The 2015 Paris Agreement, adopted by 196 member parties, seeks to limit global warming and drive actions to mitigate and adapt to climate change. Climate-related risks—both physical and transitional—have now become critical sustainability challenges. Corporations are under growing pressure to manage climate risks proactively while seizing opportunities in clean energy transitions. These dynamics have driven the global development of climate disclosure frameworks and mandatory compliance regimes, significantly influencing corporate governance and directors' duties, and thereby both creating and increasing litigation risk.

This article considers the various categories of climate-related risks and focusses upon recent litigation across the world in which stakeholders have brought proceedings against companies for alleged breaches of directors’ duties, failure to disclose climate-related risks, and failure to manage climate risk.

Categories of Climate-Related Risks: Physical and Transitional

Climate-related risks are typically categorised into physical risks and transition risks. Recent data indicates that approximately 80% of the world’s top corporations report exposure to these risks.

Physical Risks arise from climate-induced damage to physical assets and operations, including disruptions in global supply chains. These risks stem from both acute events such as hurricanes and floods, as well as chronic changes like rising sea levels. Extreme weather events are increasing in frequency and severity due to climate change and physical risks are therefore very likely to increase in the foreseeable future.

Transition Risks emerge from societal and economic changes associated with the shift to a low-carbon future. Key subcategories include:

• Policy Risks: Regulatory changes, such as carbon pricing, that impact financial returns on carbon-intensive technologies.

• Reputational Risks: Public and stakeholder backlash against inadequate climate action compared to competitors.

• Liability Risks: Climate-related litigation seeking damages or compliance with emission reduction obligations. These risks are the focus of the present article.

Liability Risks and Climate Litigation

Climate litigation is an expanding aspect of corporate climate risks, with lawsuits targeting sectors such as energy, finance, and heavy industry. These cases seek to influence corporate behaviour, raise public awareness, and hold businesses accountable for their contributions to climate change.

Climate litigation includes lawsuits before domestic and international courts addressing legal or factual issues related to climate mitigation or adaptation. These cases impact corporate credit ratings, cost of capital, and shareholder confidence, with financial institutions increasingly reluctant to fund high-emission activities.

Corporate Governance and Directors’ Duties

Litigation is increasingly challenging corporate governance and directors’ duties with respect to climate risks. A number of cases in the international courts have been brought by shareholders and interested third parties against corporates for various climate-related actions.

Cases

In a Polish case, ClientEarth v Enea [2019], ClientEarth, a minority shareholder in Enea, sought an annulment of a resolution consenting to the construction of a coal fired power plant in Poland, challenging the breach of board members’ fiduciary duties of due diligence and duties to act in the best interest of the company, as well as challenging the financial viability of the project in the context of the transition to a low-carbon economy. ClientEarth successfully argued that the project amounted to a financial risk to Enea, given rising coal prices and concurrent falling prices of renewable energy sources.  Though the case was not made directly against the directors, ClientEarth did put the directors on notice in relation to a breach of directors’ duties for a failure to consider the material economic transition risks with the project. This case also shows how minority shareholders, and in this case an activist shareholder, can influence a company's behaviour through derivative actions. Most importantly, the financial markets seemed to favour the outcome as Enea’s share price rose by 3.2% the day after the result.

A similar trend has been seen in France. In the ongoing case of Notre Affaire à Tous and others v Total, the claimants, a French non-governmental organisation (‘NGO’), along with local governments, filed suit against French oil company and carbon major Total for inadequate disclosures of corporate climate risks, based on the French Commercial Code, and failure to mitigate those associated risks in line with the Paris Agreement. The claimants seek a court order forcing Total to issue corporate strategy which:

1)    identifies the risks resulting from GHG emissions of Total’s activities,

2)    identifies serious climate-related risks and harms in line with the 2018 IPCC special report, and

3)    undertakes action to ensure the company’s activities align with a trajectory compatible with the climate goals of the Paris Agreement.

The claimants assert that these obligations arise under Article L. 225-102-4.-I of the French Commercial Code. This provision mandates companies to develop a "plan of vigilance" aimed at identifying and mitigating risks to the environment and public health that may arise, directly or indirectly, from their operations. The claimants’ case also invokes the Duty of Vigilance Law and the French Environmental Charter.

Although the case is ongoing, in 2022, New York City ("New York") intervened in support of the claimants. The city emphasized its significant interest in addressing climate change both locally and globally. New York’s intervention highlighted the severe damages and risks posed by climate change to the city itself, reinforcing the urgency of international action on the issue.

Similar claims have started developing against fund managers related to breaches of their fiduciary duties to manage climate change risk. In an Australian case, McVeigh v Retail Employees Superannuation Pty Ltd [2019] FCA 14, the claimant, a member of an Australian pension fund, claimed that the trustees of the fund were not adequately disclosing and managing climate change risks. As a result, the fund settled the claim in November 2020, acknowledging that “climate change is a material, direct and current financial risk to the superannuation fund across many risk categories, including investment, market, reputational, strategic, governance and third-party risks.”

In 2019, Milieudefensie et al. v. Shell was heard before the District Court of the Hague (“Court”), where several environmental NGOs, led by Friends of the Earth Netherlands (Milieudefensie), along with over 17,000 co-claimants, argued that Shell’s business operations were unlawful and demanded the company align its emissions reductions with the Paris Agreement. The Court dismissed the claim that Shell’s actions were unlawful but imposed a binding emissions reduction target. It ordered Shell to cut its CO₂ emissions, including Scope 3 emissions from third-party activities, by 45% from 2019 levels by 2030 to align with the 1.5°C global warming limit.

Shell appealed the Court’s decision before the Hague Court of Appeal (“HCoA”), asserting that emissions reductions were a matter for legislators, not courts, and arguing that lawmakers had not imposed specific obligations on companies to reduce CO₂ emissions by a particular percentage. Shell contended that the Court’s ruling should therefore be reversed.

On 12 November 2024, the HCoA issued its much-anticipated judgment in the appeal. The HCoA reviewed one of the most significant climate litigation rulings in recent years, which had ordered Shell to achieve a 45% emissions reduction across its global operations by 2030 compared to 2019 levels.

The HCoA allowed Shell’s appeal on the specific emissions reduction obligation. It ruled that:

• Corporate actors have a duty of care under Dutch law to mitigate dangerous climate change by reducing emissions, including under human rights law, and Shell, as a major oil and gas producer, has a “special responsibility” in this regard.

• However, Shell “does not have the absolute reduction obligation of 45% (or any other percentage) under EU law and will not have such an obligation for the foreseeable future”. While EU climate regulation, such as the Emissions Trading Scheme and the Corporate Sustainability Due Diligence Directive, does not preclude a duty of care under Dutch law, it informs the actions required for compliance.

• Companies “are free to choose their own approach to reducing their emissions in the – mandatory – climate transition plan as long as it is consistent with the Paris Agreement’s climate targets”.

This ruling is highly significant as it reinforces that, under Dutch law, companies are obligated to contribute to climate change mitigation. It also clarifies that companies retain discretion and flexibility in designing their emissions reduction strategies, provided they are consistent with the Paris Agreement. This discretion acknowledges the importance of EU regulations without imposing specific reduction rates as a legal mandate.

The judgment is likely to influence climate litigation involving corporate players, particularly in the energy sector, by endorsing private-sector flexibility in crafting energy transition policies. Notably, the HCoA ordered Milieudefensie and the other claimants to bear the costs of the initial proceedings and the appeal, potentially impacting future claims.

While Milieudefensie has not yet announced an appeal to the Supreme Court of the Netherlands, it seems probable that this case will continue, leaving the broader implications of the ruling open to further judicial scrutiny.

Conclusion

As climate litigation evolves, courts are increasingly interpreting laws to align with climate goals and societal expectations. Directors now face mounting obligations to manage and disclose climate risks effectively while ensuring compliance with legal, regulatory, and stakeholder demands. Failure to act prudently exposes companies to financial and reputational damage, stranded assets, and litigation, including shareholder derivative claims.

Overall, climate-related risks have moved to the forefront of corporate sustainability, becoming a core consideration for long-term success. Effectively managing these risks is essential, not only to meet stakeholder expectations and align with the Paris Agreement, but also to remain competitive in a rapidly transitioning market. Boards are encouraged to adopt proactive governance, implement comprehensive and transparent disclosure practices, and strategically align with climate goals to mitigate potential risks while capitalising on opportunities in the low-carbon economy.