Climate Change Law Conference 2023
Session 1: Climate Change in commercial disputes: implications for director’s duties, insurance coverage and greenwashing claims
Author: Emmie Le Marchand – Hogan Lovells
The first session in the Climate Change Law Conference hosted at Hogan Lovells featured four speakers from Essex Court Chambers, considering areas within commercial disputes where the impact of climate change is becoming increasingly influential. With extensive experience from across the Bar, each speaker sought to introduce to the room a different area where they have seen climate change law influence their practice. These areas included: the role of company directors, the scope of insurance coverage, and greenwashing claims in the context of consumer claims and corporate investment and also corporate investment.
Hogan Lovells’ Senior Legal Counsel, Lucy Ward, moderated and introduced the speakers, opening the session with some initial background into disputes trends in relation to climate science and activism.
The first in the line-up was Edward Brown KC, a prominent voice in public law and human rights cases, as well as in company law. Brown KC focused on the responsibilities of company directors and the possibilities for derivative action, highlighting to the room two significant cases in this area. The first case, McGaughey v Universities Superannuation Scheme saw a senior research fellow and a university reader bring multiple derivative claims against the directors of the USS, in relation to the scheme’s continued investment in fossil fuels and the related impact on the valuation of the Claimants’ investments. Although this particular claim was unsuccessful, Brown suggested this could be the start of a wave of claims of a similar vein being brought against company directors. He then turned to another case, ClientEarth v Shell Plc, on which he acted as lead counsel for ClientEarth, who brought a statutory derivative claim as a shareholder of Shell, on the basis that Shell had failed and was failing to mitigating the risks to the longterm profitability of the business. ClientEarth’s case was refused on the papers, so ClientEarth has not yet had the opportunity to present its case orally and Brown KC suggested it would be premature to reach any concluded view as to how this area of law would pan out in this case and others still to be pleaded.
After a quick reminder of the relevant statutory directors’ duties, Edward also spoke on the broader risks that climate change can create for boards of directors, noting physical risks of sudden onset climate events and gradual changes; transition risks arising from the move towards a net zero economy; litigation risk of rising numbers of claims against companies and their boards in relation to their environmental impact; and financial stability risks including productivity losses and impacts on global supply chains. In the face of all these growing risks, increasing regulations are only putting the squeeze on company directors, whilst operating within the existing parameters of company law. Edward considers subsidiary duties are becoming more prominent alongside the core company law duties, in respect of reporting obligations in particular and that soft law sources, which may not be strictly actionable, may be influential in shaping how directors interpret the scope of their statutory duties. He considers this is perhaps going to be a central debate going forward in terms of litigation and general themes, namely, to what extent are the standards of the common law and the 2006 Companies Act going to adapt in the context of an increased tapestry of other obligations, or, putting it another way, to what extent are the core duties going to be interpreted as a living instrument taking into account changes in societal norms. These duties proceed from an assumption that the directors or the board do perceive a climate risk to face their business in one way or another – they may not; they may. But Edward said that if they do perceive that risk, then those duties will shape the approach to climate risk At its most fundamental, directors need to understand what climate science means for their long term business and shareholder value. That probably incorporates both a duty to think – to have a governance structure and methodology which allows the company to think about the issues, through its institutions such as its committees; and a duty to act. And how exactly that duty to act looks, the extent of that responsibility, Edward says is the big question, and one that may in due course require a trip to the Supreme Court to answer.
Jackie McArthur spoke next, bringing to the discussion the concerns around greenwashing in relation to products. Her expertise includes litigation focussing on breaches of environmental emissions regulations by car manufacturers. To begin, she broadly defined the concept of greenwashing within the context of consumer goods by outlining that it is “a PR tactic used to make a company or product appear environmentally friendly, without meaningfully reducing its environmental impact”. She raise the example of the case brought against airline KLM by campaign group, Fossielvrij in relation to claims that KLM’s carbon offsetting product that customers can purchase, doesn’t actually contribute to reducing KLM’s emissions. Greenwashing claims are likely to increase as companies green credentials are put to more scrutiny. However these claims can be complex, as companies purposefully use vague terms (such as ‘sustainable’ or ‘environmentally friendly’). These terms are less likely to be actionable where the claimant has to show that the seller was aware the greenwashing claim was untrue. Jackie proceeded to discuss the main types of claims being explored through the courts. The first being the breach of express terms in the contract of a sale. She commented that this should be the simplest claim to be able to bring, but it can be difficult to prove that the statement made was untrue. The second cause of action is breach of terms implied into a contract by statute. To bring the claim using this form of action a consumer could use section 9 of the Consumer Rights Act and argue that the product does not meet a reasonable standard of quality based on its description. This cause of action is also difficult, as it would rely on the environmental aspects of the product constituting part of its overall quality. The last type of greenwashing claim Jackie raised was the tort of deceit, which was considered in the VW NOx Emissions Group Litigation where the consumers of Volkswagen vehicles argued they bought the cars on the basis of the misrepresentation that the cars complied with emission standards.
Richard Hoyle was next up and offered a different angle on greenwashing legal developments, focussing on corporate investment and issues of compliance under environmental regulations. Highlighting the new regulations produced by the FCA on the way investment products are labelled as ‘sustainable’ shows the current salience of this topic. Richard suggested this was applicable in both the equity and debt sides of corporate investment, as well as for secondary markets. Richard then discussed how a greenwashing claim might come about in a private transaction – a green investor, such as a private equity firm, might invest in a company which has energy transition strategies that comply with the Paris Agreement. However if it is then revealed, once the company is purchased, that the company had made false claims in relation to those energy transition strategies, then the SPA warranty maybe breached. Richard also raised the case of MDW Holdings v Norvill, where the waste management company underreported on its waste output, which then both impacted the valuation of the business and increased the level of risk facing the company. Finally Richard commented on greenwashing in relation to public companies, suggesting that there will be a push for more positive disclosure duties for public companies to abide by.
To close off the session, the room heard from David Scorey KC, an expert in the oil and gas sector and specifically in relation to insurance matters and disputes. He started by highlighting the increased number of notifications made by policyholders as well as forecasting an increase in claims against industries with historical emissions. The types of claims being made cover all sectors, manifesting in public and private law, constitution and human rights. David suggested that this was likely to increase disputes work, both in the English courts and in arbitration, including English-seated Bermuda Form arbitration disputes resulting from climate change claims in the USA. For example, how does one prove that an increase in sea levels in Florida was caused by the emissions of a factory in Ohio?. David’s view was that looking at the historical litigation cases on MTBE might indicate where environmental liability within insurance maybe heading and that really, “all they need is one winner and they’re home”. Speaking on the side of insurers, he suggested that exclusions within a policy will be a necessity to limit exposure to liability.
The session closed with a couple of questions, the tone of which echoed the overall impression of the panel, that companies should be preparing themselves for a coming wave of possible climate legal cases, and that it may only take one significant case for the floodgates to open.
This note is provided free of charge as a matter of information only by its authors. It is not intended to constitute, nor should it be relied upon as constituting, legal advice, and no responsibility is assumed (whether by its authors or any of the other self-employed members of Essex Court Chambers) in relation to the accuracy of the contents of the same as regards anyone choosing to rely upon it.