Fighting climate change in the courts: A tailwind for ESG investing?

Quilter Cheviot's Gemma Woodward considers emerging climate-related legal and reputational risks

Protest is, by definition, a reaction against the law. To protestors, the law represents the established order, a barrier standing in the way of the force of the new

This is not so true of the climate movement of late. Increasingly, the law and the courts are seen not as a barrier, but rather a tool to hold governments and companies to account for their climate record and to catalyse change.

According to the Grantham Institute and the London School of Economics, there have been 1,328 cases of climate change litigation across the world between 1990 and 2019. 53 of these have been in the UK. While these are all important, the decision in February of this year by the Court of Appeal to rule Heathrow’s third runway illegal is monumental.

For the first time anywhere in the world, a government has been legally challenged for failing to consider its climate commitments under the Paris Climate Agreement. The precedent is hugely significant. Already, the climate action group Plan B is challenging the government in the courts under the Paris Climate Agreement and the 2008 Climate Change Act for failing to consider the UK’s climate objectives when designing their economic response to Covid-19.

Clearly, there are second order effects on companies when a government is sued over its climate record. The ruling against the government on Heathrow will impact the airport, airlines and many other companies in the sector. However, the use of the courts in the battle against climate change could be ground-breaking for ESG investing for several reasons.

Climate change and carbon-exposure is now a major legal and reputational risk. Legal challenges against corporations used to primarily be focused on the oil majors in the US, but these  are now going mainstream as more and more climate organisations harness the power of the law to hold companies to account.

Companies will need a holistic ESG strategy right across the business. It’s all well and good being a signatory to endless climate-related initiatives and promises, but unless a company’s ESG strategy encompasses every part of t its operations, in every jurisdiction, there is the potential for climate-related litigation risk. No longer can a company quietly continue its carbon-intensive activities if it is based offshore, or operated under a discreet subsidiary. It may be out of sight, but its now very much in mind.

Accurate climate reporting will be an absolute necessity. Reporting on exposure to the climate, and the carbon-intensity of a company’s activities will change from being a ‘nice to have’ exercise to an absolutely necessity. Shareholders will demand to know a company’s carbon exposure if the alternative is being dragged through the courts. The Australian government are being sued by a 23-year old for failing to disclose climate change-related risks to investors in the country’s sovereign bonds. Companies must take note and take action to start the journey of being able to deliver comprehensive and meaningful reporting on their approach to the climate.

At this point it would be good to add the caveat that I am not a lawyer, and so this has not been a comment on the jurisprudence of climate related litigation, but rather an attempt to highlight, from an investor’s perspective, that climate-related litigation is here to stay and will provide a tailwind for ESG investing, given the emerging legal and reputational risks.

Covid-19 aside, this year has been unprecedented in the sense that the Paris Climate Agreement has, for the first time, been used to hold the government to account for a particular climate-related policy. For the reasons set out above, the emerging climate-related legal and reputational risks should provide a considerable incentive for executives to get serious on the climate, and implement a holistic ESG strategy, or risk being dragged through the courts. Shareholders will not take kindly to a courtroom standoff.

Gemma Woodward, is director of responsible investment at Quilter Cheviot and editorial panellist at ESG Clarity.

See also: – The mixed fortunes of ESG: Will we see a rebalancing after the crisis?


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...