By Martijn Wilder and Sharona Coutts -
A landmark Australian judgment has shone a light on how climate change is now working its way into traditional areas of litigation around the world.
In February, a development relating to a proposed coal mine near the small, bucolic Australian town of Gloucester, three-hour’s drive north of Sydney, sent reverberations around the world.
But these reverberations were not of the earth-moving variety – they were legal rumblings caused by a decision handed down by the Chief Justice of the New South Wales Land and Environment Court, in which he declined to override the government’s earlier decision not to grant a permit to the mining company. In doing so, he based his decision, in part, on the likely greenhouse gas emissions the mine would produce.
“The [greenhouse gas] GHG emissions of the coal mine and its coal product will increase global total concentrations of GHGs at a time when what is now urgently needed, in order to meet generally agreed climate targets, is a rapid and deep decrease in GHG emissions,” Preston CJ held. “These dire consequences should be avoided. The project should be refused.”
Contrary to the thrust of much media coverage, this decision does not necessarily mean the end of any new coal mine approvals in the state, because it was specific to the particular facts. Nor did the decision, in our opinion, entirely break new legal ground so much as cement existing law.
Preston CJ’s decision provided a detailed and thorough analysis of cases and showed it is now accepted in Australian law that certain planning statutes require decision-makers to take climate change into account when considering the social and environmental impacts of proposed developments. His Honour also incorporated into his reasoning detailed analysis of scientific and economic arguments, which showed that greenhouse gas emissions are not only a factor in weighing social and environmental costs and benefits of a proposed project, but may well be the determining factor.
In this way, the decision in Gloucester Resources Limited v Minister for Planning [2019] NSWLEC 7 is part of a trend in what is often called “climate litigation” – the mainstreaming of climate change science and economics into traditional areas of law.
To be sure, we are still seeing cases in which parties are deploying and developing novel legal arguments with respect to climate change. Writing extra-judicially, Preston CJ recently examined many of these cases in “Mapping Climate Change Litigation”, which appeared in the October 2018 volume of the Australian Law Journal. His Honour analysed cases that raise a “public trust” argument, namely that governments have a duty to safeguard elements of the environment – including the atmosphere and the climate – on behalf of humankind. He also discussed climate change cases brought in tort, which have had mixed success. And his Honour looked at cases brought within human rights and constitutional law, including the “children’s climate lawsuit” in the US.
But if there is a trend worth watching in 2019, it might be the way climate change arguments are being drawn into solidly established fields of law, such as planning, corporate, and fraud cases. Increasingly, we are seeing cases that show climate change is a factual matter that should be addressed in the way courts approach other factual and legal questions.
A corollary of this trend is that defendants in climate-related lawsuits now seem less likely to deny the science around climate change. Instead, they seem generally more willing to accept that climate change is caused by the emissions of greenhouse gases through human activities, and that it will likely have negative impacts on people and the environment, and to pursue their cases accordingly.
This article provides an overview of some key cases that are mainstreaming climate change-related issues within traditional legal arguments.
[It’s] only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk.
Noel Hutley SC
Climate change as a planning law consideration
In October 2017, the Planning Minister’s delegate refused Gloucester Resources’ application because the proposed mine was in contravention of applicable zone objectives, would have significant residual visual impacts, and was not in the public interest.
That December, Gloucester Resources appealed to the Land and Environment Court against the Minister’s decision. In April 2018, the Court ordered that Gloucester Groundswell – a community group that opposed the mine – be joined as a party to the proceedings. Gloucester Groundswell was represented by the Environmental Defenders Office (EDO), a community legal centre specialising in public interest environmental law. The EDO brought in key experts to provide evidence on matters relating to climate change, including the scientific and economic ramifications of approving the new coal mine as proposed.
While there have been a number of other cases around Australia that have considered climate change impacts associated with mines, this is the first major decision since the entry into force of the Paris Agreement and the release of the Intergovernmental Panel on Climate Change’s (IPCC) Special Report on Warming of 1.5 Degrees.
Before setting out the basis for considering climate change within the planning framework, Preston CJ first provided a detailed discussion of:
The scientific consensus that human-induced climate change is having, and will have, catastrophic consequences, including citations of the IPCC’s 1.5 degree report;
Australia’s commitments under the Paris Agreement – including the call for net zero emissions in the second half of this century; and
The concept of the “carbon budget”, which sets out the maximum remaining levels of greenhouse gas emissions that can occur before the climate warms above 2 degrees Celsius.
Preston CJ then provided a detailed and comprehensive analysis of how greenhouse gas emissions and their direct and indirect impacts are relevant matters for consideration under planning laws and applicable planning instruments in the state of NSW.
His Honour’s key findings were:
A decision-maker in applications under NSW planning legislation can take account of downstream greenhouse gas emissions, not just those caused directly by the construction and operation of the site itself.
His Honour noted that the mine proponents had not provided specific plans to offset the project’s emissions, but rather relied on unquantified claims that reductions would occur in other sectors ([529]); and
The economics of the project did not stack up, a finding relevant to the legal test of whether approving the mine would be in the public interest.
His Honour’s reasoning regarding the economics was especially noteworthy. Preston CJ provided a detailed overview of the evidence from Tim Buckley, an economist and financial analyst, about the expected price trends of coal, including coking coal for steel. While the company had argued that coal prices were likely to rise due to increased demand from large developing nations, his Honour referred to evidence that demand for coal and steel could actually decline as countries implement their obligations under the Paris Agreement. Specifically, his Honour noted that many countries are taking steps to reduce or eliminate the use of coal. India, for instance, has introduced a tax on all coal, controls on chronic and rising air pollution, and has plans to greatly expand its renewables sector. Further, Preston CJ noted that the International Energy Agency’s World Energy Outlook 2017 Report that modelled a Sustainable Development Scenario had found that global demand for coking coal would decline by about 39 per cent relative to 2016 by 2040.
Of particular note, Gloucester Resources “did not contest that climate change is real and happening and that anthropogenic GHG emissions must be reduced rapidly” ([451]). It simply argued that the mine could be approved anyway. On the specific facts of the application, that argument failed.
The practical implications of this decision are likely to make it much harder for proponents of new coal mines in NSW to win approval, though not impossible. If the project had been able to mitigate its emissions – i.e. through offsets – the grounds for refusing the project in respect of greenhouse gas emissions may not have been as strong. But the question of legal approval is very different from whether an approved project could get financing; the costs associated with obtaining these offsets could affect the profitability of the endeavour. The decision was technically limited to the state of NSW, but we note that the reasoning with respect to how climate change features in legal tests such as “environmentally sustainable development” and the “public interest” could be influential in jurisdictions with legal tests that use the same or similar concepts.
It should be noted that the mining company has lodged a Notice of Intention to Appeal the judgment.
In our view, the decision vividly illustrates the risks around holding greenhouse gas-producing assets that could become “stranded” as the world moves to rapidly reduce emissions. As the risks around stranded assets are crystalising, so too are the rules and laws that guide what companies must do to assess those risks, and disclose them to regulators, investors and the public.
The rise of climate disclosure
In April 2015, the G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board at the Bank for International Settlements in Basel, Switzerland, to “convene public- and private-sector participants and review how the financial sector can take account of climate-related issues”. This created the Task Force on Climate-related Financial Disclosures (TCFD), which handed down its final recommendations in June 2017.
First, they strongly urged directors to identify, assess and disclose the risks and opportunities to their businesses posed by climate change. Second, they provided the outlines of a framework for how to do so.
These recommendations have already made a significant impact in companies’ approach to assessing, managing and reporting risk. By September 2018, 513 companies had signed on as “supporters” of the initiative. The recommendations have also spurred a broader conversation about how businesses will be affected by climate change; a shift in lens from even a few years ago, when the focus was mostly on how the climate was being affected by business.
In the Australian context, these recommendations did not forge new paths, but did reinforce existing opinions about the requirements on directors to disclose climate-related risks. In 2016, a legal opinion published by leading commercial barristers found that Australian corporate law already required directors to assess and disclose climate risks as part of their duties under various sections of the Corporations Act 2001 (Cth). In that opinion, lead author Noel Hutley SC said, “It is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company”. Just as Hutley predicted, in July 2018, Mark McVeigh, 23, sued his retirement savings fund (Retail Employees Superannuation, or “REST”) alleging that it had failed to adequately consider and disclose its climate risks, and had thereby breached provisions of both the Corporations Act and the Superannuation Industry (Supervision) Act 1993 (Cth) requiring directors and trustees, respectively, to exercise due care, skill and diligence in the exercise of their roles, and to act in the best interests of a person in McVeigh’s position. (In Australia, retirement saving funds are generally known as “superannuation” funds.)
McVeigh specifically referred to the TCFD recommendations, arguing that “a prudent superannuation trustee … would have … ensured that the processes it has in place for managing investments and disclosing REST’s climate change business risks to beneficiaries complied with the recommendations of the Task Force on Climate-related Financial Disclosures.”
He then alleged that, “[a]t no material time has REST set in place processes or taken the steps necessary to enable its officers to inform its Board of Directors, or the Board’s Investment Committee, about REST’s climate change business risks in accordance with the recommendations of the TFCD.”
In an interlocutory ruling in January, the Federal Court of Australia said the case “appears to raise a socially significant issue about the role of superannuation trusts and trustees in the current public controversy about climate change.” (McVeigh v Retail Employees Superannuation Pty Ltd [2019] FCA 14). The legal duties on directors and trustees with respect to understanding and disclosing their companies’ climate change-related risks and opportunities continue to solidify. At the time of writing, Australian regulators, including the Australian Securities and Investments Commission, the ASX, and the Australian Accounting Standards Bureau, have each made clear that they consider climate risk to be a material factor for companies to assess and disclose where appropriate.
Exxon sued over climate disclosures
As investors grow more attuned to climate risks, they are demanding greater detail about how companies are measuring and accounting for those risks, and are scrutinising the responses. A 2018 case brought by the New York Attorney General alleges that Exxon Mobil Corporation made fraudulent representations relating to its climate risk disclosures and argues that this conduct violated the Martin Act of 1921 – a state law originally enacted to combat crime on Wall Street.
Unlike previous climate lawsuits lodged by various municipalities against major oil companies, this case is not about the causes of or responsibility for climate change and its consequences. Rather, as the New York Times editorial board put in a November 2018 column titled, “Is Exxon Conning Its Investors?”, the suit is a “straightforward shareholder fraud case”.
The gist of the suit is that, “Exxon provided false and misleading assurances that it is effectively managing the economic risks posed to its business by the increasingly stringent policies and regulations that it expects governments to adopt to address climate change.” (New York Attorney General v Exxon Mobil Corporation, 452044/2018, Complaint filed 24/10/2018).
In particular, New York alleges that, even as Exxon claimed publicly that it was applying an internal predicted, or “proxy”, cost in order to determine how those policies and regulations would affect its business, in fact, its public claims did not match its internal processes with respect to how it accounted for the likely value of assets that emit greenhouse gases. The alleged effect was to deceive investors about the risks to Exxon’s assets, and to avoid having to take multi-billion-dollar write-downs on those assets. Exxon has denied these allegations. A trial is scheduled for October.
Especially noteworthy is that two of New York’s large pension funds are Exxon investors, and had been active in demanding information relating to its climate disclosures from Exxon in advance of this lawsuit. US pension funds have historically been influential in trends to divest from other contentious sectors, such as tobacco, and some are indicating they may do the same with respect to fossil fuels.
Conclusion
Legal systems around the world are addressing climate change in rapidly evolving ways. There are many fascinating cases in addition to those we have discussed in this article. For instance, following catastrophic wildfires in 2017 and 2018, California’s energy giant, Pacific Oil and Gas, has declared bankruptcy due to tens of billions of dollars of potential liability for its alleged role in causing those fires. Commentators have called it the world’s first climate change bankruptcy, but probably not the last. We expect to see novel arguments relating to whether, and to what extent, a single company can be held responsible for “causing” fires in the context of climate change. The purpose of this article, however, was to demonstrate that climate change can also be tackled within traditional legal frameworks and that plaintiffs are increasingly availing themselves of these avenues – so far with some degree of success.
Viewed that way, the parallels with tobacco litigation may be even more instructive. Originally seen as too difficult to litigate, tobacco cases, like climate lawsuits, were plagued with problems of evidence and causation. The tobacco industry fought back with sophisticated squads of lawyers, lobbyists and scientists – similar to what we have seen from the fossil fuel industry. However, litigants also grew increasingly sophisticated and turned to traditional legal arguments that focused on the burden tobacco put on public health systems. These arguments ultimately prevailed, culminating in the 1998 “Global Settlement” between 46 state attorneys-general and the four major tobacco companies, which allowed the states to recover $206 billion in public health expenses.
Increasingly, advocates are also framing climate change as a public health issue, pointing to the strain that pollution, heat, increased diseases and other effects are having on public health systems. As former California governor Arnold Schwarzenegger said at a conference in Los Angeles last year, “You can talk about climate change and … what is going to happen in the future if you continue … relying so much on fossil fuels … but don’t forget to talk about the health aspect, and don’t forget to talk about the aspect that many people die every year because of pollution.”
