Green investors are embracing litigation

KATHLEEN O’DONNELL is a 23-year-old Australian law student whose holdings of her government’s bonds mature in 2050, by which date carbon emissions may well have pushed global warming past the 1.5°C goal enshrined in the UN Paris agreement. In July Ms O’Donnell filed a court case against the Australian government for failing to disclose climate-change risks to investors. In 2018 Mark McVeigh, another young Australian, sued his pension fund, the Retail Employees Superannuation Trust (Rest), for allegedly failing to adequately manage the risks that climate change poses to its investments.

The fact that Mr McVeigh and Ms O’Donnell are both Australian may reflect their government’s laggardly approach to climate change. But their court cases are also part of a growing willingness among green investors to see legal action as an alternative to divestment. “Unless the corporate sector switches quickly to meet investor expectations, I think we are inevitably going to see increasing shareholder litigation,” says Peter Barnett, a lawyer with ClientEarth, an NGO.

The approach can yield results. On November 2nd, with Mr McVeigh’s case due back in court that day, Rest, which manages assets worth A$57bn ($42bn), agreed to settle, stating that “climate change is a material, direct and current financial risk” to the pension fund and committing itself to identifying and managing the risks. It now aims to shrink its carbon footprint to net zero by 2050. (Ms O’Donnell’s case is still being heard.)

In some ways, litigation is the logical next step as investors become more engaged. The number of shareholder resolutions seeking to shift companies’ policies on climate change is rising, including through initiatives like Climate Action 100+, a group of 518 investors with more than $47trn in assets. ShareAction, a charity, counts 11 shareholder resolutions citing climate change filed in Europe in 2020, up from five in 2015.

If resolutions fail, shareholders can divest, or they can choose to sue. In 2018 a group of 95 asset managers overseeing $11.5trn called on rich-world utilities to draw up decarbonisation plans that are consistent with the Paris goals and eliminate coal power by 2030. “If necessary, we will deploy all the tools available to us as shareholders to require laggards to do so,” they wrote in the Financial Times. To Mr Barnett, that implies a willingness to litigate. AP7, a Swedish pension fund, lists initiating “legal processes” against companies as one of its tools to promote sustainable asset management.

So far, most lawsuits have centred on fiduciary duty to disclose climate risk. Shareholders have sued the Commonwealth Bank of Australia for failing to disclose them, including risks related to possible investment in a coal mine (the lawsuit was dropped when the bank published an annual report acknowledging the risk). In America ExxonMobil, an oil major, has been beset by class-action and shareholder lawsuits alleging that the company has misled investors on climate risks. So far, none has been successful.

In some more recent cases, the focus has shifted from disclosure to demanding strategies to reduce risk. Mr McVeigh’s case alleged that Rest was failing to address the risks posed by climate change. Ms O’Donnell’s case is being watched for a different kind of outcome. If she wins, the Australian government, which has done much to support the coal industry and little to limit national emissions, may have to issue a public statement about the financial risks posed by climate change. A backlash against dirty bonds is already hurting some of Australia’s regional governments. Last year Sweden’s central bank said that it would not invest in the assets of dirty issuers, and promptly sold bonds issued by Queensland and Western Australia.

Occasionally shareholder litigation can lower emissions directly. In 2018 ClientEarth bought €30-worth ($36) of shares in Enea, a Polish power company, and later sued over the firm’s plan to build Ostroleka C, dubbed “the last coal unit ever to be built in Poland”. The NGO argued that the decarbonisation of the energy sector would make Ostroleka C an unprofitable stranded asset, creating an “indefensible” financial risk. The Polish courts ruled in ClientEarth’s favour last year, and the project has been abandoned—a powerful precedent. ■

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