articles Ratings /ratings/en/research/articles/211006-climate-change-litigation-the-case-for-better-disclosure-and-targets-12136711 content esgSubNav
In This List
COMMENTS

Climate Change Litigation: The Case For Better Disclosure And Targets

FULL

European Financial Stability Facility

Beyond the Buzz - The ESG Implications Of The Global Supply Chain Disruption

Cracking & Fracking - Episode 14

COMMENTS

U.S. Local Governments Credit Brief: Minnesota Cities, Counties, And Schools


Climate Change Litigation: The Case For Better Disclosure And Targets

(Editor's Note: This paper was authored by members of the Sustainable Finance team within S&P Global Ratings and reflects discussions held by the S&P Global Sustainable Finance Scientific Council on Sept. 9, 2021.)

The Appetite (And Success) For Climate Litigation Cases Is Arguably Growing

As the effects of climate change are realized and the global push toward decarbonization accelerates, various stakeholders--including nongovernmental organizations, investors, and communities--are increasingly turning to litigation according to some scholars on the topic. Indeed, the number of climate change-related court cases filed globally nearly doubled between 2017 and 2020, with more than 1,800 cases filed in 40 countries as of May 2021, three-quarters of which were lodged in the U.S., primarily related to corporate entities and governments (Setzer & Higham 2021). While many cases have failed or been delayed by procedural or COVID-19-related issues, there have been a number of significant rulings that may have wide-ranging implications, including the landmark case in May 2021, Milieudefensie et al., v. Royal Dutch Shell.

Climate Change-Related Court Cases Worldwide Nearly Double Between 2014 And 2020

image

We believe the volume of climate litigation may continue to grow, as may the impact of associated juridical decisions in the policies, commitments, finances--and even business models--of defendant organizations. Investors are likely aware of the growing body of climate litigation and how it could affect the value-at-risk in their portfolios. Indeed, court orders for issuers to decarbonize more quickly or large pecuniary awards to pay for adaptation or mitigation efforts could result in greater reputational and financial risk as well as testing the issuers' strategic planning capabilities. That said, the cases are jurisdiction specific, none have yet resulted in awarded damages, and many have yet to be heard on their merits and therefore have outcomes that are inherently uncertain. To help provide some insight, here we explore rulings that could have wide-ranging implications for how different stakeholder groups view the risk of climate change litigation.

Based on our analysis of these cases, we see three key attributes of an entity that could elevate its risk of being exposed to climate change-related litigation:

  • Climate impacts highly attributable to the entity's operations.
  • Decarbonization plans viewed to be incomplete or inadequate by stakeholders.
  • Disclosure practices viewed as insufficient, substandard, or greenwashing.

In the future, prudent risk management could increasingly include analyzing portfolios for issuers whose operations display one or more of these attributes.

Climate Change Attribution Science Grows In Prominence

As climate change impacts emerge, climate change attribution science--which aims to attribute shares of emissions and the associated harmful climate effects to responsible parties with research and modelling--may play an increasingly important role in courtrooms across the globe.

Though climate cases typically proceed under a variety of legal theories, the one element that unites many climate cases is causation—in other words, a plaintiff may have to prove the defendant committed harmful environmental acts that had climate-related repercussions, said harm experienced by the plaintiff could not have happened if the climate-related events did not occur, and, such climate impacts were mainly caused by one environmental act and not many.

To date, according to Setzer and Highan (2021):

  • 58% of recorded climate cases resulted in some form of climate action, such as improved policies, new climate commitments, or investment toward climate mitigation;
  • 32% favored the defendant; and
  • 10% had no discernable impact.

Because of increased public awareness of advances in climate science, past cases, even successful ones, have mainly come to fruition because of the now intuitive causal link between high greenhouse gas (GHG) emissions and climate change. Nevertheless, we believe as attribution science matures, the percentage of cases linking defendants to climate change may rise.

Legal scholarship, including a 2020 note in the Columbia Journal of Environmental Law (see Burger et al., 2020), posits that the current state of climate change attribution science is likely sufficient for establishing causal connections for some types of legal adjudications. Yet, climate attribution scientists still face the task of strengthening the causal link between certain actions, such as emissions, to worsened climate change. There is a growing body of scientific literature, including the latest IPCC report referenced above, demonstrating that the physical impacts of climate change, such as warming temperatures, rising sea levels, and the increasing frequency and severity of extreme weather, can be attributed to anthropogenic climate change (that is, caused by human activity)--and we are seeing some of the repercussions from climate change right now.

In a courtroom setting by contrast, attributing past or future impacts from climate change to specific defendants is a complex task because today's science is relatively new and poorly funded compared with other fields of climate change.

Research by the Nature Portfolio demonstrates that more attention and funding to three key areas of research may address the evidentiary shortfall (Smith et al., 2021):

  • Attribution of climate change impacts to individual emitters;
  • The foreseeability of climate change impacts resulting from future emissions; and
  • Research disentangling the social and physical drivers of climate risk.

Nevertheless, as the datasets that support climate attribution science become more robust, and the experience of the science continues to improve, scientists may be more able to definitively tie extreme weather events to climate change such as floods, droughts, and storms. This may encourage future climate-related litigation, one of many levers that could make transition and physical risks crystalize sooner.

Playing The Blame Game

With the world's least wealthy populations also generally the most vulnerable to the impacts of climate change, the ability to sue for damages incurred because of climate-driven events could be one of the few routes available to seek recourse. The UN Human Rights Council estimates that 21.5 million people are displaced by sudden onset weather every year (UNHCR, 2016) and the World Bank estimates that three regions (Latin America, sub-Saharan Africa, and Southeast Asia) will generate 143 million more climate migrants by 2050, or 2.8% of the population of these areas (Rigaud et al., 2018). Currently, there appears to be a lack of formal legal protections and frameworks for climate refugees, potentially leaving litigation as one of the few mechanisms available for them to seek recourse. Thus, we believe that absent formal inclusion in refuge and asylum frameworks more broadly, this stakeholder group may bring more climate change-related lawsuits as attribution science becomes more robust.

Thus, we believe that issuers considered by certain stakeholders to have heavily contributed to anthropogenic climate change through direct and indirect GHG emissions, may face increased exposure to climate change litigation as the science of attribution evolves.

Status Of Country Efforts Worldwide To Achieve Net Zero Or Carbon Neutrality
Country Target year
Achieved
Suriname --
Bhutan --
In Law
Germany 2045
Sweden 2045
European Union 2050
Japan 2050
U.K. 2050
France 2050
Canada 2050
Spain 2050
Denmark 2050
New Zealand 2050
Proposed Legislation
South Korea 2050
Ireland 2050
Chile 2050
Fiji 2050
In Policy Document
Finland 2035
Austria 2040
Iceland 2040
U.S. 2050
South Africa 2050
Italy 2050
Brazil 2050
Switzerland 2050
Argentina 2050
Norway 2050
Colombia 2050
Portugal 2050
Costa Rica 2050
China 2050
Indonesia 2050
Target Under Discussion
Mexico 2050
The Netherlands 2050
Belgium 2050
Pakistan 2050
Bangladesh 2050
Peru 2050
Ethiopia 2050
Ecuador 2050
Lebanon 2050
Niger 2050
Greece 2050
Romania 2050
Croatia 2050
Myanmar 2050
Sudan 2050
Mali 2050
Guyana 2050
Belize 2050
Note: This table is not exhaustive. Source: "Net Zero Tracker," The Energy and Climate Intelligence Unit.

In response to the enactment of national targets (or the lack thereof), companies have increasingly adopted net zero targets of their own. The Energy and Climate Intelligence Unit and Oxford Net Zero found that as of early 2021, 21% of the world's largest 2,000 publicly listed companies have set net zero commitments (Black et al. 2021). Notably, this figure includes a number of electric utilities, energy companies, and extractive industrial companies (including Royal Dutch Shell, Rio Tinto, Duke Energy, and the Southern Company). These companies historically, and to varying degrees presently, rely on emissions-intensive products and processes to sustain their operations.

While setting net zero targets is a first step, assessing their efficacy and scope remains a challenge because many targets fail to cover Scope 1, 2, and 3 emissions and often do not cover the entirety of the organization's operations. Furthermore, some organizations, which have made net-zero-by-2050 commitments, do not disclose any interim targets and do not exclude the use of offsets, potentially leading to issues of credibility among investors and other stakeholders (Black et al., 2021).

Collectively, the lack of adequate disclosure and partial net zero commitments may expose companies and countries to legal challenges regarding the effectiveness of their net zero commitments. The case studies that follow describe key litigation pending in European courts that may herald further action against both corporates and sovereigns with incomplete or inadequate net zero targets. Though different in their jurisdictions and underlying claims, the corporate and sovereign cases below and the Shell case above are examples of courts mandating more aggressive emissions-reduction policies. These rulings could motivate similar legal claims in other jurisdictions seeking more aggressive, transparent, and effective emissions-reductions commitments and may serve as an effective check and balance mechanism for determining the efficacy of such commitments.

The Other Side Of The Coin: Litigation To Stop Decarbonization Efforts

As more countries adopt net zero legislation and further integrate decarbonization into policy and law, certain corporates relying on fossil fuel-intensive business models have begun to push back. At least 13 cases have been identified (excluding U.S. cases) where an entity or its investors have filed motions challenging decarbonization initiatives in direct conflict with their business models (Setzer and Higham, 2021).

Transparency On Trial

Investors, regulators, customers, and other key stakeholders are increasingly calling for transparency into companies' and nations' climate-related risks and opportunities. Corporate reporting has increased rapidly in response, with 90% of S&P 500 companies publishing a sustainability report in 2020, up from only 20% in 2011 (Governance & Accountability Institute, 2020). Increasingly, companies, especially in Europe, are using an integrated reporting framework whereby they disclose sustainability-related information with traditional financial disclosures in the same document. The U.S. Securities and Exchange Commission also recently announced a proposal for new rules on mandatory climate change disclosures (SEC, 2021). The trends seem to indicate that the volume of sustainability-related disclosures will likely continue to grow over time. At the same time, stakeholders are increasingly asking for high-quality disclosures that highlight significant financial exposures in the face of climate change.

To this end, there is a growing body of litigation worldwide that cites securities laws in an attempt to compel issuers of securities to be more transparent about climate-related risks and opportunities.

The litigation features a wide range of legal arguments, ranging from, among other things:

  • Fraud or misrepresentation that the issuer knew about climate-related risks, and chose not to disclose them because they reasonably believed it would lower the valuation of their securities offerings; to
  • Allegations that an issuer has not done enough to measure, and then disclose, its climate risks.

More rarely, but notably, there are even so-called greenwashing claims, which allege that companies' marketing materials falsely paint a rosy picture of an issuer's climate risks and strategic positioning. The case study below highlights an example of legal challenges directly related to an issuer's climate-related disclosure (or lack thereof).

Asset managers are not immune to claims of greenwashing either. It was recently reported that Deutsche Bank AG's asset management arm, DWS Group, is under investigation by the SEC and federal prosecutors for overstating its ESG and sustainability claims, specifically how it applied its sustainable investing criteria to its investments and exactly what proportion of assets were covered, in practice, by the sustainable investing criteria (Kowsmann et al., 2021). We do not have insights on the status of these reported investigations into DWS Group or their merit, but more broadly, as the number of ESG-labelled offerings from asset managers grows along with demand, we believe that stakeholders such as regulators and investors will continue to demand more transparency around sustainable investing product claims in an effort to separate the substance and impact of products from mere marketing and puffery.

As disclosures by companies, governments, and issuers come under greater scrutiny from investors and other stakeholders, we expect this to become a growing litigious area, especially for those issuers with aggressive climate-related external messaging that could be viewed as misleading. In our view, the adoption of standardized global reporting frameworks for climate-related issues, like the Task Force on Climate-related Financial Disclosures (TCFD), could serve to temper issuers' exposure to litigation of this type. Crucially, standardized reporting frameworks can help stakeholders, such as investors and regulators, understand and comparatively analyze an issuer's governance and strategy framework for managing its climate exposure as well as any quantitative value-at-risk forecasting or scenario analysis that could impact the valuation of its securities.

As climate change continues to gather pace, bringing more extreme and variable (and unpredictable) weather events throughout the globe, we believe a greater number of companies, countries, and issuers could face a rising number of courtroom challenges to their strategies or perceived (or realized) lack of efforts for dealing with climate change. Successful or not, such cases may not only serve to raise awareness about the impacts of climate change but could also shine the spotlight on those with inadequate climate disclosure or operations attributable to climate change, adding strength to global decarbonization efforts.

To date, we are not aware of any scenario where this type of litigation has had a material impact on any issuer's creditworthiness; however, we expect the rise of climate litigation may be one of many mechanisms by which transition and physical risks crystalizes for issuers, carrying with it potential for reputational and financial risks.

Note: The authors would like to acknowledge the contribution of Ellie Mulholland & Alex Cooper of the Commonwealth Climate Law Initiative to this paper.

Related Research And Criteria

S&P Global Ratings research

External Research

  • Burger, M., Wentz, J., & Horton, R. (2020). The Law and Science of Climate Change Attribution. Columbia Journal of Environmental Law, 45(1).
  • Energy & Climate Intelligence Unit And Oxford Net Zero (2021) Fifth of world's largest companies now have net zero target (accessed Aug. 19, 2021).
  • Governance & Accountability Institute (2021) Russell 1000 Research Report (accessed Aug. 19, 2021).
  • U.S. Securities And Exchange Commission (2021) Public Input Welcome On Climate Change Disclosures (accessed Aug. 19, 2021).

Citations (in order of appearance)

  • Setzer J. and Higham C. (2021), "Global trends in climate change litigation: 2021 snapshot." London: Grantham Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy, London School of Economics and Political Science.
  • Burger, M., Wentz, J., and Horton, R. (2020), "The Law and Science of Climate Change Attribution," Columbia Journal of Environmental Law, 45(1), doi: 10.7916/cjel.v45i1.4730.
  • Stuart-Smith, R., Otto, F., Saad A., Lisi G., Minnerop, P., Lauta, K., Zwieten K., Wetzer, T. (2021), "Filling the evidentiary gap in climate litigation," Nature Climate Change, 11, 651-655. Doi: 10.1038/s41558-021-01086-7
  • Riguaud, K., Sherbinin, A., Jones, B., Bergmann, J., Clement, V., Ober, K., Schewe J., Adamo S., McCusker S., and Midgley A., 2020, "Groundswell, Preparing for internal climate migration," World Bank. https://openknowledge.worldbank.org/handle/10986/29461
  • UNHCR, 2016, "Frequently asked question on climate change and disaster displacement."
  • London School of Economics. "Climate Change Laws of the World."
  • Energy and Climate, Intelligence Unit. 2021, "https://eciu.net/netzerotracker."
  • Black, R., Cullen K., Fay B., Hale T., Lang, J., Mahmood S., and Smith S., 2021, "Taking Stock: The global assessment of net zero targets," Energy and Climate, Intelligence Unit and Oxford Net Zero.
  • Governance & Accountability Institute (G&A) Inc., 2020, "65% of the Russel 1000 Index Publishing Sustainability Reports in 2019."
  • U.S. Securities and Exchange Commission (SEC), 2021, "Public Input Welcomed on Climate Change Disclosures."
  • Kowsmann,P., Ramey, C., Michaels, D. 2021. "U.S. Authorities Probing Deutsche Bank's DWS Over Sustainability Claims".WSJ.

This report does not constitute a rating action.

Primary Contact:Thomas Englerth, New York + 1 (212) 438 0341;
thomas.englerth@spglobal.com
Secondary Contacts:Paul Munday, London + 44 (20) 71760511;
paul.munday@spglobal.com
Michael Wilkins, London + 44 20 7176 3528;
mike.wilkins@spglobal.com
Sachi Jain, Washington, D.C. (1) 202-213-7083;
sachi.jain@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.