Podcast: Managing the legal risk of climate change

Transcript

Matthew Magee:

Hello and welcome back to our occasional series Brain Food For General Counsel, where we assemble some fabulous experts to help GCs develop their own thinking on a major strategic issue that they will be advising their board on.  

My name is Matthew Magee and I’m a journalist here at Pinsent Masons.  

This time we’re exploring the world of climate change legal risk: from damages claims to injunctions to rapidly expanding regulation, these risks are faced by just about every company out there in one way or another.  

Helping us identify what the risks are and think about how to deal with them are Thom Wetzer, associate professor of law and finance at Oxford University; climate change advisor with Pinsent Masons Euan McVicar, himself a former GC, and Vicky Moffatt, chief executive officer of Chapter Zero, an organisation which advises company directors on climate issues.  

But just before we get into that, I want to take a minute to highlight a source of more regular news, advice, guidance and analysis, The Pinsent Masons Podcast.  

Welcome back to the Pinsent Masons Podcast. This week we ask if the S in ESG gets enough attention, and outline new cybersecurity requirements for organisations.

It’s fortnightly and a bit more operational in focus that this series, so if you or your team would like regular-as-clockwork listening on the how to tackle the mechanics of the day job advising your business, this is one for you. There’s a link in the programme notes and the chances are if you’re listening to this you might enjoy that.  

The climate is changing, and the world is changing with it. The effects are being felt all around the world and citizens, activists and politicians are understandably looking around and asking themselves: how did we get here? 

Some are trying to identify which companies behaved in a way that makes them responsible for some of this climate change, and are taking legal action to hold them accountable.  

This is one aspect of climate change legal risk. GCs of large companies are grappling with what it might mean for their firms. Though much is still uncertain and major cases have not yet reached a legal conclusion, there is a lot we can say about what that risk is and how thinking about it is developing.  

So I asked one expert to outline what exactly climate risk is.

Thom Wetzer:

My name is Thom Wetzer. I'm associate professor of law and finance at the University of Oxford, where I also direct the Oxford Sustainable Law Programme. Climate related legal risk can arise as a result of people suffering harm that is related to climate risk, suing companies that have contributed heavily to climate change. So, for example, people may experience floodings that have been caused by an extreme weather event which is attributable to climate change, and they may say, well, actually, this flooding is caused by those who have caused climate change or who have contributed to climate change, and therefore we think that the companies or the governments or the entities more generally that have polluted the environment should also compensate us for the damage that arises as a result of climate change. So that's a damages case. That's one manifestation of climate risk that is associated with the legal system. Another manifestation is more of a sort of injunction type, as lawyers say. So people might think that a company is polluting the environment, is emitting greenhouse gases, to an extent that puts hitting our climate targets at risk. And they may say this company should change its business model to stop emitting greenhouse gases and they may ask the court to force a company to do so to, for example, reduce its greenhouse gas emissions over the next few years. And then a third example relates to companies selling products, for example, that they claim are green but the products are not in fact green, and customers may feel being made a fool of, being a victim of what we call greenwashing and on that basis, they may sue companies also, for example, providing misleading information to them.

Matthew Magee:

So of those three, the first two I think outside of the community already engaged with this, ordinary people would be quite surprised that companies would be held specifically to account for their share of a global phenomenon. What has happened so far in those kinds of cases?

Thom:

Yeah, I'm not surprised that people would think this is, you know, quite a big step. But if you think about it, it's not unique, right. We have many companies in many contexts that have been held responsible for contributing to harms that they are not the only contributor too. Think for example about asbestos litigation or think about pollution of rivers or other, what we call toxic tort cases. And there are many such examples. And so far what has been very difficult to establish in the context of climate change is that we can create a strong evidentiary basis for saying the activities of company ‘A’ contribute to climate change and climate change contributes to this particular harm, but with the development of what we call attribution science and making that evidentiary claim stick has become possible and making that evidentiary claim stick means that we also now need to think about how we legally interpret that evidentiary claim and in most countries, this hasn't yet yielded damages claimed that companies have been forced to pay out. But we're really at the start of those kinds of claims being brought being taken seriously. And that means that companies should prepare for these claims to be real and may, if not now, then perhaps in a decade, have to pay out for their historical contributions to climate change. But when it comes to climate change, it doesn't really matter whether you have emitted CO2 in Brazil or in Germany, or in China or in the United States, the additional emission of CO2 anywhere is causing harms everywhere. And so that means that the problem, if you will, the legal problem is a much more global one. But I would argue the evidentiary and legal principles at stake are not fundamentally different from what we've seen in other kinds of damages cases. In countries from Germany to the Netherlands and even the United States, we have seen courts accepting these kinds of cases and hearing them on their merits and people have been surprised by that but I've always wondered why, because if you just look at the facts, then it's clear that existing legal obligations should respond to the threats and the harms caused by climate change and the fact that this is a new problem with a complex problem structure doesn't necessarily mean that the law should ignore or take a step back from these kinds of issues. So I think it's a good thing that courts have accepted that they have a role to play in interpreting legal obligations in light of what is perhaps a disruptive phenomenon in the form of climate change. But the fact that courts are wrestling with this, that shouldn't be so surprising. Climate change is a legally disruptive phenomenon. The effects that climate change presents and the harms that it creates, and the structure of the problem with local actions creating a global impact, all of that comes together into a set of facts that is very difficult for courts to digest and to interpret against existing laws. So different courts will take different views on that. But the same court at different points in time may also take a different view on this. So it's very difficult to predict exactly what a court will do.

Matthew:

Climate advisor Euan McVicar of Pinsent Masons was the GC of the UK's Green Investment Bank and he thinks that companies should be change the focus of their climate risk attention.

Euan McVicar:

For good reason, most companies have been focused on the risk around greenwashing and regulatory compliance, the jurisprudence, the case law around the first area of climate risk, i.e. whatever actions contributed to climate change and what liability might we face for that is still developing and growing. And so there's been less pressing need for companies to think about that, and perhaps less clarity about what it might mean.

Matthew:

He thinks this because he has watched as cases have gained more traction than many people thought they would. That was certainly the case when Peruvian farmer Saul Luciano Lliuya sued German energy company RWE in Germany claiming that it was partly responsible for the melting of glaciers in Peru causing flooding.

Euan:

Perhaps one of the most famous cases is that of the Peruvian farmer. And while everyone thought that that case was likely to be thrown out at the early stages, the German courts have taken it to its next stage, and there's now a proof being held to try and establish what the evidential position is on all of that the concept has not been thrown out, and I think increasingly we're going to see activists looking for ways in which they can test that in different jurisdictions. But as the linkage between the activity of a corporate and those activities contributing to emissions and the emissions giving rise to harms which are felt by individuals and other corporates and other countries, it's not hard to see the jurisprudence developing much as it did around tobacco and the duty of care that one owes to others in relation to harms that are reasonably foreseeable from those actions. Those cases will be a huge distraction from day-to-day business, take up a huge amount of resource, potentially be very expensive to run. And of course, regardless of the outcome, they can generate a lot of reputational damage along the way.

Matthew:

So it's clear that the risk of climate litigation is something companies should be taking seriously right now. But who has this risk? Are some companies more exposed than others?

Thom:

Companies that have large historic emissions are companies that are more likely to be held responsible for the harms that are associated with or attributable to these emissions. So if you have a company with high emissions, then you should expect a higher likelihood of a damages case. On the other hand, if you have a company with limited historical emissions, but with very high emissions today, and also very high emissions projected for the future, then you should be worried about a future damages case, of course, but also about the kinds of cases that try to stop that company from polluting going forward. But it's not just the emission profile that matters. You can also imagine that companies that have the opportunity to reduce their emissions but choose not to do so, that they are more vulnerable to be targeted by, say, climate activists and companies that provide products and services that may have high emissions associated with them but that are very difficult, you know, that are essential for the functioning of the economy and that have an emissions profile that's very difficult to bring down. So, it's much more than just emissions. It's also what do you do given the options that you have? Do you reduce your emissions as rapidly as you could reasonably do? Do you have a large public profile? Yes or no? Is your company representative of a particular industry that should decarbonise quickly? And of course, what's the jurisdiction in which this company is based or is active? Because that too gives you a sense of the legal hooks that are available to those who want to bring cases of this type.

Vicky Moffatt:

I'm Vicky Moffatt, chief executive officer of Chapter Zero.

Matthew:

Vicky has first hand experience of how directors view these risks, as she works with boards advising on climate targets and transition plans. She says directors are increasingly aware of how high the stakes are.

Vicky:

Now we looked at the number of cases globally around the world against organisations and the latest data that's published was actually about a year ago, where there were 1522 climate related or ESG related litigation cases around the world. I think what we need to think about over the next several years is actually cases against individual directors themselves. If we think about the fact that most companies have net 0 commitments and a lot of those are 2030 and that's not many years, I would expect that quite a few heads will roll around that year, or maybe let me put it another way, it will sharpen the focus because companies that have made these pledges and aren't delivering on them will be in sharp focus.

Matthew:

So, you think as we get towards 2030 the number of cases against individual directors will increase?

Vicky:

I do. I do.

Matthew:

So we know the risk is real, and we have a sense of what kinds of companies are carrying more of it. But this is a relatively new area. How does a company even go about quantifying what its risk is? Euan says they should start with the processes they already have.

Euan:

At a basic level, the processes and the mechanics should be the same. Good risk management frameworks should already be taking account of legal risk that the company faces and these are two manifestations of legal risk and should be looked at in the same way. But I think because of the novel nature of these risks, the fact that they're being grappled with for the first time very often, and there's an element of horizon scanning and prediction going on here around this, they might need to be looked at with a bit of separation from the other risks so that they're better understood and that's an approach which has become quite commonly accepted more generally in how companies address climate issues. So if we look at some of the frameworks that have developed to help companies think about how they deal with climate related risks and opportunities and the Task Force on Climate Related Financial Disclosures TCFD is probably the best understood of those, that sets out a framework where people are encouraged to think about climate related risks and opportunities a bit separately to begin with from the wider risks and opportunities, and that creates an opportunity for boards, for risk management functions, for executive teams to do a bit of extra digging, a bit of deep diving on those issues. To make sure they're properly understood and that they are thought about in a bit more depth in these initial periods until they can be fully integrated into a company's normal risk management framework, but because there's a lot of specialist knowledge thinking required around this, it's good to separate them out in the initial period until everyone is up to speed with the issues, and then they can be integrated into normal risk management in a way which is going to be most helpful.

I mean, I think first and foremost, we're talking about legal risk here. So being able to get access to advice on what are the developments in case law and legislation that might impact on your liability in relation to these matters is critical and getting good reliable horizon scanning advice and support that is legally robust is important. So from your law firm is the obvious place to look, but you might also be looking to supplement that by making sure that you're getting policy advice and you can see what's coming up on the political agenda around that and you’ll also want to supplement that with making sure you're getting the right updates on the development of the science around this because the science and the clear linkage between the science and who might be attributed with blame in relation to particular activities and whether there's a good scientific basis for that will start to impact on the degree of legal risk the company bears.

Matthew:

And Vicky says that as companies understand and quantify this risk most fully, it can have an impact on the fundamentals of how they go about their business now and in the future.

Vicky:

What we're seeing is that some businesses that are more mature are actually having to rethink the very business model and how they can respond to both physical climate risk but also transition risk and continue to grow. So we can see how the legal environment impacts both on the one side, disputes, regulatory imperatives and compliance and transparency, and also on the other side, as the business model starts to shift it starts to bring questions of capital raising, investment and M&A, and that's sort of the big picture of how climate and legal questions are impacting boardrooms.

Thom:

You should think about different scenarios and that is something that companies can actually do, but surprisingly contrary to other types of climate risk, climate related legal risks have not been quantified as rigorously by financial analysts or by academics for that matter and so this is a whole new field, but I think there are many ways in which companies could assess their exposure to this risk or similarly by which those who hold portfolios investments in other companies can assess their portfolio level risk. And just to give you an example of what you could be doing, you could start with evaluating the emissions profile of a company. So what's the total amount of greenhouse gases that has been produced? One thing you can do is you can multiply that by the social cost of carbon. There are different estimates, but let's take you know, a conservative estimate. And if you do that, then you'll end up with total omissions times the social cost of those emissions that gives you the total social costs that your emissions have created and then you can ask yourself, is that a number that is going to be fully internalised through the legal system or do I think only part of that will be internalised through the legal system? This is just one of many methods which can be used. What I would always recommend companies is use multiple methods, consider multiple scenarios and on the back of that come up with, you know, a number or a set of numbers and also with a strategy to mitigate the associated risks.

Matthew:

So there are a lot of moving parts here. Companies have to understand the wider regulatory picture, get a handle on their own exposure and maybe even rethink the fundamentals of how they operate. So what should the role be for GCs in all this? As a former GC, Euan has thoughts.

Euan:

As this is a question of legal risk, I think the General Counsel has got a very clear leading role to play and it's an area where a GC can add real value to the executive committee, to the board, to the corporate generally and are going to want to do that in conjunction with the risk function within the business. Now, of course, in many regulated businesses, the risk officer role will be completely separate from that of the general counsel, but often the general counsel does have responsibility for risk. But in either model, there needs to be close collaboration between the two functions to make sure that legal risk is properly understood in the wider context of the risks that a company will be tracking and seeking to manage.

Matthew:

This might not be the easiest job in the world. Senior executives and boards already have a lot on their plate, so GCs have their work cut out for them getting and holding directors' attention, and influencing them to change where that is needed. First Euan, then Vicky, have some advice.

Euan:

The first thing is establishing relevance when you first hear about these types of risk it might seem somewhat fanciful that they might materialise, or they might seem so remote, or they might not seem relevant to what you're doing as a corporate and so I think trying to bring the legal risk to life for people by looking at some of the case studies of where others have been taken to court around this to be looking at and pointing out the extent of some of the potential liabilities and painting that within the context of either current or historic activities of your own company is a good way of helping people to understand it. If it's just described in a very abstract way, it's not necessarily going to get the attention that it deserves, and people aren't going to be able to immediately see the relevance or potential relevance over to the organisation so it's better to be brought alive. I think you know one area of pushback that we might get is that so far we've not seen any real significant examples of someone being successfully sued for their contribution to climate change. But what I think is important in that context is to be examining the trend of the case law, looking at these trends globally and thinking about how it might apply to the scope of your geographic activities, the geographic scope of your activities. So you need to be monitoring that case law everywhere where you are operating or have been operating in a significant way where you might have had an impact.

The second area of pushback you might get is that quite often a reaction to this will be, well, I don't think that's how the law should operate, that doesn't seem fair, that's not right. And people can have quite entrenched views around these issues as to what they think is right and the GCs job, of course, is to be very dispassionate about that but to examine where the risk might arise and what is a proportionate response to the risk depending on the level of that risk taking into account how the management of it might impact on your activities and what you want to do, but what the potential downside is and the amount of the loss that you might suffer if you don't take it seriously.

Vicky:

When we do talk to our members about particularly the legal side of climate the room is very quiet. Everybody, everybody is listening. This is a topic that really gets the eyes and ears of our directors. And that is because it is a very fast-paced and changing environment both in the legal and regulatory space, in the policy context and also because of physical climate risk itself. The question of legal climate risk goes to the centre of good governance and the very fiduciary duty of directors. It's a very, very mixed bag at the moment. We have some organisations who are really leading the charge and where board directors are really leading those organisations in terms of governance and oversight, and we have some who really are at the base level one, you know, really haven't even grasped how significant these questions are and everything in between. I think they what we are seeing is a real appetite to learn.

Matthew:

We are only really just beginning to understand the scale and scope of climate legal risk. It's absolutely huge and it demands a commensurate response from organisations. Thom says it must be put right at the heart of everything a company does.

Thom:

Ignoring this risk, attaching a value of 0 to this risk is not wise as a corporate strategy and is also not something that you're going to get away with for much longer. So the main thing that companies should be doing is they should come up with an emissions pathway as part of their corporate strategy that is consistent with meeting the goals of the Paris Agreement, because that is the globally accepted scientific and political consensus on what should happen. And if you want any sort of anchor, any north star for your corporate strategy that's the one it should be. Anything less will exposure to the threat of litigation and the threat of damages and as time progresses, there will be more money going into litigation, there'll be better evidence supporting those claims and you should also expect campaigners to build upon legal successes, so the legal framework should be progressively stringent, especially if we consider that as long as we don't tackle climate change, the harms will increase and more and more people will have legitimate cases for damages to bring against these companies.

Euan:

I think the key thing is to make sure that these types of risk are built into decision making processes about current and new activities. So, when a major decision is required, what are the internal governance steps that are required for sign off and along the way is some assessment being built into the process to understand whether or not this is accentuating this type of risk, exposing you to new risk in this area or where that risk is not relevant, or indeed it might be something that's helping to mitigate that risk. So, just having the right checkpoints in place to ask the questions and to assess the activity against the degree of legal risk that there might be associated with it is absolutely appropriate and that's about the mechanics of decision making.

Thom:

I mean, the costs of these kinds of cases may be so large that companies cannot afford to pay out the claim in full. If you are a financial analyst and you're covering a company, you should be caring about the climate related legal risk. If you're in the C-Suite and you're setting the strategy of your company, this is a risk that should be part of your strategy setting considerations. If you're an advisor and you're advising a company on new projects, again, the emissions associated with those projects should be considered not just in light of the PR strategy, but also in light of the legal risks that is attached to those emissions here in the UK or the European Central Bank in the EU, that they start to quantify their climate related legal risks as well. So you can see that academics and regulators are closing in and you can also see that more and more asset managers and other investors are interested in their climate related legal risks that sit in their portfolios. So you can see in other words that a risk that wasn't on people's radar in any meaningful way only a few years ago is now rapidly ending up on people's radar.

Matthew:

Thanks for listening, and do drop me a line on [email protected] if there are any big issues you’re tackling as a GC that you would want to hear a programme like this on. We really appreciate you spending this time with us, we know there’s lots else out there clamouring for your attention, so thank you an until next time, goodbye.

Brain Food For General Counsel was produced and presented by Matthew Magee for international professional services firm Pinsent Masons.