Climate change litigation rattles companies and shareholders

Hello from New York, where our beloved skyline and Statue of Liberty were shrouded in a smoky haze this week as forest fires on the West Coast drifted all the way to the Atlantic. The smog was not as bad as San Francisco’s apocalyptic situation last year, but it was our reminder that — from Belgium to China — the world is reeling from global warming. 

Today we have a thematic issue that focuses on legal action on the climate change front. We have written before about the impact “warrior accountants” can make in the green crusade. Can the legal community embrace the call to arms too? Patrick Temple-West

Climate change litigation: cases multiply and diversify 

© AFP via Getty Images

In the regional court in the town of Hamm, Germany, one of the world’s biggest courtroom battles over corporate climate change responsibility is heating up.

The case involves RWE, Germany’s largest electricity producer, and an obscure Peruvian farmer who lives on the other side of the world. Saúl Luciano Lliuya sued the company for climate change damages pertaining to a glacial lake near him that is melting. And in November 2017, an appeals court ruled that his case could proceed, a shocking development for climate change litigation.

The case highlights the evolving variety of corporate climate change cases, said Joana Setzer, an assistant professorial research fellow at the London School of Economics. She co-authored a report this month that identified at least 33 ongoing cases against the largest fossil fuel companies. These include the landmark May 2021 Royal Dutch Shell case, which the company has said it is appealing this week.

“We are now starting to see wider diversity in the approaches taken in cases seeking to influence corporate practice,” Setzer said. An increasing number of claims focused on financial risks, fiduciary duties and corporate due diligence, she added. These strategies put banks and major retailers in legal jeopardy, not just fossil fuel producers or cement companies, Setzer said.

In the US, a Boston-based non-profit this month sued Gulf Oil and Shell Oil to force the companies to prepare fuel storage terminals for flooding and extreme storms driven by climate change. In June, a Massachusetts court said Exxon must face a lawsuit from the state’s attorney-general alleging the oil major deceived investors about climate change risks. 

The climate courtroom crusaders have sometimes enjoyed financial support from billionaire Michael Bloomberg. His philanthropy division in 2017 started paying salaries for staffers in state attorneys-general offices to combat climate change. Unsurprisingly, this iteration of litigation finance drives companies crazy

While each court case is different and rulings will certainly diverge, climate change litigation is becoming an increasing worry for companies and their shareholders. Patrick Temple-West

UK law firms turn to B-Corp for a sustainability framework

The certified “benefit corporation” or “B-Corp” status has gradually become a mainstream sustainability enhancer for companies. In 2020, Lemonade, an insurance provider, and Vital Farms, an eggs producer, went public in the US as B-Corps.

The B-Corp status requires firms to balance environmental and social concerns with profit-making. It can help companies shield business owners from the pressure to pursue short-term profits.

But can B-Corp status be broadened to cover law firms too? Mishcon de Reya, a London-based law firm, is giving it a try. The firm, known for representing Diana, Princess of Wales, during her divorce in 1996, has become the second large law firm in the UK to achieve B-Corp status. Rival law firm Bates Wells won B-Corp status in 2015. It had advised more than 80 businesses on how to achieve legal B-Corp status in the UK before undergoing its own conversion.

“We aim to enable our clients and our people to shape the world’s larger purpose towards sustainability,” Alexander Rhodes, head of Mishcon Purpose, the firm’s values-oriented business division launched last year, told Moral Money.

All companies claim to honour sustainability as an inherent business value, but those that achieve B-Corp certification have gone through intensive vetting. B-Corp status can cost hundreds of thousands of dollars, Kin+Carta, a digital consulting firm, told Moral Money. The firm hopes to become the first UK PLC to achieve B-Corp status as early as this September.

So, why do it? Mishcon de Reya said its employees played a significant role, as well as indicating to their clientele where their values lie. But Rhodes said the B-Corp designation was not likely to alter the type of clients the firm took on. The firm would take an “inclusive approach” so as not to turn down potential clients despite a potentially poor ‘ESG’ record, he added.

“An exclusionary approach is not one that will work on the path to a sustainable world,” said Rhodes. “We will continue to run a very robust ethics programme.”

Mishcon de Reya’s pursuit of the B-Corp status comes as the firm is pursuing a public listing in London. Though the firm declined to comment on the status of its listing, a coveted B-Corp status should boost its valuation. Kristen Talman

Freshfields publishes legal framework for impact

The worldwide legal landscape for sustainable investing is constantly changing. To address the landscape, law firm Freshfields has published a report identifying opportunities for lawmakers to reform regulations to facilitate sustainable investing. The jurisdictions covered include Australia, Brazil, Canada, China, the EU, France, Japan, The Netherlands, South Africa, the UK and US. 

“This report is the first of its kind,” said David Blood, who co-founded Generation Investment Management with former US vice-president Al Gore (pictured with Blood).

Al Gore, left, and David Blood

“[It] shows investors they should feel empowered to rethink old investment paradigms by considering risk, return and impact as the pillars of successful investment practice.” Generation commissioned the report with the UN Principles for Responsible Investment and others. 

The report is expected to be the basis of a three-year programme by PRI, and Generation that will focus on five jurisdictions to help build legal and regulatory environments to meet global sustainability efforts.
Patrick Temple-West

ESG: A general counsel’s ticket to the top?

As companies pay more attention to ESG, it is not always clear who within an organisation is in charge. If ESG is being handled by a marketing or investor relations team, it might be a sign that the company thinks they can pump out a few glossy sustainability pamphlets and call it a day.

For a company to meaningfully address ESG, it needs to be under the purview of senior leaders who can co-ordinate across multiple departments and ensure sustainability is not overlooked in board meetings. And London-based law firm Herbert Smith Freehills sees this as a perfect opportunity for senior in-house attorneys to step up.

Companies’ general counsel (GC) have “independence” and “free-roaming remits” that make them “well placed to help their businesses tackle ESG”, writes Justin D’Agostino, chief executive of Herbert Smith Freehills.

Or as one general counsel of a property company told the firm:

“GCs are afforded a view across everything. They are mostly afforded a view across the darkest stuff, which is helpful with ESG. They are allowed to talk to each other, they have the secrets of the company but no one worries about GCs talking to other GCs and that network is powerful, albeit fractured.”

This can be beneficial to both the company and the GCs themselves, Herbert Smith Freehills argues.

As of now, the GCs who spoke to Herbert Smith Freehills were most worried about their companies damaging their reputations by not taking ESG seriously. But as seen below in our chart of the week, ESG litigation risk is a growing threat, which will make it more relevant to their core job.

And if GCs are able to be leaders in this area, it can be “the final step in the long journey towards becoming core members of the C-suite”, the law firm writes. Billy Nauman

Chart of the day

Bar chart of By sector (number of companies) showing Companies identifying substantive climate-related liability risks

According to exclusive data from the Carbon Disclosure Project, CDP, there has been a steady increase in the number of companies disclosing potential substantive litigation risks. Since 2020, 145 companies have disclosed risks, a significant rise from 95 in 2018.

The financial services sector stood out in 2020 because there was a drop in litigation risks disclosed. In sharp contrast, the manufacturing sector identified significantly more substantive climate-related risks than years prior.

Smart reads

Just in time for the Olympics, our FT colleagues have published today a series about sustainability in Japan. The articles include what future Olympics planners can learn from the Tokyo Games’ extreme weather, Japan’s nuclear dilemma and how Japanese businesses are getting serious about ESG.

Recommended reading

  • The private equity backlash against ESG (FT)

  • How do you insure yourself against climate change? (Deutsche Welle)

  • The activist antidote to ESG guff (FT)

  • Fund managers struggle to keep up with new guideposts for ESG (Bloomberg)

  • Nordea says 90% of new money now ESG as wealth unit hits record (Bloomberg)

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