Pension fund implements a net-zero carbon footprint target: the emergence of a new financial reality due to climate change litigation?

Climate change has profound impacts on peoples’ lives and the global environment, changing the way we live. Pressure on private corporations to prevent further climate change is therefore increasing rapidly. The number of climate change litigation cases brought against private corporations is illustrative in that respect. Indeed, climate change is no longer merely an issue for governments; it is a problem that affects the whole global community – including businesses.

A recent settlement in Australia illustrates the increasing role that corporations should take to prevent and mitigate climate change. As a result of this settlement, an Australian pension fund will implement a net-zero carbon footprint target for 2050. This article explores the lessons from this new case for climate change liability.

McVeigh v. Retail Employees Superannuation Trust

In 2018, McVeigh, a member of the Retail Employees Superannuation Trust (REST), commenced legal proceedings against REST before the Federal Court of Australia. REST is one of the largest pension funds with approximately $50 billion under management. Since 2013, McVeigh has been a member of the fund, which entitles him – under the 2001 Australian Corporations Act – to information needed to make an informed decision on the financial health of the pension fund and his financial contribution to the fund.

In this case, McVeigh requested the pension fund to provide information regarding the knowledge and management of REST of the financial risks of climate change for the pension fund. In McVeigh’s opinion, however, the disclosed information was insufficient, and as a result, he initiated legal proceedings for an alleged breach of the 2001 Australian Corporations Act. Later, in September 2018, McVeigh added that REST had also breached the 1993 Australian Superannuation Industry (Supervision) Act, as – inter alia – the management of investments made by REST and the communication of their climate-related risks did not comply with the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD’s recommendations give guidance for the disclosure of the risks and (financial) opportunities of climate change. Through the implementation of the recommendations, the risks of climate change will become an inherent part of business and investment decisions.

At the end of 2020, prior to the court’s substantive examination of the case, the parties reached a settlement, whereby REST committed to a net-zero carbon footprint target for 2050 and to follow the recommendations of the TCFD. Subsequent to the settlement, the pension fund stated in its press release that:

“Climate change is material, direct and current financial risk to the superannuation fund across many risk categories, including investment, market, reputational, strategic, governance and third-party risks”.

The growing importance of climate change liability

The lawsuit and the settlement agreed between McVeigh and the REST demonstrates the impact of climate change and climate change litigation on the business operations of pension funds, banks, and insurers. As the climate crisis worsens and a greater impact on our daily lives becomes more likely, the impact of climate change on the financial sector increases.

Climate change will lead to (further) financial risks in the future. Investments that until recently were considered low risk may become daring investments in the (near) future with a strong rise in climate-related litigation. Moreover, it cannot be ruled out that the Carbon Majors as the largest emitters of greenhouse gases, will be confronted with considerable liabilities in the (near) future due to successful climate change litigation cases. This is further illustrated by the fact that towards the end of May 2021, the District Court in The Hague in The Netherlands will decide on the proceedings instituted by Friends of the Earth Netherlands et al. against Royal Dutch Shell. In this legal proceeding, Friends of the Earth et al. have demanded that Shell must reduce its CO2 emissions by (net) 45% by 2030, (net) 72% by 2040, and (net) 100% compared to 2010. In view of the (potential) impact of this judicial ruling on business operations and liability risks of greenhouse gas emitters, the legal principles chosen by the court in the assessment of the claims of Friends of the Earth Netherlands et al. as well as the outcome of the proceedings are likely of significance to the financial sector.

The REST case emphasises that it is expedient for the financial sector to address the imminent financial risks of climate change at an early stage, while also playing a pivotal role in climate change mitigation.

 

Edward Brans and Mathijs Peters are associated with the Dutch law firm Pels Rijcken & Droogleever Fortuijn, both as an attorney-at-law. In addition, Edward Brans is a professor in sustainability and environmental liability at Utrecht University.