White & Case’s Mark Clarke explains new corporate climate litigation risks

Last year climate advocates seized on a new litigation weapon: rights-related claims. The tactic of pursuing rights-related claims against emitters meant a reckoning for countries like France and Germany, as well as energy company Shell.

Last May, Dutch Friends of the Earth won a case against the company by claiming its failure to raise emissions targets violated human rights in the Netherlands (Milieudefensie et al. v. Royal Dutch Shell plc).

The trend has persisted up to the present. NGO ClientEarth in March sent a letter threatening legal action to Shell in the UK, where Shell had moved its headquarters, for failing to secure the company's future value for shareholders.

Law firm White & Case partner Mark Clarke, who leads its London commercial disputes practice and co-heads the firm's global energy industry group, told Net-Zero Business Daily by S&P Global Commodity Insights about litigation trends being felt by energy companies.

Net-Zero Business Daily: How has climate litigation evolved since Urgenda Foundation v. The State of the Netherlands?

Clarke: Historically, climate change litigation principally involved claims for damages against large oil and gas companies, and other substantial emitters of greenhouse gases. However, owing to the difficulties in establishing a chain of causation, these claims generally had little success. This resulted in a pivot towards rights-based claims.

The Urgenda decision was the first by any court in the world to order a nation to limit its GHG emissions for reasons other than statutory mandates, as it found the Dutch government had violated the duty of care to its citizens under Articles 2 and 8 of the European Convention on Human Rights. This decision has been followed by several more rights-based claims, generally commenced by environmental groups against European governments, including France, Belgium, and Germany.

More recently, rights-based claims have been brought against corporations, as demonstrated by Milieudefensie's success in the Netherlands (extending the scope of the principles established in Urgenda) against Royal Dutch Shell. Rights-based claims are likely to remain a dominant feature of climate change litigation in the years to come.

Another prominent category of rights-based claims has emerged, based on the principle of intergenerational iniquity. These claims are brought by young claimants, deploying the argument that children and young adults will suffer from the impacts of climate change to a much greater extent than older adults. Young claimants have successfully used this argument in many countries around the world and the youth are becoming a powerful force in climate litigation.

Net-Zero Business Daily: Where in the world is climate ligation growing, and to which parts of the world do you see it spreading?

Clarke: While, in numerical terms, there are many more climate change-related claims within the US than outside it, many of these claims have either failed (for example, on the basis of injusticiability) or are still pending. That being so, a lot of the most significant decisions in climate litigation have occurred outside of the US, in particular, in Europe.

This is particularly so given the increasing success of rights-based claims, and as these continue to gain traction, the number of climate cases in Europe will increase.

Looking to the future, climate litigation is likely to spread to nations that are particularly vulnerable to the impacts of climate change, but in which there has been little or no climate litigation to date. For example, of the thousands of climate change-related cases that have been commenced throughout the world, only a handful have been brought in any of the 54 countries in Africa. As the impacts of climate change become more extreme, this is likely to change, and the recent decisions that have been rendered by European courts will provide a legal template for claimants.

Developments in the law concerning parent company liability may also facilitate claims against parent companies registered in European countries in relation to the climate impact of the activities of their subsidiaries in countries in other continents, such as Africa.

Net-Zero Business Daily: ClientEarth recently sent a letter to Shell UK threatening action over duties of care owed to shareholders. Have there been similar cases in the UK, or would this be the first?

Clarke: This is unprecedented. If ClientEarth obtains the court's permission to pursue the derivative claim against Shell UK's directors, it will be the first claim of its kind in the UK.

However, ClientEarth's letter is part of a wider trend of shareholder activism, in which shareholders are seeking to use traditional business mechanisms to take action against companies in relation to climate change.

For instance, it has become increasingly common for activist investors to use their votes to influence the setting of company climate targets in line with the Paris Agreement, and some activists have gone so far as to use their votes to remove and replace directors to ensure the company's climate policy is in line with their expectations.

Net-Zero Business Daily: How are oil and gas companies preparing for more duty-of-care-related climate litigation?

Clarke: Even before the Milieudefensie judgment was released, energy companies had responded to the drive towards net-zero in various ways, including: 1. by taking steps to reduce the emissions from their operations (both in terms of the actual production and refining of oil and gas, and also from the energy used to run their operations); 2. by developing integrated power businesses, incorporating low-carbon and renewable electricity; and 3. by investing in carbon capture and storage, whether through direct air capture or other technologies.

The key takeaway from the Milieudefensie judgment is that the steps taken by an energy company must demonstrably mitigate the climate impact of their operations, as the Dutch court expressly criticized Shell's climate commitments as "intangible, undefined and non-binding."

Net-Zero Business Daily: Do you see any trends in recent court decisions involving companies?

Clarke: There has been a pivot away from damages claims to rights-based claims which seek to hold companies to account for the climate impacts of their operations, and claimants in several jurisdictions have threatened or brought claims adopting the Milieudefensie model.

However, at this stage, it is difficult to identify any discernible trends with respect to court decisions in relation to companies.

It is certainly true that an increasing number of courts are finding in favor of claimants, but most of the key decisions have concerned governments [as defendants].

As regards claims against companies, while the Dutch courts have allowed rights-based arguments relating to the overall impact of hydrocarbons to prevail against private companies, not all European courts consider the effects of fossil fuels to be a legal issue.

For example, a decision by the Scottish Court of Session in October 2021 determined the environmental impact of fossil fuel consumption to be a political matter, which should be dealt with by the executive and not the judiciary, showing that the issue of the justiciability of climate change-related claims is far from settled.

Net-Zero Business Daily: France, Germany, and even the EU became targets of climate litigation by activist groups last year. What is the long-term outlook for climate litigation against countries as Paris Agreement deadlines draw nearer?

Clarke: The success of rights-based claims to date have set clear precedents and proved to be a successful mechanism for holding countries accountable for their climate commitments. Countries can expect to have their [nationally determined contributions] and, indeed, their adherence to the timetable for delivery of the same, carefully scrutinized as the Paris Agreement deadlines draw nearer.

Countries can also expect to be held accountable for their commitments, and climate litigation will no doubt continue to be deployed by climate activists for this purpose.

Net-Zero Business Daily: Countries aiming for net-zero face lawsuits alleging that states have violated international treaties protecting energy investors, Investor-State Disputes. What are some of the potential outcomes of this?

Clarke: As climate policies and regulations change, this will inevitably affect investments in the entire hydrocarbon value chain. The risk of [a] suit will correlate with the extent of the impact, and investors will use whatever means of recourse are available to chase their losses, including treaty-based claims against host states.

It is unlikely, however, that the risk of investor state arbitration will ultimately slow progress towards net-zero, but it does highlight the importance of stable climate-related regulatory regimes in host states.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.