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Graph of the week

Graph of the week

15-01-2021 | Insight

Rapid increase in number of lawsuits against fossil fuel companies

  • Sylvia van Waveren
    Sylvia
    van Waveren
    Engagement Specialist

Around five years ago, the Dutch government lost a lawsuit forcing it to reduce its greenhouse gas emissions. It was the first time a court had compelled a government to act against climate change. Fast forward to today and there are new targets in the legal battle against climate change: major fossil fuel companies.

Currently, there are various court cases pending in the Netherlands, France, the UK and the US, aimed at forcing energy companies to stop using fossil fuels sooner.

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Litigation on the rise

The Grantham Institute recorded 1,587 cases of climate litigation between 1986 and the end of May 2020, 1,213 of which took place in the US. The graph shows the huge increase in the total number of court cases in that 35-year period.

Moreover, the institute calculated the climate change plaintiffs had won in 42% of the cases in the US, and as many as 58% outside the US, between 1994 and 2020. What is certain is that these lawsuits are increasing awareness and will undoubtedly have a favorable influence on future litigation. Companies in the sector are also sensing this momentum and having to shore up their legal arguments.

The precedent of tobacco

The model for these legal proceedings is the successful litigation against major tobacco companies in recent decades. This ended in 1998 with a federal agreement ordering them to pay a whopping USD 206 billion to 46 US states, over a 25-year period, to cover the costs of health care and other related claims.

Could the same happen with fossil fuel companies? Litigation against companies is nothing new. But so far, the primary aim of this has been to obtain compensation from them for actual victims. It is difficult to link as yet undeterminable damage from climate change directly to energy companies.

Therefore, the focus of the litigation is shifting to more creative compensation practices. For example, by obliging companies to reduce their CO2 emissions, abandon their production of fossil fuels or increase investments in renewable energy sources. Or, simply, to introduce a good climate policy.

Spillover to the financial sector

It is highly likely that future court cases focus not only on the fossil fuel companies themselves, but also on investors and banks - the parties providing them with the necessary financing. Pension funds are already coming under fire. At the end of last year, one of Australia's biggest pension funds agreed a settlement in a case concerning climate change.

The pension fund was accused of not protecting its members’ pension savings against the change in global climate conditions. As part of the settlement, the pension fund agreed to incorporate the financial risks related to climate change in its investments.

Near-term action needed in the financial sector

This growing litigation represents a new front in the fight to get companies to take responsibility for the climate change crisis. It remains to be seen whether a court can force an oil and gas company to change course. But I do believe the financial sector should play a bigger part.

Banks, insurance companies and asset managers play an important role in financing the transition to a climate-neutral economy. At present they still have considerable exposure to the financing of the fossil fuel industry.

They could easily call upon their credit clients to set climate change objectives, which would allow them to make their credit and investment portfolios less climate sensitive. The best way to do this is by offering a reward, such as lower interest rates for climate-neutral loans. This would create a win-win situation for both lenders and borrowers.

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