Climate change litigation is a developing frontier. Activists are increasingly turning to the courts to hold to account those perceived as directly or indirectly contributing to climate change. This article focuses on the complex matrix of liability for private companies and the latest trends in climate change litigation and greenwashing around the world. 

The Supreme Court’s decision in Smith v Fonterra: A landmark judgment of international significance to large corporates

The Supreme Court of New Zealand this month handed down a landmark decision in Smith v Fonterra & Ors, allowing claims brought by a climate change activist against seven corporate defendants to proceed to trial. The decision marks a significant departure from the approach taken by the Court of Appeal, which had earlier agreed with the defendants’ arguments that the claims should be struck out because they had no prospect of success. 

The decision is important because it marks a rare success by an activist litigant against a corporate defendant in a climate change case in a common law jurisdiction. It opens up the possibility of other activist litigation against corporate defendants relating to their carbon emissions or other aspects of their operations that may have an adverse environmental effect. While such claims may not have any real prospect of success at trial, the decision means that it will be more difficult for corporates to use the summary strike-out procedure to bring them to an end quickly and efficiently. 

The plaintiff, Mr Smith, is an elder of Ngāpuhi and Ngāti Kahu and a climate change spokesperson for the Iwi Chairs Forum. He claims a traditional connection to coastal land which he says is threatened by climate change. He brought his claims in the torts of public nuisance, negligence and a proposed new tort relating specifically to climate change. The argument before the Court related primarily to the tort of public nuisance, which in general terms applies where a person allows an emanation from their land to affect the property of another person to their detriment.

In finding that the claims ought to be permitted to proceed to trial, the Court addressed the following key issues which will be relevant to other climate change litigation:

1. Novel claims may be harder to strike out: The novel nature of the claims and the significance of the harm claimed militated against permitting them to be struck out without a full trial, where a decision could be made with the benefit of evidence and full argument. This may encourage other activist litigants to push boundaries with new types of claims.
2. Legislative action does not exclude common law claims: Legislative regimes intended to provide a comprehensive national response to the challenge of climate change, such as permit regimes for emissions and carbon credits under enactments such as the Climate Change Response (Zero Carbon) Amendment Act and Resource Management Act, do not exclude the possibility of common law claims. An emitter that has been granted permission to operate within certain parameters under the legislative scheme may nevertheless be challenged by an activist litigant. This may encourage activists who consider that the Government’s response does not go sufficiently far. 
3. Causation not fatal: The challenge for the plaintiff of proving that the defendants’ emissions (or emissions by others that they facilitate) caused him specific loss notwithstanding that they are only a tiny proportion of global emissions was not fatal to his claim. The Court made reference to old cases in which polluters of rivers were held liable for damage suffered by other users of the rivers, notwithstanding that other persons were also causing pollution, although in those cases the connection was more obvious and direct. The plaintiff’s requirement to prove ‘special damage’ in a claim of public nuisance was not a bar to his claim.
4. Only “substantial and unreasonable” emitters will be caught: The claims will only succeed if the plaintiff proves that the defendants’ actions amounted to a “substantial and unreasonable” infringement of his rights, which is a “significant threshold” that only some emitters will cross. Those who merely drive cars or heat their homes, for instance, will not be caught. This creates an interesting distinction between those who drive cars or heat their homes and those who supply them with the fuel that enables them to do so, albeit the end result is the same. However, the Court held that whether the defendants’ conduct exceeded this threshold could only be determined at trial.
5. Remedies may not be effective: Of some comfort to corporates who are prospective targets of these claims, it was far from clear that a remedy of any significance would be granted even if the plaintiff succeeded in proving a breach of a legal duty. The Court indicated that the case might be legally untenable if the plaintiff claimed money damages to compensate him for loss, as a “more conventional” approach might then be taken to the requirement for proof of causation. However, he was seeking only declarations and injunctions. The declarations sought were a possible remedy, although the claim for injunctions faced obstacles and the Court would tailor any injunctions with a view to their impact.   
6. Tikanga: The Court acknowledged that tikanga was relevant to the claim and that aspects of tikanga would need to be addressed at trial, particularly in relation to the plaintiff’s claimed relationship with the relevant land and claims to be exposed to loss and damage in ways that are not necessarily financial or economic.  

The decision is of importance to large corporates that are significant greenhouse gas emitters or support or facilitate other concerns that are significant emitters, as it exposes them to the prospect of activist litigation on novel grounds. While such litigation may have limited prospects of success at trial, and even if there is a measure of success the remedies granted may have limited effect, the litigation process can be public, slow and expensive. Activists may be encouraged by the decision to identify new opportunities to raise the public profiles of their causes and put pressure upon corporate actors with more confidence than before. 

The case will now be scheduled for a trial in the High Court in the usual way. 

Disclosure: MinterEllisonRuddWatts’ Auckland and Wellington litigation teams separately represent two of the defendants in the proceeding. 

Climate change trends in Australia and the United Kingdom 

Globally, regulators, NGOs and climate change activists are sharing experiences and learnings across different jurisdictions to adapt their proceedings to achieve their desired outcomes. New Zealand businesses therefore need to keep a sharp eye on overseas precedents and how those might encourage litigation trends in New Zealand.

On a per capita basis, Australia is a global leader in climate change litigation, second only to the United States of America.  While New Zealand has already seen some climate change litigation, there is much to be learned from Australia, the United Kingdom and Canada.

The Australian regulators have been active, with ASIC issuing three proceedings for alleged greenwashing by several superannuation funds [1].  On 12 December 2023, following the ACCC’s review of greenwashing claims, it released eight principles to guide environmental claims in marketing and advertising, emphasising the need for accurate, evidence-based, clear messaging in respect of environmental claims [2].  

Cases in the United Kingdom in 2023 have also demonstrated a novel pathway for plaintiffs to challenge how companies assess and address climate risks – targeting directors personally). If we see successful litigation of this nature globally, the implications for D&O insurance, corporate decision-making and risk management could be significant. The introduction of New Zealand’s new Climate-related Disclosures regime, with reporting due from 2024, will also set the foundations for future actions to come, as seen overseas.

Greenwashing action: Not a matter of if, but when

Greenwashing penalties pose one of the greatest risks to private entities arising from climate-related obligations. While the law behind “greenwashing” is essentially governed by the concept of misleading and deceptive conduct in the Fair Trading Act 1986 and the fair dealing provisions of the Financial Markets Conduct Act 2013, the application of that law is far from simple. This is particularly evident in enterprise branding. While a company can make a statement about its environmental credentials which , on its face is true, it could be considering misleading and deceptive if it causes a misleading impression overall. 

A key example of this is the UK Advertising Standards Authority’s (ASA) decision in October 2022 relating to HSBC UK Bank plc (HSBC UK). In that decision, the ASA considered two statements made by HSBC UK on bus shelters: “HSBC is aiming to provide up to $1 trillion in financing and investment globally to help our clients transition to net zero” and “[W]e’re helping to plant 2 million trees which will lock in 1.25 million tonnes of carbon over their lifetime”. While both statements were true, the ASA concluded that a consumer would form the view that HSBC UK was making a positive overall contribution to the environment, that it was committed to ensuring its business and lending model would help support businesses to transition to net zero, and that planting two million trees would be a meaningful contribution to the sequestration of greenhouse gases. The ASA considered this impression was misleading where HSBC UK was financing companies that generated notable levels of emissions and intended to keep funding thermal coal mining and power production to 2040. This decision was not without controversy, but the ASA’s guidance doubled down on this holistic view [3].  While the ASA decision is not binding on any New Zealand court, we expect that the regulators in New Zealand will be alive to this approach and may take a similar view. This means that, to be prudent, any statement relating to sustainability, climate change or environmental credentials needs to be not just factually correct, but checked for any overarching impression the statement might create in the minds of consumers. 

Climate change action against directors 

In England, two cases in 2023 have opened the gateway for action against directors personally for breaches of directors’ duties. The director’s duty to act in the best interests of the company in the Companies Act 2006 (UK) now includes mandatory ESG considerations, which have underpinned these novel actions. New Zealand’s newly amended equivalent duty in the Companies Act 1993 does not go this far, only making ESG considerations voluntary (as in the Canadian Business Corporations Act 1985), but there is scope for ambiguity in how much attention must be paid to these non-mandatory considerations. As the Australian Institute of Company Directors has repeatedly emphasised, climate risk is financial risk and will inevitably colour how directors discharge this duty[4].

In May 2023, the English High Court dismissed a derivative action by ClientEarth, a shareholder of Shell plc, against the company’s directors in the novel case of ClientEarth v Shell plc [5]. ClientEarth alleged that Shell’s directors were in breach of their duty to act in the best interests of the company, which includes having regard to the company’s impacts on the community and environment, by failing to properly address the risks of climate change through Shell’s operations. The High Court reaffirmed the careful balancing act of considerations required of directors, especially large multinationals, and that the Court is slow to interfere with this balance unless there is a clear breach of the duty. The Court was also skeptical of ClientEarth’s good faith in bringing the claim as a minority shareholder and as an activist organisation whose values were opposed to Shell’s operations. On that basis, ClientEarth was also required to pay costs.

Soon after the ClientEarth decision, in July 2023, the English Court of Appeal heard a similar line of argument in McGaughey v Universities Superannuation Scheme Ltd [6]. Several members of a pension scheme brought a derivative action against the directors of the corporate trustee who administered the scheme, alleging their investments did not align with many decarbonisation and divestment goals. The Court of Appeal agreed with the High Court that this was not a derivative action because there was no loss suffered and no breach of any directors’ duties was alleged. 

The English courts have shown they are slow to interfere in director decision-making that has impacts on climate risks, especially considering the variety of competing and often polarised considerations they are required to balance when acting. Nevertheless, the potential to sue directors personally for their actions on behalf of the company is now in the minds of shareholders. While ESG considerations are not mandatory for directors discharging their duty of good faith in New Zealand, providing a further buffer against such claims, this area could develop quickly if majority shareholders also begin to challenge director decision-making and tangible losses could be proven. The best way to guard against such action is to ensure that the board’s decisions on climate change are robustly considered with external evidential support to substantiate them, that goals are clearly communicated and achievable and, if the company’s ability to reach its goals is compromised, the company ensures it communicates this to stakeholders clearly and in a timely manner. 

Climate-related disclosures and the path ahead

With the introduction of climate-related disclosure obligations in the Financial Markets Conduct Act, 2024 will bring the first financial year where climate reporting entities will need to prepare and lodge climate statements. New Zealand’s new climate-related disclosures framework reflects similar disclosure regimes in other jurisdictions where regulators or shareholders have brought actions for insufficient disclosures, indicating similar actions could arise in New Zealand. 

Liability for failure to comply with climate standards can fall on climate reporting entities and their directors, and fines or civil penalties can reach up to $2.5 million. However, the FMA has indicated that a limited grace period will apply at the beginning while companies navigate their new obligations. As this will not last forever, many companies are working on voluntary disclosure to ensure that teething issues are well addressed by the time the FMA seeks to use its enforcement tools.

While regulators will have their eye on compliance with climate-related disclosure obligations, shareholders will too. Australia has seen shareholders scrutinise financial institutions for failing to make accurate and transparent disclosure of climate risks. In McVeigh v Retail Employees Superannuation Trust [7], a pension fund member sued REST alleging it had failed to disclose information about climate change-related business risks and plans to address them. The claim was ultimately withdrawn, but only once REST agreed to implement climate targets and measure, monitor and report its progress according to the recommendations of the Task Force on Climate-related Disclosures. Furthermore, in Abrahams v Commonwealth Bank of Australia [8],  the Federal Court of Australia granted orders permitting a shareholder of the CBA access to internal documents to assess the bank’s compliance with its environmental policies and commitments. 

With similar procedures available under the Companies Act 1993 in New Zealand, companies should be aware of the potential for the Court to intervene and require disclosure if shareholders are not getting the full picture on climate risk assessment and mitigation plans, as in Abrahams. 

Transparency and accuracy will be key to avoid action both from regulators and from shareholders in terms of climate-related disclosures.

2024 and beyond 

The re-purposing of existing causes of action and the creation of novel types of proceedings is set to continue as individuals, shareholders and NGOs draw inspiration and learn lessons from litigation around the world. We expect to see new areas of focus such as biodiversity conservation, ocean protection and water scarcity. A complex patchwork of liability awaits companies as they seek to navigate this evolving area. 

Podcast: Unpacking Smith v Fonterra and global climate change trends

In our episode of the Litigation Forecast 2024 Podcast Series, litigation partners Jane Standage and Andrew Horne discuss the Supreme Court’s decision in Smith v Fonterra & Orr – a landmark judgment of international significance to large corporates. Listen below.
 

References and footnotes

1. Mercer Superannuation (Australia) Limited, Vanguard Investments Australia and LGSS Pty Limited (ActiveSuper).
2. Australian Competition and Consumer Commission “ACCC releases eight principles to guide businesses’ environmental claims” (press release, 12 December 2023).
3. Committee of Advertising Practice The environment: misleading claims and social responsibility in advertising—Advertising Guidance (non-broadcast and broadcast) (Advertising Standards Authority, June 2023).
4. Noel Hutley and Sebastian Hartford-Davis Climate Change and Directors’ Duties: Memorandum of Opinion (The Centre for Policy Development and the Future Business Council, 7 October 2016); and Bret Walker and Gerald Ng The Content of Directors’ “Best Interest” Duty: Memorandum of Advice (Australian Institute of Company Directors, 25 July 2022).
5. ClientEarth v Shell plc [2023] EWHC 1137 (Ch); ClientEarth v Shell plc [2023] EWHC 1897 (Ch); and ClientEarth v Shell plc [2023] EWHC 2182 (Ch).
6. McGaughey v Universities Superannuation Scheme Ltd [2023] EWCA Civ 873, [2023] Bus LR 1614.
7. McVeigh v Retail Employees Superannuation Pty Ltd [2019] FCA 14; and McVeigh v Retail Employees Superannuation Pty Ltd [2020] FCA 1698.
8. Abrahams v Commonwealth Bank of Australia FCA SD864/2021, 4 November 2021.