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Climate change litigations against heavy emitting companies – 4 trends investors need to be aware of

In the recent years we have seen significant increase in climate change lawsuits against companies responsible for heavy carbon emissions. The Hague District Court’s ruling against Shell last week to set more ambitious emissions reduction targets is currently fresh in everyone’s memory, but this is only one of the latest of about 1500 climate litigations filed in the last three decades against coal companies, oil and gas companies, steel and cement manufacturers, and other heavy carbon emitters.

The number of climate change litigations are expected to continue increasing in the foreseeable future, and investors need to pay closer attention to the climate litigation risks while evaluating their investments. Our ESG Base research team have identified the top four trends related to such litigation:

1. Litigations not limited to developed economies

Based on the data compiled by our ESG Base research team, the companies operating in the developed economies, particularly in the US, Australia, UK, and EU are at higher risk of climate litigation. About 80% of all the climate related litigation to date have originated in the US. However, the litigations are no longer constrained only to developed economies. Since 2015, we have also seen an increase in litigation in Asia (16 cases), Africa (6 cases), and South America (14 cases).

2. Significant proportion of these litigations have favorable outcomes toward climate change actions

Analysis of the litigation outcomes since 1990s show that a fair proportion of the litigations had outcomes favourable to climate change actions. Very often such outcomes will have negative impacts on the profitability and valuation of the litigant emitting business. About 42 percent of the cases in the US filed between 1990 and 2016 had favourable outcomes toward climate actions. While the Trump administration’s attempts to undermine climate protection caused a shift in these trends between 2016 and 2020, we expect the pre-2016 trend to return under the current administration. Outside the US, the judges are even more likely to support greater climate actions. About 58 percent of the cases filed outside the US had favourable outcomes.

3. The legal proceedings can be more damaging to the heavy emitters than the outcome of the litigation itself

Perhaps the most damaging consequence of these litigations to the emitting companies is not the outcome of the litigation itself, but the documents and disclosures that come to light because of the litigation proceedings. Courts may require the companies to turn over documents and information relevant to the suits, with the possibility that these disclosures will be made public. The secrets and conduct of an emitting company, particularly if there is evidence that the company knew about the damaging effect of its emissions, could create significant negative publicity for the company and its sector, and could lead to permanent reputational damage. For reference, one could look back at this phenomenon in the 1990s in relation to the tobacco industry.

If such documents come to light during the litigation proceedings, this could also lead to fresh litigation.

3. Establishing the litigation may not be trivial for climate activists

Despite the above three significant litigation risks mentioned above, investors need to be aware that establishing and conducting the litigation is a difficult process for the plaintiffs. For example, in the US, a plaintiff must establish standing under state law or federal law, and also establish that the emitting company is under the same jurisdiction. The plaintiff would then have to persuade the court of the harm caused by the company. Very often the heavy emitting companies – coal fired power plants, large oil companies, steel or cement manufacturers, etc. are integral parts of a country’s economy, and it is not always easy to establish the action of one particular company as the cause of damage to the global climate. Furthermore, the defendant companies are often far more resourceful than the plaintiffs, which tend to be an individual or an NGO or a government entity. Also, in the US a case may proceed from a state court to a federal court, and suddenly the plaintiffs may find that the judges are less sympathetic to climate action. Having said that, environmental activist groups around the world are continuing to gain more experience in successfully establishing and conducting climate litigation. And even in cases where a litigation is not successful, the negative publicity could cause significant reputational damage to the company and its investors.

Understand your reputational risks due to an investee company’s climate litigation

All of these above trends signal that as an investor, you need to seriously consider the risks of climate litigations when backing a company.

To help you better identify and get an accurate picture of the risks involved, ESG Base have developed cloud-based digital capabilities which help collect information from and engage in dialogue with the investee companies on the companies' governance, strategy, risk management, and progress on addressing the risks of climate change.

Get in touch with us to find out more about our ESG Base platform capabilities.

Who we are

ESG Base is a global premium provider of technology and data solutions enabling ESG investments in real assets. Our mission is to offer scalable technology solutions for fund managers and investors to identify the best ESG aligned investments and monitor performance throughout the investment lifecycle.

ESG Base is part of the G20 InfraChallenge building better, innovative and resilient infrastructure.

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