2020 Litigation Forecast - Climate change risks for companies and directors
Climate change – and the appropriate response – is a defining issue of our time. While there has been discussion about climate change litigation risks for companies and directors, 2020 will be the year that we begin to see some of these issues played out in the New Zealand courts.
Some encouragement to bring climate change proceedings is found in an article published last year by three of our Supreme Court Justices – Climate Change and the Law. In it, the judges explain that if companies do not respond adequately to climate change, they may face increased legal risk in direct claims against them concerning their emissions, as well as claims against their directors for breaching their duties under the Companies Act.
Directors’ liability: a headline item
At MinterEllisonRuddWatts’ annual Corporate Governance Symposium 2019, Professor Will Steffen, Emeritus Professor at the Fenner School of Environment & Science at the Australian National University College of Science, described climate change as the primary topic of the 21st century in the context of directors’ duties.
“We have run out of time – the time for talk is over, the time for action is here. We can still make change, however not within the present socio-economic model”, says Professor Steffen.
Climate change should be a headline item for directors, who must encourage management to take bold action while accepting that not every initiative will succeed. This is supported by our Supreme Court Justices’ article, which expresses the view that there will be an increasing focus on corporate governance issues surrounding climate change.
What are some of the potential claims?
Where directors fail to consider and respond to climate change risks that cause harm to a company, they could face claims that they breached reporting obligations and duties of care, including the risk of regulation, penalties and brand damage, among others. These appear to be the primary risks arising from potential climate change claims.
We see directors as significantly more exposed than companies at present.
Directors can protect themselves from climate change litigation risks
Boards of directors must become what has been described as ‘earth-competent’, meaning they need to become multi-dimensional in their thinking about climate change. This involves:
- assessing whether boards have the skills, competencies and education to do the best job;
- thinking about how climate change may affect a company; and
- taking appropriate steps to mitigate risk.
In addition, boards of directors should plan for adaptation. This means working together to take greater steps to reduce the risk and impact of climate change in a way that involves customers, investors and employees. The riskiest strategy for directors in this area is, in our view, to do nothing.
2020 will see major NZ companies in the legal spotlight
Although the Supreme Court Justices expressed the view that difficulties of claims against companies are “starkly apparent”, the High Court will see in 2020 the first claim made, in any Commonwealth country, against companies for loss and damage alleged to have been caused by their emissions.
The claim, that names seven major New Zealand companies, alleges they have caused the torts of public nuisance and negligence by emitting greenhouse gases as part of their business activities. The litigant, a climate change activist named Mike Smith, claims that the emissions have caused him loss and damage by affecting ancestral coastal lands in which he claims an interest. Mr Smith seeks injunctions against the companies requiring them to reduce their emissions to zero by 2030.
The claim will face significant hurdles under the current law when the issues are played out in Court this year. One issue is that the relief sought is inconsistent with the target of net zero emissions by 2050 imposed under the recently passed Climate Change Response (Zero Carbon) Amendment Act 2019.
MinterEllisonRuddWatts acts for two of the defendant companies.
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