case did not, include an assessment of combustion emissions when the oil that was produced from the site was eventually burnt. So in this context the ruling has obvious implications in the energy sector for planning of future fossil fuel projects, or other energy projects which involve high carbon emissions.
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Johnny
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Thank you Chris, the Finch case really stands out not only being a case that made it all the way up to the Supreme Court, but also that judgment showing us the bigger picture that should be considered. Is there anything you can tell us about international climate change litigation?
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Chris
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One of the key jurisdictions that's been the focus of a number of important decisions here is the Netherlands. Recent decisions from the Hague should be taken seriously for large corporates as the direction of travel for climate litigation. So to just pick a couple of examples, the first is Friends of the Earth and Royal Dutch Shell. So here the plaintiff saw a ruling from the court that Shell must reduce its CO2 emissions by 45% by 2030, compared to 2010 levels. And then in turn to zero by 2050, in line with the Paris Climate Agreement, and the court said that they acknowledged that Royal Dutch Shell cannot solve the global problem on its own, however this would not absolve Royal Dutch Shell of its individual partial responsibility to do its part regarding the emissions of the Shell Group, which it can control and influence, and here this judgment is still under appeal.
So the second case here is Urgenda Foundation and The State of the Netherlands. So here the court concluded that the state has a duty to take climate change mitigation measures due to the severity of the consequences of climate change and the great risk of climate change occurring. So back in December 2019, the Supreme Court of the Netherlands upheld a decision under Articles 2 and 8 of the ECHR, meaning that The State of the Netherlands is legally obliged to reduce its greenhouse gas emissions by a minimum of 25% by the end of 2020 compared to 1990 levels. So Johnny, one of the issues that has also emerged and we should discuss on this podcast is the response to climate change protests from within the energy industry. Could you just talk us through how the legal system has been used by large energy companies in this context?
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Johnny
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Of course, it's well worth noting the importance and widespread use of the legal system and in particular injunctive relief and addressing the impact of campaigns brought by protest groups such as Just Stop Oil, Extinction Rebellion, and Insulate Britain. A number of such cases have emerged in recent years involving companies associated with the oil and gas industry, these cases applied to persons unknown and thereby restricted protests at a number of different locations including petrol stations and oil refineries. And now to revert back to you Chris for the last topic of this podcast, what are the risks for energy companies and how can they be mitigated?
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Chris
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Johnny, that's a really good question and I think the key points are for those operating in the sector there's a number of distinct issues to consider and address including: the greenhouse gas emissions associated with operations and the importance of mitigating those emissions, careful consideration of existing investment strategies and where appropriate changing them, the importance of disclosing climate related risks and ensuring that a company's green credentials actually match reality, the physical impact of operations and the importance of complying and adapting to a changing legal and regulatory environment. So those risks and issues can be addressed with within companies in a variety of ways so just as a few examples, it's important to ensure that companies senior management really understand and are aware of the importance of these issues and they're actively involved in their management and decision making. So even when issues are being addressed at a subcommittee level senior management are still made aware and understand the issues through a direct reporting structure.
And the second one is the need to consider carefully civil or regulatory risk of claims and where they may come from, so within the company's own climate related disclosures, or the company's position as part of a wider sector. And then the last point here is the need to complete risk assessments which enable a company to understand the impact that that company has on the climate, and then also the external risks that the company's exposed to relating to climate change, so physical climate risks and then also transition risks so policies regulatory or market responses to transition the economy and then separately that the needs of shareholders, consumers, and then wider communities in which that company operates. And then thinking about wider information and external resources it's helpful to keep on top of changes in this area so in terms of external resources there's lots of information out there which ranges from the firm's own sector focused material, to academic publications from entities such as the LSE and the UN, and then also case law updates and it's also important to consider what peers in the sector are doing which information might not be so focused on in the more general publications.
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Johnny
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[music] Thank you for listening to Risk Rewired: the energy disputes podcast. If you'd like to know more about our Energy Disputes team and how our experts can work with you, please see our website and don't forget to subscribe, and thanks for listening. [music]
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