Climate change is an ever-increasing focus of corporate, social and political discourse, and, not coincidentally, we are starting to see a rise, and a pivot, in litigation connected to climate change.

The first wave of climate change litigation in Australia focussed on approvals for developments of fossil-fuel projects. Now, a second wave is being added, seeking to force companies directly and indirectly affected by climate change risks (including the transitions needed to mitigate them) to assess and report on those risks.

A third wave, not yet seen in Australia, is likely to come. In that wave, investors will seek to recover their losses from directors, auditors and advisers who have not confronted climate change risks. Separately, communities most affected by climate change are likely to litigate to try to force action by government and the largest emitters, and to seek damages from those they think might be held responsible for contribution, inaction, and obfuscation.

Latest IPCC report on the impacts of climate change

In October 2018, the Intergovernmental Panel on Climate Change (IPCC) released the latest in its series of authoritative reports relating to the impacts of climate change. This particular report was focussed on the impacts of global warming of 1.5°C above pre-industrial levels. It reinforced earlier views expressed by the IPCC and others as to the importance of taking steps to limit warming to 1.5°C, but also of the significant impact that even that level of warming is likely to have.

It said that keeping the increase to an average of 1.5°C would require rapid and far-reaching transitions in energy, land-use, infrastructure and industrial systems, and that the transitions required would be unprecedented in terms of scale, even if not speed.

One of the products of climate change, already starting to be felt in Australia, is an increase in extreme weather events, such as heatwaves, and more frequent or intense floods, droughts, bushfires and storms. In rural and regional communities some of those impacts are already pronounced. And in coastal Australia, the changes will be compounded by rising sea levels requiring the taking of local action for prevention and mitigation.

An uptick in climate change litigation in Australia?

There has been a recognition that Australia needs to participate in global efforts to mitigate the impacts of climate change, but disagreement about how best to do that (and how much to do). In the meantime, companies are increasingly taking the lead, in recognition of the risks to their own businesses, and often in the face of pressure from shareholder groups and other activists.

Against that background it is perhaps no surprise that predictions are starting to flow of an uptick in litigation in Australia related to climate change.

While the types of matters dealt with in the first wave of climate change litigation in Australia are unlikely to fall away, a second, different, wave has begun to break, and more will follow.

The types of matters which have been, and will be litigated, fall into four broad categories.

1. Challenges to decisions approving projects and developments

The first wave of climate change litigation to be seen in Australia concerned challenges to decisions by governments and other regulatory bodies to approve projects and developments which may have significant direct or indirect greenhouse gas emissions. The most obvious of these are projects such as coal mines, coal-fired power stations and gas exploration.

Challenges of this type are ongoing, and recent examples have arisen in the context of the proposed Adani Carmichael mine in Queensland, and the recent Rocky Hill Coal Project in NSW – we discuss the outcome of the litigation about that project here.

This type of climate change litigation is likely to continue, and even grow more frequent. Over time, greater focus may fall on projects with direct and indirect emissions that have not yet been as much of a focus of disputes. Those might include, for instance:

  • oil and gas exploration;
  • expansion or construction of facilities for energy-intensive manufacturing; and
  • changes to land use.

The sorts of principles which are currently being relied upon to oppose new coal mines may, over time, be called in support of litigation challenging those types of projects – particularly if there is a perception that regulation and decision-makers haven’t kept up with the need for those developments to be managed in a way that minimises net greenhouse gas emissions.

2. Challenges to corporate decision-making and disclosures

It is virtually certain that risks associated with climate change will have significant and sometimes profound negative impacts on a wide range of industries and businesses, and that investors in those businesses will suffer financial losses as a result.

It also seems fairly predictable that where investors consider that they have suffered those losses unexpectedly, because of inadequate management or disclosure of climate change risks, they will be looking to see whether they can recover those losses from the individuals and entities who controlled or advised the company.

Consequently, a second area in which climate change litigation has already taken root, and can be expected to grow quickly, is litigation over decision-making and disclosures concerning climate change risks by (particularly, but not exclusively) listed public companies.

There is potential for claims to be made against public companies and their directors, auditors or advisers for:

  • failure properly to disclose climate change risks to the market;
  • failure to assess properly, and take adequate action to mitigate, climate change risks; and
  • failure to appropriately value a company’s assets and investments, taking into account those risks.

The climate change risks that companies need to be concerned with have been described as falling into two broad categories:

  • Transition risks – risks associated with transitioning to a lower-carbon economy, and the extensive policy, legal, technology and market changes that may involve; and
  • Physical risks – physical impacts of climate change, which can be acute - such as risks derived from extreme weather events - or chronic – referable to longer term shifts in climate patterns, leading to, for instance, sea level rises or chronic heat waves.

In October 2016, the Centre for Policy Development published an opinion that it had received from Noel Hutley SC on the extent to which the law permits or requires directors of Australian companies to respond to climate change risks. Mr Hutley SC expressed the view that company directors who failed to consider climate change risks now could be found liable for breaching their duty of care and diligence in the future.

An update to the advice was provided by Mr Hutley SC on 29 March 2019. He noted that there is a profound and accelerating shift in the way that Australian regulators, companies and the public perceive climate risk.

It is clear that ASIC agrees that boards should be looking at these issues. In a September 2018 report, it suggested that directors and senior managers of listed companies need to understand and continually reassess existing and emerging risks to a company’s business, both immediate and long-term, including climate risk.

Perhaps just as important as considering the risks and opportunities associated with climate change is, for listed entities, the disclosure of those assessments to the market.

In 2016, the G20 Financial Stability Board set up a Taskforce for Climate-related Financial Disclosures. The Taskforce issued a report in June 2018 which set out a recommended framework for voluntary, consistent climate-related financial disclosures. The recommendations were aimed not only at industries which would be directly affected by climate change, but at financial sector organisations exposed to those industries – such as banks, insurance companies and asset managers.

In its September 2018 report, ASIC also supported those recommendations for Australian listed companies with material exposure to climate risk. ASIC went on to recommend that listed companies consider disclosing climate risk separately to other risk categories, and focus on ensuring the disclosures are sufficiently clear and specific.

It also said that it considered that the law requires the directors’ report, within a listed entity’s annual report, to include a discussion of climate risk when it could affect the entity’s achievement of its financial performance or disclosed outcomes. Similar considerations would be required for prospectuses.

At present, the litigation related to these types of issues is primarily driven by a desire to raise awareness, and improve corporate responsiveness, to climate change risks. Thus, the relief sought has been declarations and injunctions, rather than damages. For instance, a case has been brought against the large industry super fund, REST, by one of its members, seeking (at least initially) declarations that REST has breached the Corporations Act, and its equitable obligations, by failing to hand over information requested by the member about the implications of climate change risks, and an injunction requiring it to provide that information.

Similarly, an earlier case was brought against the Commonwealth Bank by shareholders who sought declarations that the Bank had breached the Corporations Act by failing adequately to disclose climate change risks in its 2016 annual report. That case was reportedly withdrawn after the Bank committed in its 2017 annual report to undertaking climate change scenario analysis.

As time passes, however, and as climate change starts to affect the value of companies, and investors suffer losses, it seems inevitable that plaintiffs will begin to claim damages for these types of breaches by companies and their directors. Those claims might attract the interest of litigation funders, and come in the form of securities class actions.

3. Litigation against companies responsible for significant emissions

Another development which has started internationally and been predicted to grow, but is yet to occur in Australia, is litigation against entities which are the source of the greatest direct or indirect greenhouse gas emissions.

Like climate change litigation linked to corporate obligations, litigation of this type might initially be focussed not on the recovery of damages, but on injunctions preventing emissions which might contribute in a significant way to further global warming, and the physical impacts associated with it. While a range of potential plaintiffs might pursue this type of action, it seems likely to be taken by those most exposed to physical impacts of climate change – such as coastal communities affected by rising sea levels, or regional communities exposed to devastation by repeats of extreme weather events.

Claims of this type against major emitters have emerged already in some other countries (including the US, Germany and the Philippines). They tend to be based on torts of nuisance, negligence or conspiracy. So far, for various reasons, they have had very limited success. However, it appears that some of the obstacles to their success are starting to fall away.

One major difficulty plaintiffs have faced is demonstrating that particular harm that might be suffered by them has been caused, or contributed to meaningfully, by any particular entity. However, in recent times studies have emerged, in peer-reviewed journals, of the proportion of CO2 emissions produced by what have been described as the ‘Carbon Majors’ – that is, the world’s largest greenhouse gas emitters since industrialisation. Those studies have, interestingly, also sought to identify the proportion of those emissions produced in the last 30 years.

In addition, there have been rapid developments in climate change attribution research, which seem likely to assist in tracing particular weather events to climatic developments associated with greenhouse gas emissions. The combination of that science with the identification of the most significant past and present emitters may permit Courts to conclude that particular emitters have contributed, in some proportion, to a particular harm, or to a harm which is threatened.

These types of claims don’t depend on companies having a general and ongoing duty to take into account their impact on environment. Nor do they depend on an obligation of directors to act in the interests of stakeholders other than shareholders, or to protect a company’s standing in the community. But if corporate law develops further in those directions, then combined with the “stepping stone” approach to liability, the scope for litigation against companies contributing significantly to climate change, and against their directors, will increase.

A further possibility is that claims will be brought connected with misleading conduct in the case of major emitters if they are found to have recognised the risks of climate change (and their contribution to it) some time ago, but have actively taken steps to undermine public recognition of or belief in it, thereby contributing to delay in responding to the risks. Litigation of this type has started to emerge in the US, with local government as the plaintiffs.

4. Suing governments for failing to take steps to mitigate climate change

A final class of climate change litigation which has emerged overseas, but not yet in Australia, consists of challenges to government inaction on climate change, or to government support for industries contributing to climate change.

Again, these claims initially involve applications for mandatory injunctive relief, or declarations of obligation, but could potentially expand over time into claims for damages.

Internationally, the leading claim of this type to date has been the Urgenda litigation in the Netherlands. In that case a Dutch NGO succeeded (at first instance and on appeal) in arguing that the Netherlands Government had breached its duty of care to the Dutch people by not taking sufficient steps to set and meet targets to reduce greenhouse gas emissions and prevent climate change. The relief ordered was that the Netherlands reduce emissions by at least 25% by the end of 2020, relative to 1990 levels. While the Government has agreed to comply with the ruling, as a matter of principle it has foreshadowed a further appeal.

The legal basis for the claim was that the Government had a duty to safeguard the protection and improvement of the living environment. That duty arose from a combination of tort law and international obligations to which the Netherlands had signed up.

A lot of attention has also been given to the survival (so far) of the Juliana case in the US in the face of various motions by the US Government to delay or dismiss it.

In the Juliana case a group of young people have brought an action against the US and various heads of US agencies alleging that, among other things, their policies on fossil fuels fail to satisfy their obligations to hold certain essential resources in trust for the benefit of all US citizens (this is described as the ‘public trust doctrine’). They seek declarations, injunctions restraining particular conduct, and mandatory injunctions requiring, for instance, implementation of a remedial plan to phase out fossil fuel emissions. An interlocutory appeal, which may determine whether the case is able to go to trial, is expected to be heard shortly.

In Australia it is far from clear that actions equivalent to Urgenda or Juliana could successfully be pursued, but it is certain that they are being contemplated. If the warnings about the impacts of climate change continue to intensify, and there is a sense that the action taken by the Government is inadequate in its scope or speed, litigation of this type may well be attempted.

Moreover, to the extent that governments make decisions (or implement policies) which seem to support ongoing or increasing emissions by industries or entities which contribute meaningfully to Australia’s overall level of emissions, these types of actions may be taken against both governments, and the beneficiaries of those policies, in an attempt to thwart their implementation.

Looking forward

In the years ahead we are destined to see an increase in climate change litigation in Australia. That increase is likely to involve a gradual move beyond litigation seeking to disrupt projects and developments, and forcing boards of directors into assessing and reporting on climate risks. There will be a trend toward:

  • claims for damages by investors who have suffered unexpected losses, and communities affected most directly by climate change, and
  • claims seeking to force governments and significant emitters to take action to reduce greenhouse gas emissions.

These litigation risks – for entities, their supply chains, and their markets – and how they can be mitigated, will be important factors to assess when companies examine their exposure to climate change risks more broadly.

 

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.