Great expectations

The court’s interpretation and application of the law evolves over time to reflect our society’s priorities, values and challenges. Through the common law, judges can create new principles and causes of action, which they do from time to time. Two recent examples where the courts have moved the dial would be in health and safety and the recognition of Te Tiriti o Waitangi - Treaty of Waitangi principles.

The question now is, what role will the courts play in climate change?

Lawsuits relating to climate change are among the fastest-growing areas of litigation worldwide. In the recent United States case of Held v Montana, the court held that state policies

prohibiting decision-makers from taking climate change into account in relation to fossil fuel projects violated the state constitution. (Unlike the New Zealand Bill of Rights, the Montana constitution requires the state to protect and improve the environment.)

In New Zealand, the case to watch is Smith v Fonterra. Michael John Smith is a Ngāpuhi and Ngāti Kahu elder and climate change spokesperson for the Iwi Chairs Forum which filed a claim against seven major New Zealand businesses, all involved in industries releasing greenhouse gases.

Smith, who says his way of life is at risk from the effects of climate change, argues that companies owe a general duty to cease:

• Contributing to damage to the climate
• Dangerous anthropogenic interference with the climate system.
• The adverse effects of climate change through their greenhouse gas

At present no such general duty exists.

The High Court knocked back a strike- out application on the basis the plaintiff had raised a novel argument that should be properly tested. The Court of Appeal disagreed and now the matter is before the Supreme Court with the outcome keenly awaited.

The acceptance of a general duty (that is, a duty to all of society, rather than a specific identifiable group of individuals or interests) would clearly initiate a range of complex challenges for all directors. It is still very early days for this novel case. It is not at all clear the Supreme Court will even allow the general duty claim to be properly heard.

Interestingly, and possibly presciently, in a 2019 legal essay prepared by Chief Justice Winkelmann and Justice Glazebrook the two justices opined that “climate change does not easily conform to existing forms of action”, and that the common law generally proceeds incrementally, while climate change issues require a rapid response.

It remains to be seen whether they will be proven correct but in any event there could be more fertile ground elsewhere for climate activists.

Company Act duties

Directors in New Zealand are bound by section 137 of the Companies Act, which requires directors to act with care and diligence. Directors are therefore required to have a sound understanding of key risks, including environmental risks, and ensure appropriate frameworks exist to identify and manage them.

In addition, the recent amendment to the Companies Act has clarified (for the avoidance of doubt) that directors may also consider environmental, social and governance matters when assessing a company’s best interests in accordance with section 131 of the Companies Act.

Shareholder activism

In a UK case heard earlier this year, an environmental NGO argued Shell directors were breaching their duties by not acting quickly enough to prepare the company for a post-fossil fuel future. The court dismissed the claim, upholding the traditional view it is for directors to determine how they achieve the company’s best interests and weigh up the competing considerations. The decision could yet be successfully appealed.

In Australia, shareholder resolutions seeking climate change action are gaining traction. The successful resolution against Woodside Petroleum in 2020 called for the company to align its emissions with the Paris Agreement. This trend reflects the shifting attitude among shareholders towards environmental responsibility.

Greenwashing

Regulators and activists overseas are focusing on allegations of greenwashing – or unsupported claims about eco- friendly practices – and similar claims are possible in New Zealand. Recent examples in Australia are the legal action brought against Mercer Superannuation and HSBC for misleading environmental statements.

Climate-related disclosure regime

Mandatory transition planning concerning climate-related business risks will be introduced for New Zealand’s large listed issuers, banks, insurers and fund managers from FY25.

The introduction of the disclosure regime and its overlap with a director’s obligations under section 137 of the Companies Act highlights the need for directors to consider these changes carefully and potentially seek legal advice. The reporting regime presents a particular risk of potential legal action if reporting is, at some later date, found to be inaccurate or misleading.

Conclusion

The increase in climate-related litigation indicates a very strong impatience in some parts of society at the lack of progress in addressing climate change. The duties of directors are open-textured and will evolve to reflect these changing social expectations.

The steps directors take now could be judged from the viewpoint of a court sitting in 2030, when the impacts of climate change are more adverse and public awareness of likely future damage has improved. Directors that adopt a ‘business as usual’ approach to governance will face increasing scrutiny by customers, shareholders, competitors, regulators and ultimately the courts.