Q&A: How businesses are being sued over their contribution to climate change

Businesses are also starting to feel the impact of corporate duty of vigilance laws (such as those introduced in France, Germany and Norway), which require companies in scope to identify and prevent any severe environmental impacts across their supply chains.

These frameworks create the corporate duty of care to protect the environment which has been so difficult to establish through the courts in common law jurisdictions, sparking a wave of lawsuits against banks over the climate impact of the activities they finance.

And with the EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) set to be implemented into member state law next year, we could see an uptick in climate-related litigation follow.

What risks does climate litigation pose for boards?

As a result of the duties of care and diligence they owe to their companies, board directors could be held responsible for not taking adequate steps to manage and mitigate the impact of climate change on the business.

For example in the UK, directors and officers may face claims for breach of fiduciary duties based on their alleged failure to consider the environmental impact of their decisions in the context of their obligation to promote the success of the company.

In some jurisdictions, directors and officers of financial institutions may face claims alleging that their decisions to finance “brown” energy, in and of themselves, constitute a breach of duty given the likely short-term damage to the reputation of the business, as well as the longer-term risks that such loans might become non-performing due to regulatory change.

As Lord Sales, a Justice of the Supreme Court of the United Kingdom, observed in remarks to the Anglo-Australian Law Society: “Under certain circumstances … companies’ interests may be so implicated by climate change effects that [directors’ and officers’] general fiduciary and due care obligations actually require them to cause their companies to take action to reduce their contribution to climate changing activity.”[1]

While this remains a developing area of the law, it is important for directors to weigh climate change factors in their decision-making to limit any adverse reputational and financial impacts on the companies they manage and, in turn, reduce the potential for climate-related litigation.

What actions can companies and their boards take to reduce their risk of litigation?

In most jurisdictions, board directors are ultimately responsible for understanding the climate-related risks and opportunities their business faces, as well as its potential exposure.

As far as mitigating the risk of litigation over historic climate impacts, boards should therefore ensure they are aware of key legislative and case law developments, especially in relation to rulings that establish precedents around causation.

In terms of climate impact litigation more broadly, the principal risks arise from any perceived failures to reduce the impact of the business and its supply chain on the climate, and to manage the effect of climate change on the business (we look at the litigation risks associated with climate-related disclosures in a separate Q&A here).

Good risk management processes ensure that climate impacts are taken into account in board decision-making and that this is appropriately documented in board minutes.

Boards should also look at their governance structures and consider whether responsibility for climate-related issues should sit with a nominated director or committee.

Some investors are putting pressure on companies to go further than this (for example by proposing specific climate-related resolutions that are binding on the business), so proactive engagement with shareholders is critical.

The rise of duty of vigilance laws requires businesses to prevent severe harms to the environment across their supply chains, which necessitates extensive due diligence to map where these issues arise.

“Prevent” in this context requires the business to use whatever leverage it has with its suppliers (in much the same way as with human rights laws such as the UK Modern Slavery Act), for example by renegotiating contracts to introduce penalties for poor environmental performance or by switching to greener business partners.