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Investor and Financial Claims

This Guide has so far focused on claims by people directly affected by climate change, or organisations who represent them, and claims against contributors to climate change, such as governments or corporations who may be able to reduce emissions or their impact. But in addition to physical harm, climate change has a huge effect on businesses and companies, as well as on individuals. As a result, there are opportunities for businesses, investors and shareholders to pursue climate litigation due to the financial harm it will cause.

Although this form of climate litigation may not seem to directly benefit the people generally, it could have a very strong indirect effect in changing corporate behaviour towards a lower carbon economy and reducing emissions. This is because companies do not want to be put out of business by climate change or the need to transition to a low carbon economy, and company management, investment advisers or others in the financial sector do not want to be liable for the adverse financial consequences of climate change on companies.

1

What Are the Financial Risks?

Climate change risks to companies are numerous and various.  They are often classified into three broad types:


(a) Physical or Operational Risks


This means the physical risks posed to a company by the effects of climate change. For example, a factory that risks being repeatedly flooded will not be profitable and an agricultural business in an area stricken by drought will likewise not survive.


(b) Transition Risks


These are based on the prediction that globally; countries and corporations will take actions necessary to comply with the Paris Agreement and be part of a transition to a low carbon economy. Carbon intensive industries may no longer be profitable or viable. This may happen because the increasing regulatory costs of high carbon industry will be too high, or because renewable energy is cheaper to produce. Or it may mean that the climate risk associated with such industries are too great for them to continue.

This has happened already happened with much of the global coal industry. Their shares may fall in value, and their assets be “stranded” (this means that the oil and coal reserves of corporations won’t be able to be taken out of the ground and be used for commercial activity). The risk of stranded assets is sometimes described as a distinct and fourth category degree of risk known as “carbon asset risk”.


(c) Liability Risks


Companies who do not report or account correctly for climate change risk may be liable for penalties or lawsuits, and in addition the activities of major carbon intensive companies may render them directly liable for their contribution to climate change.

Key Resources: Task Force on Climate Related Financial Disclosures

This provides detailed guidance on the types of risk faced by companies in different business and industry sectors.

Carbon Tracker also publishes research to assist in assessing the financial impact of climate change on carbon intensive companies.

These factors give rise to a number of types of potential legal liability.

2

Claims by Shareholders Against Companies and Management

Often carbon intensive projects and operations are undertaken by businesses due to a failure to appreciate the risks, or for political or other reasons, even though they may be unwise and/or unprofitable.

Under many national systems of law, the companies’ management owe a duty to shareholders to act appropriately. Sometimes environmental organisations or concerned citizens buy shares in companies to bring action against it to prevent it undertaking projects or ventures which are risky in climate change terms.


(a) What is the Legal Basis for this Type of Claim?


The legal basis for this type of claim arises from the basic principles of company law, and the relationship between the shareholders of the company, who collectively own it, and the management in the form of directors and managers.

The directors and managers owe duties to manage the company prudently for the benefit of the shareholders (these are often called “fiduciary duties”). Although they have discretion in what exact actions they take and they have to act in the interests of the shareholders as a whole, rather than just groups of individual shareholders, a breach of this duty may render them legally liable.


(b) Who Can Bring a Claim?


In general, shareholders may bring this type of action. Quite often environmental activists buy small numbers of shares in a company, not because they agree with the way it’s run or want to share in its profits but because they want a platform to voice their views and even take legal action.

In some countries, small groups of minority shareholders cannot bring this type of action. However, in other countries, it may be possible to take a “derivative” action where the company’s management is acting against the interests of the shareholders as a whole.

Example:  Von Colditz v Exxon

Shareholders of Exxon sued on behalf of the company to recover moneys and assets allegedly wasted by Exxon management. The claim alleged that the Exxon management provided misleading information to investors and regulators on the degree of climate risk to the company, and were in breach of their duty as directors.


(c) What Evidence Is Needed for this Type of Claim?


There are three matters that need to be shown:

1. That the company faced climate-related financial risks that were material and foreseeable

Not every minor risk will count. Risks include not only those in the immediate future but also those in the longer term.

2. That the company’s board of management or directors were in breach of duty

Normally a company considering climate risks must do so by:

  • Identifying the risks;
  • Assessing the risks and the scale of them; and
  • Managing the risks.

If the company does not even consider whether such risks exist at all, it is unlikely to have complied with its duties, unless it is in one of the relatively rare industry sectors where climate change is not a risk. If the board of directors did not act prudently and with loyalty to the shareholders (for example preferring its own short-term interests in terms of bonuses or executive pay to the interests of the shareholders) it may be in breach. Usually national legislation sets out directors’ duties in this regard.

Sometimes this question can be considered from public documents such as annual reports of companies. In other instances, it may be necessary to seek information about the way the company was managed. Most of the largest carbon intensive companies are public companies, which are subject to higher obligations in relation to conduct and disclosure, than private companies.

3. The claimant must show actual loss and damage caused by the breach of duty. This is usually a reduction in share value.


(d) What Remedies may Be Available?


One possible remedy in these cases is compensation or damages for financial loss caused by the breach of duty. However, shareholders may be able to require a company to take specific action or refraining from action, such as investing in a financially risky carbon intensive plant, project or other company.

Example: Client Earth v ENEA

The Claimant, an environmental law organisation, purchased some shares in the defendant company and sued it in Poland, alleging warned that its ongoing actions in relation to a proposed coal  plant risked breaching board members’ fiduciary duties of due diligence and to act in the best interests of the company and its shareholders. The Polish court found the plans to be invalid.

Companies also have a general duty under relevant national law to prepare accurate accounts including assessment of risks and provide accurate information to regulators and shareholders. A failure to assess or report on these risks accurately may render the company liable to legal claims from shareholders who have been misled, or to enforcement actions/fines by regulators. Indeed, some companies have been accused of deliberately misstating climate risks in their reports or press releases.

Example: Ramirez v Exxonmobil:

The claimants purchased shares in Exxonmobill in 2016. The complaint alleged that Exxon’s public statements at that time were materially false and misleading because they failed to disclose that internally generated reports concerning climate change recognized (a) the environmental risks caused by global warming and climate change, and (b) that due to risk associated with climate change Exxon would not be able to extract existing hydrocarbon reserves it claimed to have. The claim also alleged that Exxon’s form 10-K, which was required by law to make disclosures to the Securities Exchange Commission were also false. The claim failed as a matter of fact as the court found that the statements were not misleading.

Key Resources: The Commonwealth Climate and Law Initiative  has published reports into Directors’ duties here and here. These provide a detailed guide to the duties of directors, trustees and others in common law jurisdictions in the UK, Australia, Canada and South Africa. These duties arise both under common law (duties of care and fiduciary duties) and under companies legislation. CIEL has published a guide, which gives similar guidance on the law in the US.

3

Other Claims for Failure to Report

If company reports or information given publicly fail adequately to disclose climate risks, this may put companies in breach of their obligations under national laws regulating companies and their reports and accounts, and a complaint to the relevant authority may result in court proceedings and/or regulatory sanction.

Example: The English Financial Reporting Council

The Council has duties to ensure that reports of English companies comply with the regulatory requirements for such reports. They have guidelines on  reporting on climate related risk. A complaint to the authorities is not a legal claim in a court, but is a type of legal intervention that may be effective.

Check if there is a similar body in your country.


(a) What Is the Legal Basis for this Type of Claim?


The basis for this type of claim is the obligation under national law for companies to provide accounts and reports which are true and accurate. For example, in England the position is governed by the Companies Act and in the United States by Securities legislation. The requirements now often include a specific duty to report on environmental performance and/or environmental impact/risks.

Even a generic requirement to report on material risks often requires a report/disclosure of risks emanating from climate change. A company that has breached these obligations may have broken the law.


(b) Who Can Bring a Claim?


Usually, these types of obligation are enforced and policed by national regulatory authorities. In England, this is the Financial Conduct Authority/financial Reporting Council. In the United States, it is the Securities Exchange Commission.

These bodies may bring proceedings themselves, but frequently they will only do so if there is a complaint by a citizen of the relevant state. Anyone may make a complaint whether or not they are a shareholder of the company. Although this is not a formal court claim, it means that the national regulatory authority has to consider the matter.


(c) What Evidence Is Needed for this Type of Claim?


There are two main requirements for this type of complaint.

1. That the company faced climate-related risks that were material and foreseeable. Not every minor risk will count. Guidelines for assessing and disclosing climate-related risks can be found on the website for the Task Force for Climate-Related Financial Disclosures; and

2. That reports made by companies under their legal obligations are not accurate in this respect.


(d) What Remedies may Be Available?


Remedies may include a declaration that the company was in breach, a requirement that the information is corrected, or possibly a fine for the company.

Example: ClientEarth Complaint to the Financial Report Council (UK)

Client Earth made a complaint to the FRC in 2018 in relation to Lancashire Holdings, an insurance Company, alleging failure to deal adequate with climate risks in its Annual Report. The claim was based on a breach of the European Transparency Directive. Similar claims have been made based on obligations in the Companies Act, including under section 172 which refers to the impact of the company’s operations on “the community and the environment”.

4

Claims Against Investment Managers and Pension Funds

Many shares in corporations are held not by individuals but by investment funds, pension funds and others who manage assets, including shares in companies, for the beneficiaries or members of the funds. These are often individuals who have pension plans, or investors who want their investments to be managed by others.

A failure by investment managers or pension fund managers to appreciate the financial risks inherent in climate change, and the related risks of investing in carbon intensive industries, may put them in breach of their duties to the beneficiaries of the fund or people who they advise.


(a) What Is the Legal Basis for this Type of Claim?


Trustees are under a duty similar to company directors to acts as “fiduciaries,” which in simple terms means to act prudently in the interests of the people who are to benefit from the pension fund.

National laws vary but typically the duty can be broken down into the duties that a prudent trustee must fulfil including the:

1. Duty to diversify the assets of a particular fund so the majority of the wealth is not concentrated into one particular investment. A trustee must diversify assets unless there are circumstances that justify retention of a concentration of assets, or if the duty has been waived (“duty to diversify”);

2. Duty to manage the fund solely in the interest of the beneficiaries. The trustee must act in good faith and cannot act in a way that would create a conflict of interest with their beneficiaries (i.e. they must not gain any direct or indirect personal profit from their role) (“duty of loyalty”);

3. Duty to act impartially and fairly in the administration of the fund. This includes a duty to act impartially between beneficiaries of different funds (“duty of impartiality”);

4. Duty of the trustee to familiarise themselves with the trust on appointment and to investigate complaints or any problems relating to a fund or its assets (“duty of inquiry”);

5. Duty to monitor all investment decisions. This includes a duty to monitor risk within the portfolio of investments (“duty to monitor”); and

6. Duty to observe the terms of the fund and to prudently administer the fund in accordance with the agreed terms, taking into account all relevant facts and circumstances (“duty to act in accordance with the plan documents”).

Each of the above duties is relevant to assessing whether and how fully a trustee has complied with his or her overarching duty of prudence. A failure to identify, assess and manage climate related risk to the pension fund investments may constitute a breach of this duty.

Trustees are under a duty also to consider the interests of all the potential beneficiaries. So, an investment policy which discriminates against certain categories of beneficiary may also put trustees in breach. For example, it has been suggested that young people are potentially affected more by investment in carbon intensive assets.

One question which sometimes arises in this type of case is whether the Trustees’ duty is limited to maximising financial gain on their investments, or whether they can take into account environmental or social concerns in their investment policy. This will often be a contested issue in court, but even from an economic perspective, it may be that an argument can still be made that Trustees have breached their duty on the basis of the financial risks associated with climate change (see above).


(b) Who Can Bring a Claim?


This type of claim would normally be brought by someone who has a pension plan against the trustees of their pension fund. Many companies have pension funds specific to them for the benefit of their employees. In addition, many people have individual pension plans whereby money put into their pensions is invested by an independent asset manager.


(c) What Evidence Is Needed for this Type of Claim?


The evidence needed is similar to that described above in relation to claims against company management.  An initial step is ascertaining to what extent the Trustees took climate-related risks into account at all. The Trustees will normally provide information to beneficiaries on the policy on investment.

Expert assistance may be required to assess the extent to which there may be a breach as the rules on pension investments and the calculation of financial consequences of various risks are both complex.


(d) What Remedies may Be Available?


If a breach is proved, it may be possible to require the Trustees to rectify this and amend their investments/investment policy.

In addition, if any beneficiaries such as pensioners have suffered loss they may be entitled to compensation. This is a complex question as often the extent of any loss may not be known and/or the loss may not be suffered until sometime in the future.

Example: McVeigh v Retail Employees  Superannuation Trust

An Australian pension fund member filed suit against the Retail Employees Superannuation Trust (REST) alleging that the fund violated the Corporations Act 2001 by failing to provide information related to climate change business risks and any plans to address those risks.  The complaint alleged that the pension fund Trustees owed “fiduciary” duties to the members who were beneficiaries of the fund to guard against financial risks associated with carbon intensive investments. These duties were alleged to be owed under national legislation dealing both with companies (including REST) and with duties of pension fund trustees. In 2020, REST agreed its trustees have a duty to manage the financial risks of climate change. The case was settled out of court.

Key Resources: The  Commonwealth Climate and law Initiative  and CIEL guides referred to above are also useful for this type of claim.

5

Other Types of Financial Claim

There is a general principle that professional advisers in the financial sector owe a duty to act reasonably and carefully in giving their advice to those who may rely on it. The extent of this duty varies from country to country. If the duty is breached and, in reliance on poor advice, someone suffers financial loss, they may be entitled to compensation. This leads to the possibility of claims against various types of participants in the financial sector who give advice or publish information which may be relied upon.

These potentially include the following:

  • Credit Rating Agencies. These assess the creditworthiness of major corporations. A failure to take into account climate-related risks may lead to an overoptimistic rating of a company. For more information, see this CIEL Study on CRAs and Climate Change;
  • Auditors. These are independent accountants who have to consider the company’s accounts and certify that they appear to be a true and fair reflection of the company’s financial position. Auditors negligently failed to identify and report on climate-related risks may be liable to the company itself and/or to shareholders in it; and
  • Investment advisers. The same principles apply to a wide class of advisers who may give investment advice based on their opinion of the value of future prospects of a company. A failure to factor in climate -related risks may make this advice negligent.
6

Consumer Claims

It may also be possible for consumers to bring legal action or make complaints where companies give misleading information about a climate-related aspect of their business or products. For example:

  • A common issue is misleading descriptions of the “greenest” or environmental friendliness of a product or service. This is often known as “green washing”. A company that falsely states information in this regard may be liable for breach of advertising codes or regulations.
  • A company may also be liable to a fine and/or compensation to consumers who bought the product in reliance on the claims.
  • A company may also be liable for a fine or another consequence if it involves a breach of relevant safety or environmental legislation.

For example, Volkswagen, the German car manufacturer, has faced liabilities of billions of dollars in fines and compensation as a result of the installation of a concealed “defeat” device which ensured that the car underreported emissions during tests. Although this was primarily concerned with NOx emissions and not climate change related emissions, the same principles could apply in a climate context.

Example: OECD Complaint against BP

An example of such a claim related to climate change is Client Earth’s recent complaint against BP for breaching the OECD guidelines. This alleges a BP advertising campaign in relation to its low carbon activities was misleading.

7

What Can You Do?

Often a credible threat of legal action will achieve results without the need to take actual legal action. Steps that you can take include the following.

  • If you are a member of a pension scheme, you could write to the managers or trustees seeking information about the extent to which they take climate change risks into account in their investment policy. Depending on the answer, legal action may be possible;
  • Reporting suspected instances of inadequate reporting or disclosure of a company’s climate change policies, or of the climate consequences of its activities, to the relevant regulatory authorities;
  • Buying a small number of shares in a company with a view either to raising questions for the management or, possibly, taking action if they appear to have breached their duties to shareholders; or
  • Considering whether advertising or marketing of a company’s product or services is misleading or inaccurate, and if so, reporting to relevant authorities.
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