The impact of climate litigation on government fossil fuel investments
Despite commitments from countries around the world to tackle greenhouse gas emissions, fossil fuel financing continues to grow at an alarming rate. At the same time, the number of global climate litigation cases is increasing rapidly. Could a meeting of the two put pay to governments’ ongoing appetite for investments into oil and gas?
At a recent climate action leadership conference, UN secretary general Antonio Guterres, for the countless time, made clear the UN’s stance on fossil fuels. He noted that the oil and gas industry reaped a record $4tn windfall in net income in 2022, yet for every dollar spent on oil and gas drilling and exploration, only four cents went to clean energy and carbon capture. His assessment was damning: “Trading the future for thirty pieces of silver is immoral,” he said.
Guterres’ comments come during a period of unprecedented global temperatures, and just months before COP28, which will be – controversially, for many – held in Dubai, the capital of oil-rich United Arab Emirates. Sultan al-Jaber, the UAE official due to lead the climate summit in November, has repeatedly suggested that climate action should focus on reducing emissions, rather than phasing fossil fuels out entirely. Guterres – in a thinly-veiled criticism of al-Jaber – reiterated at the June leadership conference that “the problem is not simply fossil fuel emissions” but “fossil fuels, period.”
“the problem is not simply fossil fuel emissions” but “fossil fuels, period.”
Saying one thing and doing another
On paper, nations are moving in the right direction. At COP26 in Glasgow, 39 countries and public finance institutions signed the Glasgow Statement on International Public Support for the Clean Energy Transition, which saw them pledge to end new direct overseas support for fossil fuels and prioritise public finance for a clean and just energy transition. UK Prime Minister Rishi Sunak (who in August 2023 granted hundreds of new oil and gas licences in the North Sea) even announced that the UK will become the world’s first ‘net zero-aligned finance centre’.
Yet despite the mountains of scientific evidence pointing to fossil fuels’ immense role in the demise of the planet, government funding into oil and gas continues apace. Data from the OECD and International Energy Agency (IEA) shows that overall government support for fossil fuels in 51 countries worldwide almost doubled to US$697.2bn in 2021, from US$362.4bn in 2020, as energy prices rose with the rebound of the global economy post Covid. The IEA’s latest estimates show that worldwide subsidies for fossil fuel consumption skyrocketed to more than USD $1 trillion in 2022.
This is a trend that has long been on the rise. Between 2013 and 2019 – the last ‘business as usual’ year before the disruption of the Covid-19 pandemic – the share of G20 energy financing directed to fossil fuels rose from 74% to over 89%. From 2019 to 2021, global development banks and G20 countries – including France, Germany, and Italy – provided at least $55bn/year in international public finance for oil, gas, and coal.
IEA executive director Faith Birol says, making the move away from fossil fuels isn’t straightforward. “Fossil fuel subsidies are a roadblock to a more sustainable future, but the difficulty that governments face in removing them is underscored at times of high and volatile fuel prices.” Indeed, rising inflation and the war in Ukraine has created major challenges in this area.
The system needs to be tightened up
But this continued investment isn’t simply a product of current events. As the International Institute for Sustainable Development (IISD) notes, “Loopholes in definitions create opportunities for governments to continue providing subsidies and public finance for fossil fuels, and other accountability mechanisms – such as a timeframe for implementation in line with climate science, and technical and other capacity-building support – are missing.”
Public finance bodies also often justify continued support for fossil fuels by saying it is necessary to aid the development of the world’s poorest nations. However, it is perhaps no surprise – and certainly in keeping with the theme of the forthcoming COP – that data indicates that the countries receiving the most money from the G20 tend to be wealthy nations with significant oil and gas reserves.
Renewables make attractive investment
Yet against this backdrop, research shows that investments into global renewables have a return seven times higher than fossil fuels. The IEA’s report, Clean Energy Investing: Global Comparison of Investment Returns, demonstrates how listed renewable power portfolios have outperformed listed fossil fuel portfolios in all markets and that the cost of capital remains lower for renewable energy companies than fossil fuel companies. The environmental argument for renewables, meanwhile, is indisputable.
The role of litigation
So what will it take for a meaningful step-change on oil and gas funding? Lobbying, boycotting, protesting and campaigning have made critical inroads, but activists are now increasingly turning to a newly-emerging tool: climate litigation.
According to new findings from the United Nations Environment Programme (Unep), the number of climate change court cases around the world has more than doubled since 2017, and is rising rapidly.
Unep’s report, Global Climate Litigation Report: 2023 Status Review, shows that while most cases have been brought in the US, climate litigation is now taking place all over the globe, catalysed by plaintiffs from all demographics. Around 17% of cases are being reported in developing countries, for example, while 34 cases have been brought by and on behalf of children and young people under 25 years old. In Switzerland, plaintiffs are making their case based on the disproportionate impact of climate change on senior women.
“Climate policies are far behind what is needed to keep global temperatures below the 1.5°C threshold, with extreme weather events and searing heat already baking our planet,” says Inger Andersen, executive director of Unep. “People are increasingly turning to courts to combat the climate crisis, holding governments and the private sector accountable and making litigation a key mechanism for securing climate action and promoting climate justice.”
According to the report, cases typically fall into one or more of six categories:
-
those centred around human rights;
-
challenges to non-enforcement of climate laws and policies;
-
keeping fossil fuels in the ground;
-
advocacy for greater climate transparency;
-
corporate liability and responsibility for climate harm; and
-
failures to adapt to the impacts of climate change.
The impact of this growing climate litigation on corporations is already proving significant. A Dutch court, for example, has ordered oil and gas company Shell to comply with the Paris Agreement and reduce its carbon dioxide emissions by 45% from 2019 levels by 2030. This was the first time a court found a private company to have a duty under the Paris Agreement.
In another first against Shell, environmental law firm ClientEarth filed a case against Shell’s Board of Directors in February 2023 for not taking action to move away from fossil fuels fast enough. This represents the first ever case of its kind to hold corporate directors personally liable. The UK High Court dismissed the case in May 2023, but has since granted ClientEarth an oral hearing where the Judge will be asked to reconsider.
Impact of litigation on share value
A recent study from the London School of Economics’ Grantham Research Institute also found that the filing of a climate case or subsequent court decision against a company reduces its expected value by an average of 0.41% – a modest but not insignificant amount. “We didn’t know before if the markets cared about climate litigation,” says Misato Sato, lead author of the study. “It’s the first evidence supporting what was suspected before; that polluting firms and especially carbon majors now face litigation risk, in addition to transition and physical risk.”
It’s certainly not a new risk. Back in 2015 Peruvian farmer Saúl Luciano Lliuya filed an unprecedented legal claim against energy giant RWE, seeking compensation for its role in causing historical climate change that threatened his home. The German company’s relative value subsequently fell by 6%.
In fact, the risk of climate litigation to corporations is now such that companies are in turn suing their insurers for not providing enough adequate protection against lawsuits. In August 2022, for example, Aloha Petroleum, a subsidiary of the US-based Sunoco, filed a claim against AIG’s National Union Fire Insurance Company of Pittsburgh, arguing it had failed to protect Aloha from the mounting costs of defending climate-related claims by local governments in Hawaii.
And in a somewhat dystopian twist, companies are even filing lawsuits against governments on the basis that action against fossil fuels is hurting their business. For example, Energy company Ascent is asking for $118m from Slovenia after it passed legislation requiring environmental assessments for fracking and German companies RWE and Uniper are suing the Dutch government for $1.6bn and $1.06bn respectively following the Dutch government’s move to phase out coal and shut down coal-fired power plants by 2030.
Filippino climate activists vs the carbon majorsIn 2015, a group of 12 organisations and 20 individuals brought a case to the Philippines’ Commission on Human Rights against the ‘carbon majors’ – 47 of the most high-emitting, multinational and state-owned producers of natural gas, crude oil and coal, including BP, Shell and Chevron.
The group, led by Greenpeace Southeast Asia, argued that the carbon majors are responsible for a large percentage of global greenhouse gas emissions. Citing the Philippines’ high degree of vulnerability to the effects of climate change, the applicants alleged violations of the rights to life, health, food, water, sanitation, adequate housing, and self-determination. They also specifically invoked the rights of vulnerable groups, peoples and communities, including women, children, people living with disabilities, those living in extreme poverty, indigenous peoples, and displaced persons.
The Commission subsequently launched the National Inquiry on Climate Change, which aimed to determine the impact of climate change on the human rights of the Filipino people, as well as determining whether the carbon majors are responsible for climate change.
In 2022, nearly seven years later, the Commission released the findings of its inquiry, which said that the world’s most polluting companies have a moral and legal obligation to address the harms of climate change.
The case represents the first time a human rights body ruled that fossil fuel corporations can be been found legally responsible for human rights harms linked to climate change. While the Commission does not itself have the power to hold the carbon majors legally responsible or to fine them, the report sets a vital precedent for climate litigation in the future, with charities, NGOs, law firms and oil industry analysts calling it a ‘landmark case’.
|
Actions against governments
It is clear, then, that climate litigation in a corporate context is becoming an integral part of securing climate action and justice, but its use on a governmental landscape may prove trickier.
There have already been a number of legally significant developments in this space. In 2021 a court in Paris held that France’s climate inaction and failure to meet its carbon budget goals have caused climate-related ecological damages. In 2022, a UK court found that the government had failed to comply with its legal duties under its Climate Change Act 2008 when approving its net zero strategy. The same year, the UN Human Rights Committee concluded for the first time that a country – Australia – has violated international human rights law through climate policy and inaction.
Dr Sennan Mattar, lecturer in climate justice at Glasgow Caledonian University, says that the rise of climate litigation is encouraging. “It means that more and more, national governments are having to defend their position when it comes to the funding of fossil fuels. It’s making the case that they have a legal obligation to protect their citizens, and now they have to spend time formulating policies that will defend them from litigation.”
Issues around national obligations...
But when it comes to fossil fuel financing, the issue of extraterritoriality presents a roadblock. A case in point is the decision by UK Export Finance (UKEF) to fund a mega gas project in Mozambique, estimated to produce between 3.3 and 4.5bn tonnes of CO2 equivalent over its lifecycle – more than the combined annual greenhouse gas emissions of all 27 EU countries. Friends of the Earth challenged this decision in court, but the case ultimately failed due to question marks around the UK’s obligations to prevent emissions originating from other countries.
This then ties in to issues of sovereignty, which Sennan says is “the real kicker” when it comes to the fossil fuel investment discussion. “This is whether countries can be held legally accountable to other countries, and generally speaking, the answer is no, they can’t. Citizens of one country can take their own governments to court, but the outcome of that case won’t necessarily set a precedent for cases in other countries, because their legal frameworks are different.”
This is particularly evident within EU countries – many of which have similar legal frameworks – where there is an ongoing conflict of opinion about the foundations of the Paris Agreement. “As an environmental treaty, it has been successful in getting countries to cooperate. Everyone agrees that we need to protect the environment and the climate,” says Sennan. “But it doesn’t specifically mention fossil fuels, because nations can’t tell other nations what they use to power their countries, or how they invest in energy – whether that’s at home or overseas.”
...and sovereignty
This issue of sovereignty was made especially clear in 2020 when former US President Donald Trump withdrew the US from the Paris Agreement. “There is always the risk that governments will try to insulate themselves from climate obligations – and indeed litigation – by changing their frameworks to enable them to withdraw from international agreements,” says Sennan. However, he acknowledges that’s not a good look. “There’s a geopolitical cost to doing that, and it doesn’t sit well with the international community.”
Climate litigation is still in its relative infancy, so a lot of these issues are being considered and explored, but litigation’s role in at least influencing fossil fuel policy is becoming clearer.
The role of the loss and damage mechanism
“The more it is argued, the more it is developed and then there’s a greater body of work to draw from,” says Sennan. He points to the creation of a Loss and Damage mechanism – or the ‘polluter pays’ principle – as an example of this. “It’s not a direct law against fossil fuel investment, but it will eventually say that if you invest in fossil fuels you will be causing damage and loss, which you must be accountable for.” Indeed, the LSE’s report notes that we can expect a substantial uptick in litigation addressing the prevention of and redress [or loss and damage] for climate change in the coming years.
"If you invest in fossil fuels you will be causing damage and loss, which you must be accountable for."
As of May 2023, more than 2,300 global climate change litigation cases have been logged by the Sabon Centre for Climate Change law – the majority of them against governments.
According to the centre, more than 50% of climate cases have direct judicial outcomes that can be understood as favourable to climate action, while the majority continue to have indirect impacts on climate decision-making beyond the courtroom. At the same time, the conversation around fossil fuel financing is becoming louder and, for governments, harder to ignore. Exactly how the relationship between the two will evolve is yet to be understood and will undoubtedly require time and effort to establish, but despite its current challenges and limitations, the potential of climate litigation in this area should not be underestimated.
“Even when lawsuits are unsuccessful, they create discussion and awareness,” says Sennan. “Current fossil fuel investment is at odds with the climate outcomes everyone agrees are urgently needed, so it’s increasingly clear that climate litigation will have a key role to play in influencing governments away from oil and gas financing. As such, I suspect things will look different in a few years’ time.”
Further reading
|
You may also like
8 ways to increase biodiversity in a garden
A checklist for holidaying more sustainably
About Ocki and OckiPro
Are 1.5oC and net zero meaningful globally?
Activate employees
Find out how OckiPro membership engages employees to deliver sustainability impact.
Get Involved
There are many ways to get involved with Ocki and its community. To find out more, click the button below
You may also like
8 ways to increase biodiversity in a garden
A checklist for holidaying more sustainably
Are 1.5oC and net zero meaningful globally?
© 2022-2024 Ocki Sustainability Limited All Rights Reserved