What climate litigation means for Canadian businesses

Greg Hudson [00:00:08] Hello, and welcome to Lexpert TV. Climate lawsuits are on the rise in the US showcasing the increasing legal complexities associated with climate change. Meanwhile, in Canada, many experts see a growing wave of climate related litigation as environmental issues come into focus. To help navigate this new complicated of an evolving legal landscape. Today we'll be speaking with Matti Lemmens, Partner at Stikeman Elliott, with offices located in Montreal, Toronto, Ottawa, Calgary, Vancouver and New York. Stikeman Elliot is a global leader in Canadian business law. Matti, thank you so much for being with us.  

Matti Lemmens [00:00:43] Thank you. 

Greg Hudson [00:00:44] I guess I'll jump right in. Recently, there was a case in the states wherein a group of students successfully sued the government over climate change. What exactly happened? And why was it noteworthy? 

Matti Lemmens [00:00:57] Well, so that was a case in Montana. And there were about 16 young people involved that had constitutionally challenged the provision of the Montana Environmental Policy Act. And that provision prevented the state from considering the impact on the climate when allowing energy projects to proceed. And ultimately, those 16 young people were actually successful in that litigation, the state's constitution imposed a sort of affirmative duty on the state to provide a clean and healthful environment. And so the court found that that protection included a duty to provide safe climate and struck down the provision of the policy act as unconstitutional. So there's a debate whether that will actually survive on appeal in Montana, but we'll have to see how that comes. The court ultimately made a finding of fact that human activities are influencing the climate. And in particular, the use of fossil fuels are influencing the climate. So that is sort of the vein of what's going on now in the States.  

Greg Hudson [00:02:01] Now, we obviously have a different legal system in Canada. But what can we expect to happen here? 

Matti Lemmens [00:02:08] Well, we've already seen some of that happening here in Canada in the past decade. But there was a recent case in Ontario, the math or an Ontario case, where there was a similar sort of group of seven young people that filed that action against the Ontario government for passing the cap and trade cancellation act 2018. And that had repealed sort of these initial greenhouse gas targets that were set under the Climate Change Act, and had less ambitious standards for climate change emissions. And so Canada doesn't have that same sort of protection of the healthful environment that the Montana Constitution has. And so what they had to look at was the Canadian Charter of Rights and Freedoms, they looked at two particular sections, section seven, which protects the right to life, liberty and security of the person, and section 15, which protects against discrimination, and it promotes equality in Canada. And so the court found that people that were bringing the application had, in fact, they were seeking an imposition of positive obligations on the government under the charter, whereby the government would be responsible for setting stronger targets which secured their rights under the charter. And usually, section seven, and section 15 are more often used to prevent government action that deprives persons of their constitutionally protected rights. So that was a bit of a different, you know, sort of a goal to go at that these young people had taken. And so the court ultimately decided it was not necessary for it to consider whether the circumstances warranted the imposition of positive obligations on the government under Section seven, because the court already rejected the applicants argument that the government action had restricted the applicants rights in such a way that was contrary to the principles of fundamental justice. So in considering those principles of fundamental justice, the court sort of looks at whether something is arbitrary, or whether it's grossly disproportionate. And the court found that a positive obligation doesn't really fit neatly into whether something is arbitrary, or whether it's grossly disproportionate, because that would seem like you're arguing that something is insufficient, as opposed to be what they were looking for, was saying it was insufficient, as opposed to being too much. And so the court found that those sections were just not really engaged by the case at all. And so the case is actually of some value for climate change advocates in the sense that they weren't just dismissed outright for seeking political action. They were actually identifying specific government actions and legislation that they were taking issue with, because prior cases, such as one in Quebec In 2021, Environment Jeunesse, it actually had not proceeded because it was not found to be juiced issuable at all, it was found to be more of a political issue. So we may see some differences now in the approach being taken by climate advocates. 

Greg Hudson [00:05:20] Now, those two examples, there was the government that was being sued over climate change, what about private companies? What, what kind of companies and industries should be weighing the risks of climate litigation? 

Matti Lemmens [00:05:32] Well, of course, everybody probably could think that greenhouse gas emissions, let's look at oil and gas companies. And so we have seen some of that going on in the litigation in other countries and in our country as well. For instance, there was a New York Attorney General action against ExxonMobil for alleged misrepresentations in its public disclosure related to climate change. And so the New York Attorney General, was seen as having to prove the alleged misrepresentation as basically a reasonable investor would have to have made a different investment decision based on that climate disclosure or those alleged misrepresentations. And ultimately, the case was dismissed, the court found that a reasonable investor would not have made a change. It made some comments related to taking a contextual analysis of the specific matters at hand. So evolving environmental policies and climate policies over time, and specifically, these alleged misrepresentations occurred in 2013 to 2016. At a time when most investors were not actually looking at climate related disclosure that much. And so it was seen as unlikely to have caused any alteration in the investment decisions of the investors. We also have seen some other cases in. In the UK, for instance, earlier this year, client earth a climate sort of advocate had brought a claim against this board of directors of Shell claiming that the Board did not properly manage the climate change strategy of the company, client Earth had become a nominal shareholder of shell. And so what it tried to do was exercise the right to bring an action pursuant to a derivative action, which is a type of action that allows shareholders to bring actions against the directors and officers of a company for wrongdoings against the company. And so client Earth asserted that Shell Energy's Transition Plan which sought to reduce emissions by 50% by 2030, was not adequate. And it further asserted that since the board had not properly prepared the company for the low carbon transition, the board was putting the company at risk. The court ultimately refused to permit the derivative action to continue, you need permission of the court to actually have a derivative action. And so to get that permission, you need to establish that there's a prima facie case at hand, they were unable to do that. The court found that client Earth did not try to provide any expert evidence on which the court could rely in relation to climate science, carbon markets or other related areas. And they only spoke to the law and policy relating to climate change. Of course, the management of shells business was for the directors to determine, including how best to promote the success of the company. And so the court noted the client Earth's case appear to ignore the size and complexity of shells business, and the fact that the directors of shell will be required to consider a range of competing considerations that the court is frankly ill equipped to interfere with. The court noted also the client Earth had not brought the action in good faith, but rather with an ulterior motive of promoting its own public policy agenda. And so the court encourage client Earth to advance its use as a voting shareholder instead of in the court. So what does that mean for Canadian companies? I mean, certainly, as a board member, you want to make sure that you're at least considering these things. But you may ultimately face your own shareholders even if nominal bringing actions and you may have to consider whether it's being brought in good faith or not. We've also seen climate change litigation in Canada, against private companies in two sort of different avenues kind of related to those examples. One is sort of related to targeting inadequate steps being taken to reduce contribution to emissions, and one is related to inadequate disclosure. 

Greg Hudson [00:09:42] What should companies and organizations consider regarding climate change disclosure? 

Matti Lemmens [00:09:48] Well, there's an increasing requirement to disclose climate related matters to investors. We've certainly heard about it in the news. And that can have a secondary effect of causing companies to reduce emissions wherever possible. But of course, there's all those competing obligations and considerations that are reasonable to consider by a board in a company. And so you know, even if you reduce emissions, you reduce the amount of disclosure required, obviously, but that might not be the best thing and then the best interests of the company once you consider all of those other competing factors. Currently in Canada, there's no mandatory disclosure required specifically for climate change in Canada, however, material information is required to be disclosed, and some may see material information as including climate change related to the issuers business. That's under National Instrument 51-102. However, we are likely to see some legislation coming out in Canada related to climate change disclosure soon. So there's been a Canadian Securities Administrators published a notice and request for comment in late 2021 on a proposed National Instrument 51-107, which is known sort of colloquially as the climate disclosure proposals, that national instrument hopes to create a consistent method of climate change disclosure across jurisdictions, the requirements contemplated under that national instrument would largely adopt the recommendations of the task force on climate related financial disclosure, which was formed during the 2015 G20 meetings, and it would apply to all reporting issuers, there are different scopes of emissions to consider in disclosure, and those are sort of impacted in that national instrument. So scope one is where they are directed missions, or sorry, emissions from operation of things the company owns or controls, scope two, these are indirect emissions from production of energy the issuer buys from external providers. But then there's scope three, and those are indirect emissions that are related to the issuers value chain. These aren't really under the direct control of the issuer. And the issuer can't really control things like who's manufacturing their resources, and that sort of flavor, how their employees commute, for instance, or how their customers can use their products. But all of those may factor into scope three, admission disclosure. And so right now, that proposed National Instrument, NI 51-107 is considering two approaches to disclosure of emissions. The first approach is a complier explained model of disclosure, the issuer would have to disclose all scope, one, two and three types of emissions or explain why they shouldn't have to disclose. And the other option that's being considered is that making disclosure of scope one emissions mandatory, but scope two and three will be voluntary. So we'll have to see what happens there. But as you can imagine, so three activities are really broad for companies. So what should you consider in your supply chain network is really what you have to do. You know, you might think about the upstream and the downstream upstream, including purchased goods, fuel and energy related activities, transportation and distribution, waste generated IT Operations, Business Travel, employee commuting, leased assets, for instance. And downstream, you might consider some of those same things, but also processing of sold products, end of life treatment of sold products, leased assets, franchises, and investments. So you can see how broad it can truly get. And really, this only will apply to public companies if it actually comes in to play. But private suppliers are also going to have to consider it because public companies interact with private suppliers all the time in their supply chains. And so if public companies are under scrutiny for this disclosure, you can imagine how private companies that have to interact with those public companies will now have to consider their particular effects on climate change and their related activities, monitoring it so that the public companies can disclose it in the US. In fact, the SEC in early 2022 proposed some rule changes to deal with these scopes, one, two and three emissions. And so we're seeing some of this play out down in the US already. And as well in California, we just recently saw a bill come out, actually two bills come out beyond the requirements of the Securities Exchange Commission down there, and they want to see that scope three emissions are starting to be disclosed and 2027 for companies of a certain value and revenues. So it's increasing. We've got Think about it. And it obviously can play into certain aspects of the litigation as well. 

Greg Hudson [00:15:09] Are there any actions companies should take to mitigate the risk of climate related litigation? 

Matti Lemmens [00:15:14] Well, absolutely, I mean, you should certainly consider taking stock of what all of these different scopes of emissions are because they could all come into play, you may seek environmental consulting, to, in fact, help you with that type of disclosure. Your lawyers can also help you with that type of disclosure, we certainly have a laundry list of things that we can look at in terms of what you would need to consider and the different types of disclosure that we've already seen from companies to date. Certainly, you're going to see that climate change related disclosure is likely to influence investors in the future. So it's important to your bottom line, and it might be a catalyst for future litigation in Canada, unfortunately. In fact, just in early October 2023, Greenpeace announced that it had filed a claim related to Suncor's disclosure and how carbon regulation is affecting the long long term outlook for son corps assets. So you can see how this type of disclosure is extremely important to get accurate and correct to avoid this type of litigation in the future. 

Greg Hudson [00:16:23] Thank you so much for your expertise in this area. Matti, and thank you for joining us today. Thank you. For Lexpert TV. I'm Greg Hudson. Have a great day.