In retrospect, the year 2019 will likely be seen as a turning point in the combat of climate change. With Friday for Future as pace maker, for the first time in history, there is a globally-aligned political movement including countries on every continent urging for immediate and robust action against climate change. Pressure on legislators is increasing to take more drastic measures with the European Union and Ursula von der Leyen’s ‘European Green New Deal’ setting the scene for the coming comprehensive rebuilding of economies, moving away from the age of fossil fuel to a new green model building on renewable energies. The Commission’s goal is to put Europe on a new path of sustainable and inclusive growth, with an overall target of being the first continent to reach net zero by 2050. At the heart of the Green New Deal is a proposal to mobilise €1trn of investment and a just transition mechanism, with direct funding of €7.5bn directed towards regions which have the greatest reliance upon carbon-intensive industries. In the coming years the Commission will formulate wide-reaching policy and regulation in the areas of energy, industry, transportation, building, agriculture and biodiversity. The fight against climate change, with the aim to cut global warming at maximum 2°C above pre-industrial levels by 2100 and achieve only a 1.5°C rise, will not be won against the economy and will depend on massive investments into new technology. It is also clear that new regulations will be adopted where market mechanisms may be perceived as ineffective or too slow.
Hitting the charts of business risks
Climate change is beyond doubt the greatest single threat to the future of mankind. Given the environmental and political developments, it is thus no surprise that climate change risks have also been climbing the ladders of business risk rankings and have become a mandatory c-suite issue for company leaders to consider and implement in their risk management and business strategies. For example, climate change now, eventually, made the top ten (number seven) in the global Allianz Risk Barometer. While that may still appear as an underestimation, when considering the interrelatedness with many of the other top-ranked risks including business interruption and supply chain risks (number two), regulatory changes (number three), natural catastrophes (number four) and reputation (number eight), the comprehensive impact of climate change risks on companies is more than evident.
Often, the impact of global warming on rising sea levels and climate extremes dominates risk discussions. And quite rightly, this is where everybody can see and feel climate change accelerating. However, moving into 2020 and beyond, companies, their directors and officers will increasingly need to also respond to regulatory, litigation and liability risks. In some industries, such as the energy and automotive sector, fundamental change has been on the way for a few years, but is still picking up speed. Beyond these most directly impacted sectors, companies across all sectors will need to assess how climate change risks and new legislation will impact the way they are running their business.
Climate change litigation
Pressure is on legislators to take more drastic decisions at an increased pace. This pressure is not only political but is also coming from the courts. According to recent statistics (cf. climatecasechart.com), there are meanwhile more than 1,600 cases pending with the courts worldwide. Not surprisingly, the US continues to be the litigation hot spot accounting for more than 1,300 of these cases. Other noteworthy jurisdictions are Australia, Canada, the European Union and the UK.
Actions against governments
Most of these actions continue to be cases brought against governments. While the debate continues whether the courts are an appropriate mechanism to address climate change and, while plaintiffs have seen set-backs (such as recently in the Juliana v US  case where the Ninth Circuit Appeal Court dismissed the claims for governmental action to regulate carbon dioxide pollution for perceived lack of power to order the US government to adopt a national remedial plan to phase out fossil fuel emissions), other cases have seen spectacular success. Especially, the landmark final ruling in the Dutch Urgenda case on 20 December 2019 obliging the government to cut carbon dioxide emissions by at least 25% by the end of 2020 (compared to 1990 levels) is seen as a playbook for similar actions. The decision was based on the European Convention on the Protection of Human Rights and Fundamental Freedoms, namely the right to life, and the right to respect for private and family life. More such rights-based legal arguments will come before courts in 2020 and, for instance, a similar constitutional action was just recently filed before the German Federal Constitutional Court. Even if not many of the governmental cases are successful, together with the necessary further implementation of the Paris Agreement and other international and national plans for action, company leaders need to anticipate that more regulation will come at a higher speed in the future and will need to anticipate what that means for the business in good time and to take respective actions.
Actions against companies
The risk of litigation is by no means confined to governments. The cases brought in public law are now accompanied by an extensive body of civil litigation against private entities. In the US and Europe a number of influential climate liability cases have been started with the intention of defining new duties and standards of care for carbon-emitting businesses and, eventually, their investors, financiers, insurers, advisers, customers and clients. For obvious reasons, climate liability litigation is also being closely watched by the insurance industry. Liability insurers may be impacted in several classes, most obviously under general liability, product liability and environmental liability policies.
For example, in the US, a number of lawsuits has been filed by several municipalities and one state against the oil industry, seeking damages under common law tort theories for the financial consequences of climate change. The thrust of the allegations is that, from 1965, the oil industry defendants: extracted a substantial percentage of the world’s raw fossil fuel; caused a quantifiable percentage of global fossil fuel-related CO2 emissions; wrongfully promoted their fossil fuel products; concealed known hazards associated with the use of those products; championed anti-regulation and anti-science campaigns; and failed to pursue the less hazardous alternatives which were or might, with further investment, have been available. The complaints are not made under federal environmental law but under the common law and, in some cases, codified state law, including public nuisance, private nuisance, product liability, negligence and trespass. The substantive issues at stake in the cases break new ground. The plaintiffs’ central allegation is that oil is a defective product which has caused greenhouse gas emissions and contributed to man-made climate change.
Climate liability litigation is, however, not uniquely an American phenomenon. One of the leading climate liability cases has been brought in Germany by a Peruvian farmer against the energy company RWE (Lliuya v RWE AG ). The claimant alleges that a lake threatens to overflow as the result of glacial retreat, creating a risk of flooding to his home. He seeks to hold RWE responsible for its part in man-made global warming and claims a contribution towards the €3.5m cost of draining the lake. The claim is similar to the US litigation in that it seeks to establish a causal relationship between RWE’s emissions and the risk of physical damage. As the claimant asserts that RWE was responsible for 0.47% of global greenhouse gas emissions over the last 250 years, he seeks damages of €17,000 to represent a contribution of 0.47% towards the cost of draining the lake. While the first instance court dismissed the action, in February 2018, the Higher Regional Court of Hamm on appeal made an order that the claim should proceed to the evidence stage.
Climate change risks are, in a broader context, part of corporate social responsibility and companies’ environmental, social and governance (ESG) strategies. In this context, rating agencies are taking climate risk – and other ESG metrics – seriously, warning of lower credit ratings for carbon-intensive companies, or steeper borrowing costs for municipal bond issuers that fail to take climate resilience measures. In addition, investors are revisiting their investment policies and are also pressing for decision-useful climate-related financial disclosures. BlackRock has joined forces with Climate Action 100+, bringing the financial clout of this investor initiative to a total of $41trn under management, nearly 40% of the world’s publicly traded stock. Its chair and CEO Larry Fink in his annual letter to chief executives wrote ‘I believe we are on the edge of a fundamental reshaping of finance’ noting that ‘climate change has become a defining factor in companies’ long-term prospects’. Less publicised, Ping An, China’s largest insurer also joined Climate Action 100+ and has followed EU and US (re)insurers in adopting a non-coal underwriting and investment policy.
A number of jurisdictions have been reporting requirements relating to climate change. In 2010, the US Securities and Exchange Commission (SEC) issued interpretive guidance to public companies regarding its existing disclosure requirements as applied to climate change. The European Commission has for example addressed the methodology for non-financial reporting in its respective non-binding guidelines on non-financial reporting (2017/C 215/01). In particular, the framework for climate-related financial disclosures introduced by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) in June 2017 will very likely see increased implementation. Although currently still voluntary, governments such as the UK are considering introducing obligations for large asset owners to disclose climate risks in line with TCFD recommendations. A number of companies have started on a ‘TCFD journey’ taking the view that risks are best understood and managed before such disclosures become compulsory.
At the same time, climate change disclosures have started to materialise as the subject of more claims against companies and their directors and officers, and the impact is being felt by insurers under directors and officers (D&O) policies. Climate change has become an important board-level issue, and corporations themselves as well as their directors and officers may be held accountable if disclosures are not adequate. Increasing interest in this area by investors, regulators and the plaintiffs’ bar, and the recent decision in the putative securities class action pending in the Northern District of Texas, Ramirez v ExxonMobil Corp, suggest that an increase in these types of claims could now be on the horizon. Plaintiff firms will continue to test various claims and theories of liability, as they did with tobacco, asbestos and other mass tort claims. They have taken a particular interest in climate change disclosures by companies in the energy sector, but they are also looking closely at other areas such as mining, transportation and insurance.
Climate change-driven regulation and litigation is on the rise. And the claims arise on a global scale with claimants seeking to shop for the forum that appears best suited to develop liability theories. It is thus no coincidence that Mr Lliuya’s claim is brought against RWE in Germany although there would have been other available defendants and forums. Climate liability litigation will not, therefore, be limited to the courts of the jurisdiction in which the alleged damage occurred. Companies are at risk of litigation in the courts of any country where they conduct business and subject to that country’s laws.
The increase in climate change litigation is also fuelled by advancements in climate attribution science. A growing body of science around the attribution of extreme weather events may encourage a greater number of cases brought by individual claimants. The same is true of causation theories. Plaintiffs in the US rely on collective liability theories which have been tried and tested in other environmental lawsuits such as the MTBE litigation. The theory of contribution-based causation put forward in the RWE case is, in principal, well established under German law in other cases and also not dissimilar to the approach taken by the English appellate courts in employers’ liability asbestos claims.
Accordingly, companies and insurers need to expect that the prospect of successful claims will improve with time: the greater the number of cases, the higher the probability that one will succeed. Political policy changes to zero carbon growth, related technological improvements and new industries taking the lead play their part: once society is less dependent on fossil fuels, it will be a less daunting prospect for a judge or jury to hold that oil is a defective product or that its consumption amounts to a violation of fundamental rights.
Climate change liability risks also extend to other commercial sectors beyond the fossil fuels industries. While they are the easiest targets for the first round of claims, if and once legal theories gain acceptance, plaintiff lawyers will likely extend their activities to sectors, notably manufacturing, transportation, construction and, last but not least, agriculture and those who finance, advise and support those sectors. And beyond that, with the increasing demand on climate risk-related disclosures, pretty much any company could become subject to scrutiny by regulators and investors. In civil law countries, directors and officers themselves may be held liable by their own companies for failing to comply with the duty of care if they do not sufficiently take climate change risks into account in revisiting and amending business strategies.
Naturally, climate liability litigation will thus also affect the insurance industry across various business lines. So far, policies typically do not address climate change risk expressly so it will become increasingly important for insurers to understand their ‘silent climate change risks’ and to manage their exposures. Underwriters will need to stay on top of the changing risk profiles of particular sectors and jurisdictions. Wordings teams should reflect on the adequacy of existing wordings and the boundaries of existing products. Claims handlers will also face new challenges with claims often following new or re-formulated theories, being of an international nature and having cross-border implications and with policy language, such as occurrence wordings, aggregation issues or exclusions for deliberate conduct or pollution, being largely untested in relation to climate change liability claims.
As we are setting off in the 2020s, the world is at a crucial point in time. Sustainable change is required now to avoid the most disastrous consequences of climate change. As policymakers, investors, claimants and others are increasing the pressure, it is now the time for companies across all industries to revisit their business models and to make sure that climate change related-risks, both retrospective and future, are adequately dealt with as it is certain that these risks will remain at the top of the charts for a long time.