Out-Law Analysis | 05 Oct 2021 | 1:32 pm | 3 min. read
Trends seen in other jurisdictions and a boom in ‘green’ investments suggests climate-related litigation in the UK will increase and its focus broaden beyond the commitments and claims made by the government and energy companies.
A recent case in Australia demonstrates that the green credentials stressed in statements made by companies will come under scrutiny, and companies need to be able to justify those statements with clear evidence, and detailed plans for achieving ‘net zero’ emissions where this is a stated target of theirs.
The case involves a claim made against Santos, Australia’s biggest gas supplier, by the Australian Centre for Corporate Responsibility (ACCR), which is a research and shareholder advocacy organisation. This claim is unique in that it is alleging that Santos has engaged in misleading and deceptive conduct in breach of Australian consumer law by claiming in its annual report and on its website that natural gas provides ‘clean energy’ and that it has a roadmap to reach net zero by 2040.
The ACCR has stated that this is the first court case in the world to challenge a company’s net zero emissions target for being misleading. The ACCR has argued that whilst Santos has firm plans to increase its emissions by expanding production projects in Australia, its plan to become carbon neutral is heavily reliant on carbon capture which it considers an unreliable technology. The ACCR said: “Companies have a legal obligation to be upfront and honest with investors in their annual reports. This is particularly important to investors who are trying to assess which companies will survive and thrive in a rapidly changing global energy economy.”
In the UK shareholders have increased their demands in relation to climate change compliance on the basis that climate change creates additional financial risks for companies. This is manifesting itself in arguments that directors' legal duties, such as those under section 172 of the Companies Act 2006 to promote the success of the company for the benefit of its members, require them to take climate change considerations into account – for example, when making investment decisions.
The power of these legislative provisions is well known to claimant groups. There are already examples of activists referencing section 172 duties in correspondence with major banks in relation to climate issues. ClientEarth is one such group to have written to leaders of financial institutions to warn that providing financial or advisory support to organisations behind fossil fuel projects might be a breach of their fiduciary duties as directors and that such action might leave the bank open to litigation and shareholder activism.
We have not yet seen any actions brought against directors for breach of duty on these grounds, but the heightened scrutiny of directors’ decisions and a companies’ strategy, together with a greater awareness of potential causes of action, could lead to claims being brought in the near future.
Climate-related claims could also be raised on contractual grounds. Disputes may arise in respect of sustainability-linked loans (SLLs) where the borrower fails to meet certain selected and pre-agreed sustainability performance targets (SPTs), such as improving the energy efficiency of a building or reducing water consumption.
Under the terms of the SLL the success, or failure, to meet the SPTs will trigger other provisions in the loan, such as the interest rate. An area of potential dispute could be disagreement as to whether these SPTs have been met given the preferential interest rates at stake.
Although the lack of any standardised classification makes it difficult to assess, some experts estimate the current total value of environmental, social and governance (ESG) assets as at $35 trillion, with the value having risen by around one third between 2016 and 2020. However, the Bank for International Settlements has warned that unless transparency in relation to these ESG assets can be ensured, there is a risk of a price “bubble”, drawing comparisons with railroad stocks in the mid-1800s, internet stocks during the ‘dotcom’ bubble, and mortgage-backed securities – all investments which saw large price corrections.
One area of potential dispute is so-called ‘greenwashing; where the ‘green’ credentials of the asset are overstated. Where the value of an ESG asset falls due to the asset being greenwashed an investor could seek to recover damages on the basis that the asset has been mis-sold and the price inflated due to the “greenium” – the enhanced value of an asset due to its green credentials. This could lead to mass actions involving many thousands of potential claimants.
So far, most litigation has been confined to companies in the energy sector, and actions against governments, however, we can see from recent international developments, and the boom in green investments, that litigation in other areas is bound to follow.