Climate Change Litigation - An introduction and some emerging themes in the Second and Third Waves

Climate Change
QC Boston Tomo
Climate Change

In 2017, there were 884 climate change cases across 24 countries. Of that total, 654 were commenced in the USA. By 2020, the total had risen to 1550 across 38 countries, with 1200 commenced in the USA and 97 commenced in Australia[1]. This represents a 60% increase (approx.) in total cases in the 3 years to 2020. This exponential growth is likely to continue.

Climate change cases can be conveniently categorised into 3 Waves, which are differentiated by the parties, causes of action, relief pursued and the case narrative. The historical and expected growth has and will not be uniform across these 3 Waves.

The First Wave

First Wave cases are administrative law challenges to government decisions made under planning and/or environmental legislation approving specific projects and developments with a climate impact. NGOs and aggrieved persons with standing prosecute these claims against Councils and governments. Declarations and injunctions, rather than damages is the relief sought.

It appears that many Australian climate change cases to date are in the First Wave. As the name suggests, First Wave cases were first in time. These cases arguably trace their history back in Australia to arguably Greenpeace Australia Ltd v Redbank Power Pty Ltd[2] in 1994, which was a challenge to a government decision approving the construction of a coal fired power station on grounds including that GHG emissions would contribute to the greenhouse effect.

The challenge by Environment Victoria Inc. in the Supreme Court of Victoria against the decision of EPA (Victoria) in relation to licence amendments to the coal fired power plants at Loy Yang and Yallourn is a recent example of a First Wave case.

So long as approval is sought for projects with a climate impact, First Wave cases will continue to populate the litigation landscape.

The Second Wave

Second Wave cases are negligence and nuisance claims against governments and companies seeking damages for the impact of climate change. To date in Australia, the plaintiffs are individuals or classes of individuals who have sued the government. Overseas, there have been cases against major carbon emitters.

I am not aware of an Australian damages case in negligence or nuisance against a company for the consequences of its GHG emissions. This might be due, in part, to the difficulties in establishing duty, breach and causation in climate change.

Some of these difficulties were exposed in the New Zealand case of Smith v Fonterra Co-Operative Group Limited[3], which is also notable because the NZ Supreme Court rejected the existence of an inchoate duty of care making corporations responsible to the public for their GHG emissions.

The German case of Lliuya v RWE may provide some progress towards a viable damages case against a major carbon emitter. There, Mr Lliuya (a Peruvian national) sued RWE (a German multinational energy company with no operations in Peru) in nuisance under the German Civil Code for the increased risk of flood damage to his home in the Peruvian Andes. It is alleged that this risk arose as a result of the GHG emissions from RWE’s German operations contributing to the melting of the glaciers near Mr Lliuya’s home in the Andes. While this explanation may induce scepticism under Australian jurisprudence, the case has survived many hostile challenges and so may provide guidance on the causation inquiry and the veracity of climate attribution science that could be adopted in Australia.

While not a damages case, the NGO, Milieudefensie, successfully sued Shell in the District Court of the Hague under an “unwritten standard of care” in the Dutch Civil Code. The Court ruled Shell reduce its CO2 emissions (Scopes 1 to 3) across the Shell Group’s worldwide activities by net 45% at the end of 2030, relative to 2019 emissions levels. This decision has been appealed.

The recent Federal Court of Australia proceeding by Mr Pabai against the Commonwealth seeking damages for property damage to the Torres Strait Islands (e.g., degradation of land and marine environment, and the loss of culture and native title) is an Australian example of a Second Wave negligence case against the Commonwealth government in which damages are sought[4]. There have also been several cases against Councils and State governments for the climate change impacts of coastal erosion. In addition, there was also the Sharma case[5] in which a negligence claim was made against the Commonwealth Environment Minister in relation to a coal mine extension project in New South Wales. However, damages were not sought.

The Third Wave

The Third Wave is currently the hottest of topics. This Wave consists of claims for breaches of directors’ duties and disclosure obligations under the Corporations Act 2001 (Cth), and consumer protection laws under the Australian Consumer Law. These claims are made against companies and/or directors for greenwashing and for failures to meet GHG emissions targets and ESG objectives. Until a viable damages case arises, the likely relief pursued will be declarations and injunctions sought by regulators, NGOs, shareholders, and members of superannuation funds.

The Third Wave has more prominently introduced into the legal vernacular terms such as “ESG,” “greenwashing”, “sustainable”, “net zero”, “carbon neutral” and “Scope 3 emissions” (to name but a few). These terms have now established a new intersection between:

  • climate change;
  • the corporations and consumer protection laws; and
  • consumer products, financial products, investment strategies and corporate governance.

The Australasian Centre for Corporate Responsibility’s (the ACCR) proceeding against Santos is an example of an Australian Third Wave case. Here, the ACCR challenges Santos’ claims under consumer protections laws that natural gas provides “clean energy” and that it has a “credible and clear plan” to achieve “net zero” emissions by 2040.

The NGO, ClientEarth, has pioneered derivative action claims, which is a new development in the Third Wave cases. ClientEarth successfully challenged in the Polish Courts, a Board resolution authorising the construction of the €1.2bn, 1GW coal-fired power plant (Ostroleka C project). Under Polish law, directors have duties of diligence and to act in the best interests of the company.

More recently, ClientEarth issued a pre-action letter against the directors of Shell for breach of the statutory directors’ duties. Under the UK Companies Act 2006, directors must act in a way that would most likely promote the success of the company having regard to the likely long-term consequences of any decision and the impact of the company’s operations on the community and the environment[6]. The Australian Corporations Act does not have such an express duty, but this requirement is arguably covered by the directors’ duties under sections 180 and 181 of the Corporations Act. It is alleged that the Shell directors are mismanaging the material and foreseeable climate risks facing Shell. This is allegedly evidenced by Shell’s fundamentally flawed climate change plan.

Warning shots have been fired under the Third Wave in Australia. Abrahams v Commonwealth Bank of Australia and McVeigh v Retail Employees Superannuation Trust were both cases where discovery of documents in relation to ESG decision making was at issue.

Greenwashing (and climate washing) claims fall within this Third Wave. The Australian Securities and Investments Commission (ASIC) defines “greenwashing” in relation to investments as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical[7]. This definition could be applied (with modification) to other contexts.

Recently, the European Union’s markets watchdog announced it was working on a legal definition of “greenwashing” to underpin enforcement action[8].

There is an apocryphal story that the term “greenwashing” was coined by Jay Westerveld in 1986, an American environmentalist, after seeing a sign in the hotel claiming that using less towels would help the environment by lowering the consumption of detergent and energy. Mr Westerveld claimed that the real purpose of the sign was to increase hotel profits by saving on the labour, detergent, and energy costs of washing towels.

Greenwashing cases will cover consumer products, financial products and advice and company operations both in a business-to-consumer context and a business-to-business context. This latter context should not be overlooked.

In Australia, the Australian Competition and Consumer Commission (the ACCC) has pursued companies for greenwashing: Holden in relation to describing Saab cars as “green”[9]; V8 Supercars for its Racing Green Program[10]; Prime Carbon in relation to the soil carbon and sequestration program[11]; Kimberley Clark in relation to "flushable wipe”[12]; and Woolworths in relation to “biodegradable and compostable products” in the Ecolife range[13] (to name a few examples).

There has been a proliferation of consumer product greenwashing cases in the UK before its Advertising Standards Authority. For example, Oatly UK Ltd in relation to advertisements comparing the environmental impact of producing its Oat Milk to cow’s milk; and Ryanair for advertising it has the “lowest carbon emissions of any major airline.”

In the US, there have been a number of cases including most recently a claim against Aldi for the sale of sustainable salmon, which recently survived a summary judgment application[14].

In addition, greenwashing cases involving financial products/advice and lending are on the rise. This is perhaps not surprising given that between January 2016 and September 2021, ESG lending activity worldwide grew from USD6 billion to USD322 billion[15]. Climate adaptation spending to 2050 has been estimated at USD280 to 500 billion[16]. One source of the adaptation funding will be green bonds. In 2007, the global green bond market was USD1.48 billion. By 2019 that figure had ballooned to USD257.7 billion[17].

The US Securities and Exchange Commission (the SEC) has obtained a USD1.5 million civil penalty order against BNY Mellon for the greenwashing of its investment strategies. Further, the SEC and its German counterpart, BaFin, have recently launched separate investigations into the asset manager DWS and its majority shareholders, Deutsche Bank, in relation to the sale of allegedly greenwashed investments.

Ms. Delia Rickard (the Deputy Chair of the ACCC) was quoted as saying that the Commission will be targeting greenwashers in problem sectors proactively rather than waiting for complaints to direct its actions[18]. ASIC has also made comments about surveilling greenwashing[19]. To assist companies, ASIC has released a how to guide to avoid greenwashing[20].

Fourth Wave

There will be a Fourth Wave. Claims under this Wave will arise as a result of parties suffering losses from the shift to a carbon neutral economy. Examples of such claims include breaches of intellectual property rights from green technology (such as carbon capture and storage) or contractual disputes arising from moratoriums on coal, gas, and oil extraction. These disputes may not crystalise until 2030 or 2050, the target dates set by the Glasgow Climate Pact.

Some Themes

To date in Australia, First Wave cases have predominated the climate change litigation landscape. There has not yet been a proliferation of cases in the Second and Third Waves in Australia. Why?

With Second Wave cases the reasons could include the difficulties in establishing:

  • a company’s duty of care to a particular class of persons from historic emissions that might have been authorised; and
  • damage that is causally linked to a breach of duty.

With Third Wave cases the reasons could include the fact that:

  • a viable damages case has not yet presented so as to attract the interest of class action lawyers;
  • the “regulatory” landscape is populated in some areas by guidelines[21] rather than mandatory obligations and the application of those guidelines is untested; and
  • the Australian regulators have not yet commenced testing the areas of risk in Court. But this may be about to change.

These reasons are not immutable. And given the quantum and market saturation of ESG marketed consumer and financial products; the continued improvements in climate change science; and the growing public sentiment for climate action, the anticipated explosion of climate change litigation in Australia seems inevitable.

Broadly, the case narrative of Second and Third Wave claims is “personal liability” be that in the form of government liability or corporate liability for climate change mitigation and adaptation, and ESG breaches.

In Second Wave cases, the gateway to that personal liability is negligence and/or nuisance. In Third Wave cases, the gateway is directors’ duties and disclosure and consumer protection laws accessed through corporate and regulatory concepts such as:

  • acting in the best interests of the company and shareholders/members;
  • preserving shareholder and company value;
  • properly managing climate risks;
  • protecting market integrity and consumer rights; and
  • disclosure of timely, accurate and verifiable information.

The rise of NGO plaintiff litigation continues. However, shareholder derivative action has been added to the traditional public interest litigation. These cases will add to the cases regulators and shareholders may commence for breaches of directors’ duties or disclosure obligations that intersect ESG and climate change issues. Therefore, companies currently face a range of litigation risks, which could rise further once a viable damages case is found.

The various conventions and legislation that enshrine human rights into EU law have been introduced into climate change litigation in Europe[22]. The absence of a legislative human right of similar scope in Australia may prevent this development here.

[1] Global Climate Litigation Report 2020 Status Review, produced by Law Division, United Nations Environment Program

[2] (1994) 86 LGERA 143

[3] [2022] NZSC 35

[4] ClientEarth had previously made a complaint on behalf of the Torres Strait Islanders to the UN Human Rights Committees alleging various breaches of rights under International Covenant on Civil and Political Rights: Art. 27 (culture); Art. 17 (freedom from arbitrary interference); Art. 6 (life)

[5] [2022] FCAFC 35

[6] s.172 UK Companies Code 2006

[7] ASIC’s Information Sheet INFO 271 issued in June 2022

[8] “EU Watchdog to define ‘greenwashing’ as sustainable funds rocket” Reuters 11 February 2022.

[9] [2008] FCA 1428

[10] Undertaking under s.87B of the Trade Practices Act 1974 (Cth) dated 8 September 2008

[11] Declarations made by the Federal Court of Australia on 11 March 2010

[12] [2020] FCAFC 107

[13] [2019] FCA 1039

[14] Rawson v Aldi, Inc. in The US District Court for the Northern District of Illinois Eastern Division. The decision of Judge Jorge L. Alonso dated 17 May 2022

[15] ESG Lending by Sehoon Kim et al., 8 March 2022

[16] Sustainable finance and the role of Securities Regulators and IOSCO: Final Report (April 2020) published by the Board of the International Organisation of Securities Commissions

[17] 2019 Green Bond Market Summary (February 2020) published by the Green Bond Initiative

[18] Financial Review 15 June 2022

[19] Media Release 22-141MR on 14 June 2022

[20] ASIC’s Information Sheet INFO 271. The ACCC has also issued guidance “Green marketing and the Australian Consumer Law dated 11 March 2011.

[21] For example, the Taskforce on Climate Change Financial Disclosures and Sustainability Linked Leveraged Loans.

[22] In the Milieudefensie case, Articles 2 and 8 of the European Convention on Human Rights and Articles 6 and 17 of the International Protocol on Civil and Political Rights were used to find that climate change posed a threat to the human rights of Dutch residents and the inhabitants of the Wadden region. In summary, these rights articulate the right to life and the right to respect for private and family life, respectively.

In the State of the Netherlands v Urgenda Foundation the Supreme Court of the Netherlands ruled that the Dutch government was endangering human rights of Dutch citizens (under Articles 2 and 8 of the European Convention on Human Rights) by not meeting minimum CO2 emission reduction goals.

QC Boston Tomo

Tomo Boston KC practises in commercial law, corporations and insolvency, trade practices, environment, product liability, professional negligence and arbitrations

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