In 2019, in what is referred to as the Urgenda case, an injunction was sought to compel the Dutch government to reduce its emissions and the Dutch govt conceded to finally to reduce the capacity of its remaining coal-fired power stations by 75 per cent and implement a €3 billion package of measures to reduce Dutch emissions by 2020.
This year, India was one among the 120 nations gathered at UN Climate change conference (COP26) to address inaction over the global climate crisis. India is the world’s fourth biggest emitter of carbon dioxide after China, the US and the EU. India promised to get 50% of its energy from renewable resources by 2030, and by the same year to reduce total projected carbon emissions by one billion tonnes and eventually to reach netzero by 2070 (Net zero, or becoming carbon neutral, means not adding to the amount of greenhouse gases in the atmosphere).
An increasing urgency is being demonstrated by various stakeholders in the US, UK, Australia and the commonwealth countries, in forcing leaders of companies in certain industries and governments to acknowledge their responsibilities in providing them protection, both financial and otherwise, from the impacts of climate change.
As we transition to responsible ways of manufacturing, production and creation of value, globally countries have witnessed increased shareholder activism forcing company directors to behave more responsibly, courts spurring regulators to demand better disclosures and governments incentivising market participants to effect change in their ways of doing business. No measure however has been as effective as litigation. It had proved as a successful form of redressal for stakeholders affected by climate change to demand immediate redressal from both governments and companies. Examples abound from the US, UK, France, Italy, Australia and Poland. There are several agencies that publish their watch on the climate change litigation successes.
The future will see litigation strategies influence action by a variety of stake holders in other industries, primarily the manufacturing sectors and the carbon majors. We have seen across the globe, human rights arguments being used as support in an increasing number of cases (such as citizens affected by climate change seeking asylum), actions for nuisance and fraud, deceptive greenwashing marketing campaigns and disclosure related lawsuits. In India it is possible that we will see class actions that may soon be pressed into service by stakeholders in this context, shareholder disputes that could centre on climate issues, proxy advisory firms encouraging shareholders and investors to speak up and large foreign investors who could force such conversations or insist on a framework for transition.
Litigations and disputes with stakeholders imply financial risks and economic costs to the company. This would include legal costs, fines, damages, increased insurance premiums and of course market valuations. The conscious investor seeking to invest in ‘clean’ companies could engage event studies to assess the potential impact of climate litigation on stock prices of these companies.
Stakeholders will seek to ensure these returns are not minimised because of the company’s reluctance to acknowledge and transition from its traditional ways of doing business. For a company seeking to be a national or global major it will have to learn how to communicate to its shareholders, investors and regulators on how it will engage with them on its corporate climate plans. FLCT Global, a non-profit, has made available a Climate Transition Conversation guide that provides tools in this respect for companies.
In India, the directorial responsibilities and governance required in this regard has been set out in the broad sections of the Companies Act of 2013, speaking on the duty of trust, care, competence, disclosure and loyalty. Although several companies have constituted ESG committees, it will be crucial to see what is being discussed with respect to climate, how prepared the company is with respect to regulatory recommendations in this regard and if transition will have adverse financial impact due to unpreparedness. Globally, investors are increasingly using sustainability reporting and climate responses as a measure to see how effective management is in addressing emerging risks. If global investors foresee that these topics are not discussed meaningfully at these boards this could result in lower valuations and assessment of the Company’s financial outlook of its future. Risk management committees need to fully appreciate the impact and convey with intensity to the Board and the CEO, a planning horizon to mitigate risk.
The cost of inaction by manufacturing and other ‘emitter companies’ will far outweigh the cost of early action. Board sensitivity in this regard will differentiate companies that are future proof and those that are not. As Indian business start going global and continue to attract record foreign investments, to stay tuned to changes in global jurisprudence is smart.
Aarthi Sivanandh (Partner), J. Sagar Associates (JSA)