Global Environmental Climate Change Risks for Companies

Vyapak Desai

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Climate Change Disputes Series (I) - An Overview

by: Vyapak Desai of Nishith Desai Associates -

Monday, May 9, 2022

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INTRODUCTION

If we are thinking that climate change related problems are in the future, we are ignoring the present. Climate change problems are a present reality, for all. The climate has changed (in some respects irreversibly), and is continuing to change faster than we can think or act.

The risks arising from climate change are multifarious, and the stakeholders too many. In addition to grave risk to life and livelihood, the circumstances arising out of climate change have spurred thousands of disputes across the globe. Key stakeholders in these disputes are the human society, vulnerable communities, businesses, industry bodies, state governments, state entities, political leaders, commercial contracting parties, investors, funders, shareholders, lawyers, judges, arbitrators, scientists, technical experts, and arbitral institutions.

Most changes impacting society and its constituents are capable of being managed by the rule of law. As we face climate change, as lawyers, we are best placed to create a global legal ecosystem that works together with its constituent stakeholders to prevent, mitigate, adapt, transition and create resilient strategies to address climate change.

In this series on Climate Change Disputes, we attempt to identify risks arising from climate change for commercial parties, anticipate impending developments, and attempt to prepare our clients for the future by delivering solutions to manage climate change related risks.

In the present article, we aim to familiarize commercial parties with climate change and disputes that could arise from climate change related events. In further articles in this series, we will assess the law applicable to such disputes, delve deeper into each type of dispute, and assess effective means to resolve disputes involving private contracting parties, state entities and shareholders.

CLIMATE CHANGE – THE REALITY

Climate refers to the long-term regional or even global average of temperature, humidity and rainfall patterns over seasons, years or decades. Climate change is a long-term change in the average weather patterns that have come to define Earth’s local, regional and global climates.¹

Changes observed in Earth’s climate since the pre-industrial period (between 1850 and 1900) are primarily driven by human activities, particularly fossil fuel burning. This increases ‘greenhouse’ gas levels in Earth’s atmosphere. ‘Greenhouse gases’ are carbon dioxide, methane, nitrous oxide and fluorinated gases.² When solar radiation passes through the atmosphere, most is absorbed by the Earth’s surface, thereby warming it. The surface then re-emits some energy as infrared radiation. A portion of the energy escapes back into space. However, greenhouse gases in the atmosphere trap the remaining radiation, and re-emit it in all directions of the lower atmosphere. This is called the ‘greenhouse effect’ that incrementally warms the atmosphere, oceans, and land.

These human-produced temperature increases are commonly referred to as global warming. It is most commonly measured as the average increase in Earth’s global surface temperature. Since the pre-industrial period, human activities are estimated to have increased Earth’s global average temperature by about 1 degree Celsius (1.8 degrees Fahrenheit), a number that is currently increasing by 0.2 degrees Celsius (0.36 degrees Fahrenheit) per decade.

Between 1990 and 2015, global emissions of all major greenhouse gases have increased manifold. Carbon dioxide, which accounts for nearly three-quarters of total global emissions, increased by 51%. Methane increased by 17% and Nitrous Oxide increased by 24%. Emissions of fluorinated gases more than tripled. In 2015, human activity resulted in worldwide net emissions of approximately 47 billion metric tons of greenhouse gases. This represented a 43% increase from 1990.³

In 2018, the Intergovernmental Panel on Climate Change (IPCC) provided critical insights into the impact of greenhouse gas emissions on global warming, and the urgent need to mitigate, adapt and transition to limit global warming to 1.5 degree Celsius - beyond which temperature, the planet can become dangerous for life.⁴

However, by 2018, human activities had already caused approximately 1°C of global warming above pre-industrial levels. A February 2022 report of the IPCC suggests that at the current rate, global warming is likely to reach 1.5°C in the near term. ‘Near term’ is defined as ‘2021 – 2040’. We are already in the danger zone.

Climate data records provide evidence of climate change key indicators, such as global land and ocean temperature increases; rising sea levels; ice loss at Earth’s poles and in mountain glaciers; frequency and severity changes in extreme weather such as hurricanes, heatwaves, wildfires, droughts, floods and precipitation; and cloud and vegetation cover changes, to name but a few.

The past few years have been punctuated with several shocking climate events, leading to loss of several ecosystems, biodiversity, life and livelihoods. Last week, in an unusual historic event, the Earth's poles faced extreme heat simultaneously. Antarctica and the Arctic Circle were 70 degrees Celsius and 50 degrees Celsius warmer than normal. Nine of the 10 warmest years since 1880 have occurred since 2005, and the 5 warmest years on record have all occurred since 2015. We are in the thick of climate change and moving fast towards a precipice.

CLIMATE CHANGE RISKS FOR BUSINESSES

Since 2016, the World Economic Forum (WEF) has been listing climate change including extreme weather events, failure of climate change adaptation and natural catastrophes among the top 10 global risks for businesses. In its 2022 Global Risks Report, the WEF reports that over a 10-year horizon, the health of the planet dominates concerns: environmental risks are perceived to be the five most critical long-term threats to the world as well as the most potentially damaging to people and planet, with “climate action failure”, “extreme weather”, and “biodiversity loss” ranking as the top three most severe risks.

Due to climate change, businesses face risks and uncertainties in all realms – physical operations, availability of natural resources, existing markets, supply chain, applicable laws, regulatory changes, contractual rights and obligations, damage, insurance, and goodwill among others. A large risk in a business’ risk portfolio is, and will be, that of climate change related disputes.

Climate change disputes can be broadly defined as disputes arising out of natural climate events, human activity, or violation of international or national environmental laws and regulations. The circumstances arising out of climate change have already spurred thousands of disputes across the globe, involving several stakeholders. Human society, NGOs, vulnerable communities, businesses, industry bodies, state governments, state entities, political leaders, commercial contracting parties, investors, funders, shareholders, lawyers, judges, arbitrators, scientific and technical experts, and arbitral institutions – are key stakeholders in these disputes.

Commonly, parties involved in climate change related commercial disputes are private contracting parties, state governments, state entities, investors, and shareholders of companies. For ease of understanding, climate change related commercial disputes can be categorized into the following. We will deal with each of these categories in detail in our subsequent articles in this series.

Contractual disputes between private parties

Performance under a contract may be impacted by climate related natural events. This could result in disputes involving force majeure, frustration, termination of contracts, admissibility of claims, repudiation, re-negotiation, damages, insurance claims etc. A commercial party could initiate litigation or submit a dispute to arbitration depending on the terms of the contract or mutual agreement of the parties. Performance may be impacted by climate related man-made events. Violation of environmental laws by parties, change in laws and regulations, introduction of policies requiring businesses to transition and adapt to alternate practices - could give rise to claims involving breach of contract, breach of representations and warranties, allocation of liability, indemnity etc.

Disputes between states

States may suffer environmental harm due to human activities carried out in another state or lack of action by another state to prevent damage arising from its actions. This could result in disputes involving violation of territorial sovereignty, environmental agreements or arrangements entered into by the States, or international obligations agreed under regional or multilateral treaties.

Disputes between investors and state governments / state entities

If the party is a foreign investor, it could initiate action against the state government for adopting arbitrary measures, changing laws, revoking licenses or incentives, violating due process, breaching legitimate expectations, or according discriminatory treatment to foreign investors. Depending on the facts and circumstances, action could be initiated under the national laws of the State, under a relevant bilateral investment treaty, a multilateral or regional agreement, or free trade agreement with an investment chapter.

At the same time, state governments can enforce compliance with international environment-related obligations in treaties, balance investor expectations against regulatory chill and margin of appreciation, be precluded from liability under the treaty, or can initiate counter-claims against investors in certain situations.

Non-contractual disputes

This is a broad category including all disputes that are not strictly governed by private contracts or international agreements. This includes claims by individuals affected by state inaction to adopt or enforce environmental laws, state response to environmental complaints, corporate action and operations affecting certain communities and surrounding, and shareholders enforcing corporate commitments and obligations relating to the environment among others.

The above list is indicative. As human society, governments and companies gear up to mitigate, adapt and transition in the wake of climate change, new legal relationships will be forged and existing legal relationships will witness change. The novelty of new and uncertainty in the old is bound to give rise to disputes.

With climate change, there is a surge in certain types of environment-related agreements, such as funding, licensing, commissioning, de-commissioning, and insurance agreements. Climate change investments have increased. New types of funds and agreements have emerged, such as Sustainable Investment Funds, Green Climate Fund Agreements and Emission Trading agreements. New cross-sectoral partnerships are being forged. Companies and governments are harnessing the power of technology and finance to adapt and transition to greener practices. Hence, as businesses adapt, transition, innovate and strategize on legal relationships, they will invariably face a large risk of new types of disputes.

Some sectors are more vulnerable to climate change – such as agriculture, construction, energy, mining, manufacturing and processing and transport. Resultantly, policies mandating transition to adapt to climate change will abound in the sectors most impacted by climate change. Such transitions and adaptations could further increase the risk of climate change related disputes for parties operating in these sectors.

CONCLUSION

Climate change generates impacts and risks that may result in grave harm and losses. With heightened economic uncertainty and increasing environmental threats, understanding of risks is critical, and there is an urgent need for all stakeholders to prevent, mitigate, adapt and transition.

While commercial parties align their internal policies and agreements with climate change related developments, they must also anticipate and prepare for risks arising out of climate change related disputes. Such disputes could involve a variety of complex issues.

Additionally, parties will need to understand the law that governs their rights and obligations, and choose effective mechanisms, institutions and rules to resolve the disputes. This will depend on several factors such as the legal relationship between parties, nature of the dispute, underlying issues, law applicable to the dispute, required relief, loss suffered, stakes involved and required relief among others. Accordingly, parties can be guided to adopt the appropriate mechanism to resolve climate related disputes.

In the next article in this series, we will evaluate the law applicable to climate change related disputes.