Climate change is now firmly on the global agenda and is prompting action by political and business leaders around the world. In parallel, there has been a marked increase in climate-related litigation, buoyed by the growth and consolidation of climate science. Over 1,000 climate change-related cases have now been filed in 25 countries. Climate-related litigation is being used not only to recover the costs of climate-related damage and adaptation, but also as a means to promote and accelerate policy change and the transition towards a lower global carbon economy.
A recent report on the global trends in climate change litigation highlighted that, while climate-related lawsuits have previously tended to target governments, they are increasingly targeting the highest greenhouse-gas-emitting companies, many of which are oil and gas producers. Climate change litigation now demonstrably presents a key risk to oil and gas companies.
Calculating the cost
October 2019 saw the first major climate change lawsuit against a supermajor reach trial in the United States. The New York Supreme Court considered the Attorney General’s statutory and common law securities fraud claim against ExxonMobil for allegedly using two distinct sets of metrics to calculate the financial risks of climate change; one that was shared with investors and another that was used internally. The state is seeking between $476mn and $1.6bn as the basis for a shareholder restitution fund, among other relief. ExxonMobil has defended itself against the allegations, maintaining that it made accurate disclosures on the two cost metrics to investors. The outcome of the case will no doubt impact whether and how climate change-related claims are pursued in the future.
In direct response to the trial, ExxonMobil issued a public statement highlighting its $10bn of investment in research and development projects for lower emission energy solutions, including energy efficient initiatives, biofuels and flare reduction.[1] It also confirmed its commitment to tackling climate change risks with a focus on reducing emissions, conducting breakthrough research into lower emission technologies, and supporting public policies to reduce emissions at the lowest cost to society. The ExxonMobil lawsuit serves to highlight that the risk of climate related lawsuits is both real and potentially very costly.
The risks posed by climate change are well recognised in the oil and gas industry and increasingly driving diversification and innovation. Responses to the 2019 CDP Climate Change Questionnaire confirm that oil and gas producers recognise that failure to comply with their legal obligations relating to climate change is a key risk to their business. The responses also show that companies recognise that management of their impact on society regarding climate change is vital to the delivery of their strategy.
New strategies
It therefore comes as no surprise that all of the majors are shaping new strategies to address the transition to a lower carbon future. As pressure from shareholders and climate activists (including by way of litigation) increases, many companies are investing significantly in renewable energies—with research suggesting a strong association between the oil majors’ proved reserves and their renewable energy activities.[2]
The investment by the majors marks the beginning of their transition from oil and gas companies to energy companies in the broader sense. Indeed, last summer, the chief executive of Shell told investors that the firm is no longer an oil and gas company, but an energy transition company.[3] Total and Equinor are similarly leading the way in transforming from traditional oil and gas producers to full range energy and renewable players[4], between them making substantial investments in solar, wind, biofuels and batteries.
While the industry is embracing diversification, it remains to be seen whether this will be sufficient to meet the expectations of activists and investors, which have increased in light of government action to meet the commitments in the Paris Agreement and the UN Sustainable Development Goals. As expectations have increased, so too has the pursuit of liability, resulting in the increased risk of climate change-related litigation.
Regulatory environment
The pressure created by litigation, whether it succeeds or fails, is also likely to affect the regulatory and operating environment. Despite the mixed success of climate change litigation to date, this global trend is pushing boundaries, prompting policy and behavioural change, and creating a growing body of precedent around the world. A growing body of jurisprudence can drive policy changes that facilitate disclosure and this, in turn, may result in climate-related data held by governments and corporations regarding climate change becoming publicly available, potentially driving further climate-related claims.
Notwithstanding oil and gas companies accelerating their efforts to reduce their impact on climate change and enable a decarbonised energy system, climate change litigation will continue to increase and oil and gas producers should be prepared to face legal challenges related to the transition to a lower-carbon global economy.
Mark Clarke is a partner at White & Case; Katherine Daley is an associate at White & Case
[1] ExxonMobil statement regarding New York Attorney General civil trial; October 2019 https://corporate.exxonmobil.com/en/Energy-and-environment/Environmental-protection/Climate-change/Understanding-the-ExxonKnew-controversy#whatIsExxonKnew
[2] The renewable energy strategies of oil majors – From oil to energy?, Matthias J. Pickl, Energy Strategy Reviews, Volume 26, November 2019.
[3] Financial Times, Oil Producers Face Their ‘life or Death’ Question: Fear of an Imminent Peak in Demand Means Companies Are Less Likely to Invest. So Does that Make Shortages and a Price Rise Inevitable?. Financial Times, 19 June 2018.
[4] Could Renewables Be the Majors' Next Big Thing? Wood Mackenzie, 4 May 2017.
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