Climate change: litigation risk for companies and directors
September 2021 | SPOTLIGHT | RISK MANAGEMENT
Financier Worldwide Magazine
September 2021 Issue
Mitigating the impact of climate change is becoming a critical priority for all businesses, particularly within the financial sector.
Pressure to demonstrate green credentials is mounting from all directions in the UK’s transition toward net-zero emissions: the regulatory and reporting landscape is expanding to ensure that climate-related financial risks are addressed throughout the financial system, investors are requiring greater transparency as to how green their investments are, and the accessibility of data means consumers and employees are increasingly alive to these issues and are not afraid to vote with their feet.
In addition, litigation and enforcement action could potentially result from a failure to disclose or manage climate-related risks.
Governments and the fossil fuel sector continue to be the primary targets of climate change litigation by environmental groups and activists, as a method of procuring positive results and commitments around reducing emissions, with such cases being particularly prevalent in the US and Australia.
In recent years, claims have arisen in the context of finance and investments, including, according to the Sabin Center for Climate Change Law: (i) against a Japanese bank for allegedly facilitating environmental harm by financing a coal power plant and failing to influence its client to disclose additional environmental information or to implement additional measures to reduce the project’s emissions; (ii) against a Dutch bank for allegedly failing to report on its indirect emissions through companies and projects it financed and to set targets to reduce emissions from its own financial products; (iii) out of alleged failures to disclose to investors information about the climate-related risks of investments held in an Australian pension fund and separately in Australian government bonds; and (iv) participation in and the legality of the European Central Bank’s corporate sector purchase programme, where it is alleged the majority of bonds were issued by carbon-intensive industries.
While these types of claims have yet to manifest in England and Wales, there is certainly scope for them to do so.
Shareholder class actions against UK-listed companies are gaining traction, driven in part by the growth of litigation funding as an alternative asset class, with funders identifying potentially lucrative group litigation actions off the back of corporate misconduct and regulatory issues. The Financial Services and Markets Act 2000 provides a statutory cause of action for investors that have suffered loss in respect of securities as a result of: (i) any untrue or misleading statement in the listing particulars, or the omission of reasonably required information (section 90); or (ii) a misleading statement or dishonest omission in certain other published information relating to the securities, or a dishonest delay in publishing such information (section 90A).
Although this presently remains an uncertain area of English law, it could conceivably be used to seek recourse over a public company’s failure to disclose climate-related risks or any misstatements made in that regard. Claims under section 90 may be brought against any person responsible for the listing particulars, including the company’s directors, and liability will turn on the extent of that person’s knowledge or recklessness.
Separately, directors may be liable under the Companies Act 2006 to the company (public or private) for loss suffered because of any untrue or misleading statement in or an omission from certain corporate reports depending on the extent of their knowledge or recklessness (section 463). Liability may also attach to directors for breach of their duties under the Companies Act, in particular their duty to promote the success of the company (section 172), which requires directors in doing so to have regard to various matters including the likely long-term consequences of any decision, the impact of the company’s operations on the environment, and the desirability of the company maintaining a reputation for high standards of business conduct.
Climate-related considerations could feature in each of these categories, and a campaign is underway to amend section 172 to ensure that all UK companies do not simply prioritise the interests of their shareholders over those of wider society and the environment. Directors also owe a duty to the company to act with reasonable care, skill and diligence (section 174), which is subject to an objective as well as a subjective test and could therefore apply in relation to climate-related matters as expectations of directors evolve.
Claims against directors brought on behalf of the company take the form of shareholder derivative actions, which in theory (subject to the court’s permission) could be pursued by a minority shareholder who has only recently acquired shares in the company (section 260).
“The potential for litigation and enforcement action is just one of the climate-related risks that may arise, but it needs to be recognised and managed with appropriate corporate governance.”
It is not by any means clear that these types of climate change actions would be successful. It will often be problematic to meet the evidential threshold where the knowledge of directors is concerned, and to persuade a court to exercise its discretion to allow shareholder derivative claims to proceed. Permission to bring derivative claims will be refused where they do not promote the success of the company, which on the current wording of section 172 may be a difficult hurdle to meet if the claim is brought purely for climate-related considerations (at least until climate risks begin to correlate with and impact the company’s value).
Nonetheless, litigation has been a powerful tool in other jurisdictions for environmental groups, shareholders and individuals to raise awareness around the suspected failings or wrongdoing and to influence change. Many cases have settled with defendants agreeing to reverse the practices or proposals complained of. Where these motivations are at play such claims may not therefore need to go the distance, but they will nonetheless require careful engagement to address and defend the allegations while demonstrating transparency as proceedings are conducted. Monetary claims brought by investors (whether individuals, institutions or a group) will have a different dynamic, but many of the same considerations will apply. Other climate-related causes of action against companies and directors may include negligence and fraudulent or negligent misrepresentation.
As the permanent effects of global warming come into view, the regulatory regime is expanding to embed climate-related financial risk into the financial system, insurers are being pressured to cut the carbon footprint of the companies they insure, and industry frameworks and codes of practice are emerging that will become difficult to ignore as competitors seek to demonstrate their environmental credentials. These factors, among others, will force organisations to adapt their approach to operations and corporate governance to identify and manage applicable climate-related risks, to remain profitable.
As further rules and measures are implemented in response to the climate crisis, companies and their management who fail to comply may be subject to regulatory enforcement action in the future, which may invite follow-on litigation. While premium listed companies are already required to report on climate-related financial risks in accordance with the Task Force on Climate-related Financial Disclosures, the Financial Conduct Authority (FCA) is now proposing to apply the same to asset managers, life insurers and pension providers, in line with the UK’s intention to make such disclosures mandatory across the economy by 2025.
In making such disclosures and other public statements, it will be crucial to ensure that the information provided is full and accurate, clear and not misleading, and verifiable, to avoid the litigation and regulatory ramifications that may follow from any hint of greenwashing. Disclosures will need to be carefully constructed with specialist input where appropriate, and records should be maintained that justify the reasons for climate-related claims or statements made in case they are challenged or prove to be inaccurate.
Where inaccuracies do come to light, disclosures must be corrected at the earliest opportunity. More generally, policies and processes must be put in place and actively followed through to identify, assess and manage climate-related risks. This evolving area will require close monitoring to keep up with regulatory developments and market trends.
Efforts to alleviate the effects of climate change will continue to intensify throughout the UK, where the crisis is a serious issue on the regulatory agenda and one that is attracting attention from all varieties of company stakeholders. The potential for litigation and enforcement action is just one of the climate-related risks that may arise, but it needs to be recognised and managed with appropriate corporate governance.
While climate change actions in the UK to date have been targeted at central or local government, there is no reason to expect that companies (including those that generate significant emissions and those that do so indirectly by funding or investing in carbon-intensive businesses) will escape the scrutiny and challenges already taking hold in other jurisdictions.
Imogen Winfield is an associate at Brown Rudnick LLP. She can be contacted on +44 (0)20 7851 6078 or by email: iwinfield@brownrudnick.com.
Imogen Winfield is an associate in the international disputes team in Brown Rudnick’s London office. She has experience in a wide range of commercial disputes, including high-value breach of contract and negligence claims between financial institutions and numerous pre-action matters. Ms Winfield has acted for senior individuals in connection with regulatory investigations and has a particular interest in disputes arising out of financial contexts.
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