Corporate lawyers in a climate of change

As the implications of climate change and of the Paris Agreement dawn on large corporations, they are increasingly turning to in-house lawyers for advice on liabilities, risks and opportunities. Dr Paul K Hatchwell looks at the changing role of the corporate lawyer as economic systems face deep decarbonisation.

A decade ago, corporate climate action was still largely symbolic, confined to lip service, save for a handful of enlightened corporations, with litigation largely theoretical. Fast forward to the post-Paris Agreement era, and climate risk is rising rapidly up the corporate list of priorities, with litigation a growing concern at board level.

By May 2019, the London School of Economics' Grantham Institute on Climate Change and the Environment (GICC) had recorded more than 1,328 climate-related lawsuits in at least 28 countries, with around three quarters of them filed in the United States. Action is now spreading, notably across Europe and the Asia-Pacific region, and increasingly, even in low- and middle-income countries.

Between 1990 and 2016 in the US, there were slightly more cases unfavourable to environmental protection than favourable brought by industry and non-governmental organisations (NGOs). However, in the first two years of the Trump administration, favourable cases challenging the deregulatory agenda outweighed unfavourable ones by four to one and were on balance successful. In the rest of the world, between 1994 and 2019, the reverse was true, with 43 per cent favourable and just 27 per cent unfavourable. Some 80 per cent of cases involve greenhouse gas mitigation rather than adaptation, which tends to be driven more by citizens.

The 2015 Paris Agreement was a turning point in litigation. Many cases have been related directly to or facilitated by emerging laws resulting from the broader Nationally Determined Contributions (NDCs) called for under the agreement and the 139 framework laws that have been spawned by them.  

Climate change-related litigation can be broadly categorised as strategic or routine.

Strategic cases are usually high profile, with a visionary approach, aimed at leveraging a broader debate and change in favour or against climate action, and increasingly in favour of human rights, or at least ensuring existing goals are met^[1].

The majority of cases have been directed at governments. Urgenda Foundation v State of the Netherlands (2015) is a classic example, with the Dutch Government ordered to cut national greenhouse gas emissions by at least 25 per cent relative to 1990 by 2020. The case transferred to the Netherlands’ Supreme Court in May 2019.

Routine cases tend to be less obvious, for example, where climate issues are bound up with planning decisions leading to increased transport commuter emissions, denying permission for wind turbines, loss of productive land, enforcement of greenhouse gas reporting regulations or compliance with buying carbon allowances under the European Union Emissions Trading System. Collectively, though, they can be important in tweaking high-carbon behaviour.

Corporate exposure

More than 80 per cent of defendants to date have been governments, with lawsuits brought by citizens, corporations and NGOs. GICC notes though that ‘lawsuits are increasingly targeting the highest greenhouse-gas-emitting companies’, and corporate lawyers are starting to find themselves on the front line, particularly as climate risks are now accepted as material to company reporting.

Anthony Hobley is a co-chair of the Advisory Board at independent financial think tank the Carbon Tracker Initiative. He has helped develop legal frameworks for greenhouse gas trading in the United Kingdom, EU and internationally. He reports ‘a wave of litigation and regulation aimed at businesses’, and ‘a rising realisation of the responsibility of directors on boards and of senior executives’. In response, there has been a ramping up and broadening of climate expertise in corporate legal departments.

The key areas of concern for corporate lawyers have been in legal risks from clients, shareholders, consumers and, increasingly, developing government legislation.

But lawyers are increasingly embroiled in avoiding or dealing with the results of transitional risks, notably that of stranded assets, where poor investment decisions on long-lived assets can lead to liability during their lifetime. These transitional risks arise, for example, when greenhouse gas emission limits are tightened in line with climate science, leading to costly upgrade or closure, when a given carbon-intensive or renewable energy technology becomes obsolete and when coastal developments become uninsurable as they are ill-equipped to withstand rising sea levels, storms and flooding. Investors are asking more questions, becoming more activist, and there is growing pressure to divest from carbon-intensive assets.

Corporate lawyers have so far been less engaged in direct physical risks – storm damage, flooding and drought. This is largely the realm of insurers, who wield considerable influence through premiums. For insurers, this is still their top insurance concern in 2019. Yet here too lawyers are likely to have greater success as the science attributing extreme weather events to climate change continues to improve.

While much early action has come from insurers wary of unmanageable future climate-related claims, the financial sector, both investors and regulators, is the main driving force behind the recent surge in activity. Bank of England (BoE) governor Mark Carney’s 2015 speech on ‘catastrophic’ climate change risks was important, as was his involvement in the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD's recommendations have largely been adopted in the UK Government’s Green Finance Strategy and in the Supervisory Statement SS3/19 by the BoE’s Prudential Regulation Authority (PRA) in April 2019. The latter sets out expectations on regular risk assessment, reporting and disclosure, including allocation of responsibility at board level. Similar moves have followed elsewhere, notably in France. In August 2019, Carney went further, warning that climate laggards face bankruptcy.

Longstanding voluntary business initiatives are also moving in a similar direction, with the United Nations’ influential Principles for Responsible Investment (PRI) to adopt mandatory reporting along TCFD lines in 2020.

So how are leading firms responding? The most immediate changes are in enhanced monitoring and reporting, the results of which are slowly trickling into investment decisions. Many firms are now strengthening their legal departments as potential exposure increases. A majority of firms have yet to act, with just 39 per cent of FTSE 100 firms reporting on climate risk in 2017. Still, pressure is growing.

Post-Paris surge

Martijn Wilder is Head of Baker & McKenzie’s Global Environmental Markets and Climate Change practice. He points out that the firm has had a climate change practice for over 20 years. Even so, he stresses a large increase in cases, many arising from legal risk to firms, but increasingly too involving transitional risks. ‘Over the last two years there’s been a lot more focus on these issues’, he says. In response, ‘our practice is now very engaged on such issues’, he notes.

Wilder stresses that ‘the push from our clients has been a global push’, with the finance sector increasingly engaged. ‘We have some leaders in the mining space and agricultural sector’, he adds. Wilder considers action by the BoE and the impact of the TCFD has accelerated action considerably through finance. However, he still believes companies have a long way to go overall and notes that impacts across sectors have been very uneven.

Wilder notes that as the volume of cases increases, the types of cases have also changed: ‘Two years ago, [legal action] was along the lines of awareness raising. Now, it has gone from being an awareness-raising campaign to stopping projects actually happening.’ A key example of this is the Adani Group proposal to open the Carmichael Coal Mine. This is the first of many such proposals in the coal-rich Galilee Basin of Queensland, but one opposed by grazers and conservationists concerned about possible impacts on the Great Barrier Reef, on climate change and water.

Baker & McKenzie’s workload now includes advice on transitional risk, though not on direct liability for loss and damage from physical risk, where Wilder notes ‘the causation issues are quite challenging’. He is confident, however, that the law will evolve.  

The firm is also involved in a mix of energy-related issues, nature-based solutions and work on avoiding climate risk in investment portfolios. It is also working with governments on legislation and policy. For example, they have been advising the Queensland Government on its Land Restoration Fund worth AUD$500,000 (£276,000). Hobley observes that climate change-related litigation has increased both on the public and private level. He thinks that levels are about to rise sharply, noting that ‘the steps this year are unprecedented’; in the UK they include a net zero legal commitment to reduce emissions to net zero by 2050 and climate strikes.

‘That cannot be ignored, [and] in that context legal teams in my view would be bordering on negligent if they are not getting themselves up to speed with the new regulatory landscape’, he says.

Much of the activity has been against the oil, gas and energy majors, with strategic cases such as the successful ClientEarth v Enea case against a new coal-fired plant in Poland in 2018 and the ongoing Lliuya v RWE case (2015), where a Peruvian farmer is suing the power company for its alleged role in climate impacts in his region.  

Hobley points out that in the US, state attorney generals are investigating the potential for cases against energy companies that are alleged to have deliberately misled the world on climate change risks. Here he notes similarities with the early stages of legal campaigns to cut smoking risks and the counter-response from the industry these generated. Early cases have had little success, but this is changing in the latest wave of litigation, which now benefits from advances in climate science enabling better attribution of loss and damage. The ultimate objective is to link back convincingly to the estimated share of emissions by the company. Hobley notes that ‘common law is starting to provide remedies… that law is organic and history shows us it evolves to address what society believes should be actionable’.

But Hobley sees the potential misleading of investors as to what climate risks mean for business models, as well as lack of disclosure, as even more interesting. ‘I’m seeing a dramatic rise in interest from lawyers and legal organisations… in the financial sphere, I think we’re going to see more of that kind of shareholder action’, he says.

The Carbon Tracker Initiative has seen an increase in interest for financial analysis as concerns mount over potential destruction of shareholder value by stranded assets, not least in relation to the Polish coal plant case. Public interest environmental lawyers, such as ClientEarth, are now looking at financial analysis to explore legal opportunities, Hobley adds.

He considers that ‘Private practice will build up capabilities and understanding to meet demands of clients through what is going to be an unprecedented transition’. Pressure from litigation is likely particularly up to 2025 as a result of disrupted business models and the resulting destruction of shareholder value.

Hobley cites the Inevitable Policy Response (IPR), a research project of the UNPRI, as just one example of how shareholders’ awareness of risks is being raised. As a result, shareholders will expect the companies they own to not only be aware but to take action. As the Polish coal case ClientEarth v Enea illustrates, shareholders will increasingly look to litigation where action is not being taken or a company’s failure to act results in the destruction of shareholder value.

Catherine Amirfar, a litigation partner at Debevoise & Plimpton, has also noted ‘an enormous impact on organisations and the demands on in-house counsel’ post-Paris, generating a need for more effective organisational response and greater preparedness.  

‘There has certainly been an increase in climate-related litigation. In-house counsel can help tackle this by working with their business colleagues to ensure their organisation abides by all climate change related reporting requirements and other legal obligations.’

She adds that ‘we often work with in-house counsel to mitigate litigation risk by creating and enforcing consistent internal policies around climate change-related requirements’. Amirfar points out that ‘good internal policies can help clarify and demonstrate how the organisation meets its legal responsibilities, and identify areas where the company is not legally responsible’.

An immediate priority for companies is to build internal reporting and emissions reductions systems to mitigate climate change, but more specific action to ensure compliance and reduce exposure to litigation is complicated by continuing uncertainty as national policies evolve. ‘We have also seen an increase in different, sometimes inconsistent regulations, laws, and litigation decisions, which can make it challenging for companies across all sectors to anticipate and navigate regulatory and litigation risk’, Amirfar says.

Coordinating role

The role of corporate lawyers has grown well beyond just litigation. They find themselves in a unique advisory position and offer leadership due to their overview and strong connections with other departments. In comparison, dedicated environmental teams and energy managers tend to be seen as an add-on and are typically marginalised in influence over company policy and investment.

Nigel Brook is Head of Clyde & Co’s reinsurance team and its global campaign on Resilience and Climate Change Risk, and an expert on climate-related litigation trends and lack of developing world insurance cover. He is accumulating know-how and ‘raising awareness of climate-related legal duties and potential liabilities’. He considers that ‘for most companies, I think the role of lawyer is going to become more and more central’, as climate change will involve a range of legal issues in both statutory and common law as it seeks compliance with duty of care for companies and their executives. Brook stresses that climate change is global in nature, and also ‘a risk multiplier’ that could accelerate transitional risks. ‘Trying to keep on top of all this will be quite a challenge for legal teams’, he says.

Brook stresses the importance of horizon scanning as climate policies evolve globally. This will mean setting up a framework to be ready to act, for example, developing scenarios on the expected roll-out of carbon pricing even though the pricing is still uncertain to assess investments in the next few years.

Amirfar sees the in-house corporate lawyer role as central to company response on climate risks and opportunities, ‘as being a kind of in-house policy guru, and in charge of a mini-think tank in their companies’. After Paris, there has been ‘an explosion of regulations around the world, and I expect to see even more as countries craft and implement the policies to meet their intended national emissions reductions targets’, she notes. This means in-house lawyers need to know where and when to expect the new regulations around the world.

She also notes real leadership opportunities from successful engagement for in-house counsel: ‘Each of these new regulations build in financial incentives to take part in mitigation and adaptation, and so in-house legal counsel have the chance to be at the front of those decisions in their company by being the first to know, and to know the most’.

Among the biggest challenges for legal teams now is how they grapple with climate-related financial disclosure, followed by climate litigation, ‘because it is certainly happening’, says Hobley.

Hobley describes this as a massive change in our approach to risk, from one that has always been backward-looking, to one that is now forward looking. ‘The rear view mirror is no longer a reliable indicator of future risk: Directors, senior executives and legal teams need to make this psychological adjustment quickly and in-bed it into their internal strategic business planning and risk management processes. Otherwise the exposure for the company and directors is huge.’

This shift is at the heart of the BoE's recent Supervisory Statement 3/19: Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change.When the BoE interviews nominated directors of regulated entities to assess their suitability as board members, nominees should not be surprised if they are grilled on their understanding of these issues’, notes Hobley.

All this ‘brings you back to the legal department’, he notes, which now has to see across these issues, looking at what procedures the company has in place, whether it be transitional risks or direct impact from physical impacts.

Risks and rewards

So what are the biggest risks for legal teams preparing for climate-related litigation? ‘The key risks are legal teams not understanding changes over the last year and not really appreciating that it’s a big risk now, not in five years', thinks Hobley. He cites as evidence the TCFD’s recommendations, the PRA Supervisory Statement 3/19 and other initiatives in China, France, Japan and elsewhere, with increasing pressure for moves towards mandatory disclosure.

‘We’re in a real transition here’, he says. ‘The real risk is that legal teams miss that and then have to catch up.’

Brook warns that while there are risks in reporting transitional, physical and liability issues, failure to report and to take adequate action also exposes the company, as does careless glossy reporting. This is where the legal department ‘has an important role in guiding the company on the duties it has and also guides the directors in their stewardship of the company’.

How can counsel help make companies more resilient to these risks in their business practice and ensure compliance? Hobley believes this means ‘making sure they have someone on their legal team that understands these issues’ and implementing ‘robust governance procedures’ as has been the case for compliance with the EU General Data Protection Regulation and money laundering regulation. The goal is ensuring the organisation ‘has the necessary minimum knowledge… ensuring [the] right procedures, governance in place, training’. ‘If not, it’s highly likely they are going to breach them’, he warns.

So where are climate-related litigation risks likely to come from next? Wilder sees the next big challenge as meeting the more ambitious Paris 1.5°C target, with most of the global economy a long way from this decarbonisation pathway. He stresses that ‘some areas of the economy heavily impacted will fall away’, becoming uninsurable or becoming technologically obsolete rapidly. Others may manage a more rapid transition. These very uneven impacts will need careful management to avoid systemic economic and financial risk and disruption to supply chains.

Drilling down, the current poorly managed transition with sectorally-uneven transitional risks is set to lead to new waves of litigation for corporate lawyers, not least from shareholders. Hobley adds that it is not outside the ‘realms of possibility’ that there could well be more from civil society too.

In the more immediate future, global corporations particularly will be under pressure to improve reporting and root out regulatory breaches by misreporting, with mandatory disclosure requirements increasing globally in new sectors.

So corporate lawyers are having to face pressure from NGOs, government regulation, citizens and other firms in their supply chains on the need for accurate disclosure of risk and on litigation, as well as increasingly advising and coordinating the corporate response. This is a huge challenge with substantial uncertainty, but also a competitive and new market opportunity for legal teams in a growing number of sectors exposed to litigation. With firm country emission plans due at the COP26 UN climate change conference in 2020, it is one that they are starting to realise they cannot afford to lose.

Note

[1] The IBA Task Force on Climate Change Justice and Human Rights launched a report in this area in 2014, see /PresidentialTaskForceCCJHR2014s.