Legal risk and climate change - what rising global temperatures mean for business

The challenge of how to respond to the changing climate rightly sits at the top of the global agenda. The impact that climate change will have on businesses’ strategic operations is central to many organisations’ profitability and future survival, and businesses’ own approaches to climate change issues are under increasing scrutiny around the world. 

Just last week we saw the World Economic Forum in Davos dominated by climate change; Larry Fink’s annual letter to CEOs set the scene in the run up when he sounded his strongest warning yet to the world of corporate finance that “Climate change has become a defining factor in companies’ long-term prospects”.

In addition to increasingly activist investors flexing their muscles, the courts are also very busy. Companies are facing claims in relation to historic emissions, and elsewhere plaintiffs are demanding greater transparency on climate-related risks. Most recently:

• on 10 December 2019, the Supreme Court of the State of New York released its judgment exonerating ExxonMobil from allegations that it engaged in a scheme to defraud investors over management of business risks posed by climate change regulation. The Supreme Court accepted ExxonMobil’s argument that its internal practices to evaluate the possible costs of regulations of greenhouse gases on future projects “do not impact the company’s financial statements” and therefore did not mislead investors;
• on 20 December 2019, the Dutch Supreme Court upheld the Hague Court of Appeal’s ruling that by failing to reduce greenhouse gas emissions by at least 25% by the end of 2020, the Dutch government is acting in contravention of its duty of care under Articles 2 and 8 of the European Convention on Human Rights (Urgenda Foundation v Kingdom of the NL). In April last year plaintiffs in the Netherlands filed an action against Shell which builds on this decision, seeking to extend the Dutch government’s duty of care to private companies; and
• on 28 January 2020, a court summons was made in Nanterre in respect of a claim being brought by an alliance of 14 French local authorities and five NGOs against Total. The first climate change litigation against a private company in France, the claim looks to the French Duty of Vigilance Law, under which large French companies are required to publish annual vigilance plans outlining the measures they have taken to address the adverse impacts of their activities on people and the environment. The NGOs bringing the case claim that Total did not include enough substantial detail in its vigilance plan to curb emissions, and the company is out of step with the Paris climate agreement’s goals on limiting global heating.

Navigating this complex and rapidly changing landscape raises a range of legal challenges and opportunities, which are examined in detail in a new publication produced by Freshfields, Legal risk and climate change – what rising global temperatures mean for business.

The project includes articles by Freshfields partners and external experts exploring the main areas of risk, with a particular focus on litigation. It also contains data from Columbia Law School and the London School of Economics highlighting litigation trends around the world, which shows that 135 cases have been launched against businesses, the majority of which (59%) are in the energy and natural resources sector, and 43% of which have been launched in the last four years. It explores the main areas of risk for business, including:

• Physical risk to infrastructure as a result of more extreme weather events and rising sea levels.
• Transition risk associated with the shift to a low-carbon economy, including policy developments designed to curb greenhouse emissions.
• Litigation risk as plaintiffs launch suits against businesses seeking compensation over past emissions and greater transparency on how climate change could affect their operations.

The project also considers the opportunities that climate change presents for business:

• There is huge demand for sustainable infrastructure to aid the energy transition, while technology offers massive potential to reduce emissions. The Paris Agreement includes a goal to provide more than $100 billion annual investment in low carbon technology.
• Businesses that take the lead will open up new markets and build consumer trust, secure new sources of investment and attract the brightest talent.