Managing the legal risk of climate change

Companies in all sectors and all regions of the world are beginning to grapple with the realisation that they have liabilities related to climate damage that they have not fully accounted for. General counsel will be at the heart of posing and answering the question: what is our liability and what do we do about it?

Climate change has deep and lasting consequences, and societies are beginning to ask: how did we get here? Who is responsible?

There are many answers to those questions, but the conduct of businesses is certainly one factor. And campaigners, citizens and governments are beginning to take action to hold companies to account for past and current conduct.

That can take three forms said Thom Wetzer, a professor of law and finance at Oxford University. Companies can be sued for damages relating to past conduct involving a calculation of what an organisation’s share of climate change is; they can be subject to injunctions to stop them behaving in a certain way, or they can be subject to growing regulation of current and future activity from governments and public bodies.

Liabilities could be enormous, enough to put some major companies out of business, Wetzer said

“Companies that have large historic emissions are companies that are more likely to be held responsible for the harms that are associated with or attributable to these emissions. So if you have a high a company with high emissions then you should expect a higher likelihood of a damages case,” he said.

“On the other hand, if you have a company with limited historical emissions, but with very high emissions today, and also very high emissions projected for the future, then you should be worried about a future damages case, of course, but also about the kinds of cases that that try to stop that company from polluting going forward. But it's not just the emission profile that matters. You can also imagine that companies that have the opportunity to reduce their emissions but choose not to do so, that they are more vulnerable to be targeted by, say, climate activists,” said Wetzer.

Climate advisor Euan McVicar of Pinsent Masons said that most companies have so far focused around greenwashing as the major legal risk of climate change action. But that needs to change as cases progress to very senior courts, potentially setting precedents for future cases.

One of the most famous cases is that brought against German energy company RWE by Peruvian farmer Saul Luciano Lujia, who said that the company was partly responsible for the melting of glaciers in Peru, causing flooding.

“While everyone thought that that case was likely to be thrown out at the early stages, the German courts have taken it to its next stage, and there's now a proof being held to try and establish what the evidential position is. It wasn’t thrown out, and I think increasingly we're going to see activists looking for ways in which they can test that in different jurisdictions,” he said.

“As to the linkage between company activity and emissions, and the emissions giving rise to harms, it's not hard to see the jurisprudence developing much as it did around tobacco, and focusing on the duty of care that one owes to others in relation to harms that are reasonably foreseeable from your actions,” he said.

Hear more about Managing the legal risk of climate change on the Brain Food For General Counsel podcast.

The first challenge for companies is to understand what conduct might have led, and still be leading, to exposure to climate change litigation or regulatory action. This seems daunting, but should be possible by using and adapting existing processes, said McVicar.

“At a basic level the processes and the mechanics should be the same. A good risk management framework should already be taking account of legal risk that the company faces and these manifestations of legal risk and should be looked at in the same way. But I think because of the novel nature of these risks, the fact that they're being grappled with for the first time very often, there should be an element of horizon scanning and prediction going on here around this. So they might need to be looked at slightly separately from the other risks so that they're better understood and that's an approach which has become quite commonly accepted more generally in how companies address climate issues,” he said.

Wetzer outlined how an organisation might move from this state of awareness of the risks to actually quantifying them.

“You could start evaluating the emissions profile: what's the total amount of greenhouse gases that have been produced?,” he said. “One thing you can do is you can multiply that by the social cost of carbon. And if you do that, then you'll end up with total omissions times the social cost of those emissions that gives you the total social costs that your emissions have created. And then you can ask yourself, is that a number that is going to be fully internalised through the legal system or do I think only part of that will be internalised through the legal system? This is just one of many methods which can be used. What I would always recommend companies is use multiple methods. And on the back of that come up with a number or a set of numbers and a strategy to mitigate the associated risk.”

Chief executive of Chapter Zero Vicky Moffatt advises board members on climate issues and company strategy. She said that cases will not just target companies as a whole, but individual directors.

“The latest data that's published was actually about a year ago, where there were 1522 climate related or ESG related litigation cases around the world. I think what we need to think about over the next several years is actually cases against individual directors themselves. Most companies have net zero commitments and a lot of those are fir 2030. I would expect that quite a few heads will roll around that year. Or maybe let me put it another way - it will sharpen the focus because companies that have made these pledges and aren't delivering on them will be in sharp focus.”

The risks are clear, so how do companies go about tackling them? McVicar said that climate risk needs to become as natural a part of decision making as other kinds of risks, such as health and safety or data protection risk.

“The key thing is to make sure that these types of risk are built into decision making processes about current and new activities,” he said. “When a major decision is required, what are the internal governance steps that are required for sign off and along the way is some assessment being built into the process to understand whether or not this is accentuating this type of risk?”

Wetzer went further, saying that this kind of risk and an assessment of an organisation’s ongoing climate impact should be at the very heart of a company’s whole strategy.

“The main thing that companies should be doing is they should come up with an emissions pathway as part of their corporate strategy that is consistent with meeting the goals of the Paris Agreement, because that is the globally accepted scientific and political consensus on what should happen. And if you want any sort of anchor, any north star for your corporate strategy that's the one. Anything less will risk exposure to the threat of litigation,” he said.

“Ignoring this risk, attaching a value of zero to this risk is not wise as a corporate strategy and is also not something that you're going to get away with for much longer,” said Wetzer.