Will climate change litigation force companies to start acting like grown-ups?

Like all kids their age, mine must repeatedly be told what to do. It takes time for children to develop the capacity to know this for themselves, and in the early stages, children only believe things to be right or wrong because their parents tell them so. With a bit of luck and good parenting, somewhere between seven and ten, they will enter the “age of moral reasoning” and start to do the right thing because it’s the right thing.

Old enough to know better?

So, what does this have to do with companies and climate change? When it comes to the potentially catastrophic impacts businesses are having on the environment, it looks like the overwhelming majority of companies are still acting like children. The chances of them doing the right thing without sufficient pressure by a competent authority is seemingly close to zero but they should certainly know better. We’ve known about climate change for decades: The scientific consensus is near-total; over 190 world leaders signed the Paris Agreement recognising the need for significant and rapid cuts to global emissions; and the World Economic Forum has ranked ‘a failure of climate change mitigation and adaptation’ as the number one risk to the global economy. With such unanimity, it would be ridiculous for any company, board or shareholder to try and claim that “the jury is still out”.

Yet many companies are still fudging the issue. Just four days ago, the board of Shell and 94% of shareholders rejected a motion to establish an emissions reduction target in line with the Paris Climate Agreement, arguing that it is “not in the best interests of the company”. It’s hard to see how doubling down on activities that promote runaway climate change can possibly be in the long-term interests of any company; but I guess it all depends on your definition of “long-term”.

Fortunately, there are some grown-ups in the room. Contrast Shell’s position with that of major insurer and institutional investor Aviva, whose core value is to create legacy or “be a good ancestor”. As CEO Mark Wilson explains, “an estimated $13.8 trillion dollars of global assets are at risk if global temperatures rise by an average of 6°C …This is a risk we literally cannot afford to take”. Not only is action on climate change the right thing to do, but for Aviva and its shareholders it is “quite literally a business imperative”. If you want your company to be around for another 300 years, or even 30 years, “long-term” has a rather different meaning.

Do more rules equal better behaviour?

So, if knowledge alone isn’t enough for some companies, how can they be made to act in line with the science? Just like my three-year old, they clearly still need to be told. Analysis by KPMG confirms there are now around 400 sustainability regulations and reporting instruments across 64 countries, more than double the 180 instruments reported in 2013, and significantly more than the 60 instruments reported across just 19 countries in 2006. Over the same period, the ratio of mandatory to voluntary instruments has also risen to around two-thirds.

With a substantial increase in regulatory obligations, it is hardly surprising that the last decade saw a concomitant increase in the number of companies acting on climate change and producing sustainability reports. However, for most companies, there is still a gap between the level of ambition and what is necessary. Comparatively, few companies have targets for achieving emissions reductions, and for those that do, only some focus on absolute reductions whilst others opt for less stringent “intensity targets”. In other words, their overall emissions can still increase but they try to reduce emissions on a per employee basis or by some other metric. If the whole world followed that approach and focused on reducing emissions per global citizen rather than global emissions, given the population is projected to reach 9.7 billion by 2050, we’d still have a problem. 

Room for improvement?

According to CDP, targets set are often relatively short term. Just 55% of companies analysed have targets beyond 2020, and only 14% of companies have targets for 2030 or beyond. You would hope that these companies still expect to be in business by 2030, so why not have longer-term targets that are proven to be more effective at delivering transformative change? Globally, only 266 companies have committed to science-based targets to reduce their emissions in line with the UNFCCC target of limiting global warming to 2°C.

If we are to have any chance of creating a stable climate, we urgently need companies around the world to set longer-term targets in line with the science. For every company, like Shell, that abdicates its responsibility, others will have to cut harder and faster and it becomes increasingly difficult to see a credible path towards decarbonisation. Many companies continue to equate social or environmental responsibility with fiscal irresponsibility, despite mounting evidence to the contrary. Whilst regulation has pressed more companies into disclosing sustainability performance, it has been less effective at triggering the level of transformative change needed.

Enter the naughty (court) step

So, what other options are on the table? A last resort for parents dealing with their errant progeny is the judicious use of threats i.e. “if you can’t play nice then you’re not getting any ice cream!”. Given the notoriously short-term focus of financial markets, perhaps climate change litigation is the answer. After all, expensive fines, reputational damage and costly legal bills tend to exert downward pressure on a company’s share price.

“People are increasingly turning to the courts to find duties and obligations of governments and corporations who are currently not acting sufficiently on climate change. This trend is likely to continue.” (Brendan Sydes, Environmental Justice Australia)

A report by the UNEP found that by March 2017, 884 climate change cases had been filed in 25 countries (including the EU). Although defendants are almost always governments, there have been notable exceptions, for example, German utility RWE AG and Exxon in the US. Whilst we have yet to see any major wins in actions against companies, the success rate of cases is likely to grow following the Paris Agreement. Legal teams are also finding increasingly innovative ways to hold people accountable. Laws, their interpretation and application, vary considerably around the world. Fundamentally, plaintiffs must demonstrate that they are suffering or have suffered from climate change, that the damage can be linked to actions of the defendant and that the damage can be reduced if the defendant stops the activities in question.

High time for companies to be on their best behaviour

Around 177 countries already recognise the rights of their citizens to a clean and healthy environment, and courts are now being asked to define such rights in relation to climate change. It is already clear that climate change science can stand up in a court of law and, in litigation terms, the Paris Agreement is a touchstone development that enables governments’ laws, policies and actions to be construed as adequate or inadequate in a global context. Governments, fossil fuel companies, banks and other financial institutions funding carbon intensive projects and industries, and even company directors who fail to consider climate risks, could all be found liable and subject to legal action.

And if companies wait until they are at the court door before acting, it will already be too late. 

Martin Sedgwick is a principal consultant at Carbon Smart