Top 5 climate-related liability issues that your board should consider

A decade ago, ‘climate change law’ largely centred on compliance with environmental, natural resources, energy and planning regulations. Unless your company was a major fossil fuel producer or consumer, the potential for a climate-related claim may have seemed remote. And even then, the prospect of a loss in court may have seemed unlikely.

That was then. Now, new regulatory frameworks are being enacted across the world, and climate cases are on the rise. In fact, more than 230 climate cases across 55 countries were filed in 2023 – from the United States to South Africa, Brazil, India, China, Indonesia, Panama, Nigeria and beyond, according to the Climate Change Litigation Databases.

Claims range from breach of regulation to breach of contract, from human rights violations to securities fraud. Defendants feature companies from a broad range of economic sectors – from energy and agriculture to forestry, industrial production, aviation, shipping, finance and housing.

With the spread of climate litigation claims, and with increasing focus on governance, strategy and risk oversight within emerging mandatory climate-related financial reporting standards, directors face an elevated personal climate-related liability environment.

In response, insurers are increasingly adjusting coverage conditions and renewal questionnaires, and withdrawing cover for projects delayed due to litigation. Most of the world’s largest commercial law firms now promote their climate change law expertise. However, many boards, and the chief legal officers by whom they are advised, remain unaware of how climate liability risks have evolved.

Drawing on the expertise of the World Economic Forum’s Climate Governance Community of Experts, here are the top five climate liability issues that all directors (and chief legal officers) should interrogate as they oversee their company’s approach to liability risk – and to manage their own personal liability exposures. These are:

Companies (and their directors) are facing climate-related liability risks from increasingly novel angles. A failure to consider the expansion in claims exposures can lead to a potentially material financial risk not being identified, priced, managed or disclosed.

Key questions:

The increasing frequency and intensity of extreme weather events brought about by climate change means that the ‘unprecedented’ can no longer be considered ‘unforeseeable’. The law often considers proactive adaptation as a reasonable and proportionate response in the evolving risk environment.

However, many companies still take a ‘boilerplate’ approach to force majeure (or ‘act of God’) clauses in their material contracts. This can leave a company exposed to significant unbudgeted liabilities – perhaps even large enough to cause bankruptcy.

Key questions:

Activist litigants and other stakeholders throughout the value chain may claim a breach of consumer- and/or securities- fraud laws from any ‘say-do gap’ between the climate ambition announced by a company, and the actions taken (or lack thereof) to pursue those targets. Large companies are often targeted to amplify a claim’s impact.

Key questions:

Until recently, general descriptions of products or companies as ‘green’, ‘sustainable’ or ‘climate-friendly’ were so vague that they were broadly defensible. Now, with consumers and investors placing more value on sustainability characteristics, these terms convey elevated – and often specific – meanings.

In addition, regulators in many jurisdictions – including, for example, the EU and UK – are adopting laws that limit when ‘environmental’ labels can be used and the conditions that must be explained, such as product composition and the use of offsets.

Key questions:

Around the world, regulators and accounting standards setters are responding to calls from investors to provide consistent frameworks for the financial reporting of sustainability-related information. Regimes such as the International Sustainability Standards Board (ISSB) and Corporate Sustainability Reporting Directive (CSRD) will require companies to disclose data that has not previously been collected or verified under financial information systems, and a significant increase in forward-looking statements.

In addition to corporate exposure for regulatory breach or misleading disclosure, directors may be personally liable for any mis-statements that they approve, and/or for a failure to diligently oversee their company’s preparation for the step-change in reporting requirements.

Key questions:

In conclusion, climate change is transforming the exposure of companies to litigation. The breadth of potential claims and the immediacy of risk arising from a failure to adequately identify and manage both the physical and transition risks arising from climate change should not be underestimated.

The growing number of climate-related claims across various jurisdictions underscores the importance for companies to thoroughly assess their exposure to these risks. By reviewing and enhancing their approach to climate governance, boards of directors can reduce the risk of litigation to the companies they serve and for themselves personally.

Disclaimer: the views and perspectives expressed herein are a result of a collaborative drafting process of the Climate Governance Community of Experts (CGCE), an inter-disciplinary climate governance expert group convened by the World Economic Forum. They do not necessarily represent the views of the World Economic Forum, nor those of individual CCGE members or their organizations. Furthermore, the views and perspectives outlined in this text do not constitute any general or specific legal advice related to any ongoing or future legal processes in any particular context or jurisdiction.

This article is the final one in a series of three created by the Community of Climate Governance Experts cohort of 2023-2024. The Forum would like to thank all contributors for their valuable input over the past year.