Should asset managers take their lead from US President Donald Trump’s recent claim at the United Nations that climate change is the “greatest con job ever perpetrated on the world” and abandon green investment?
No, because events are proving him wrong and legal actions around the world are poised to drive home to companies and governments of their responsibility to battle climate change.
Investors need to take note of this because a greater proportion of corporate profits may need to go into meeting climate-related legal costs, or reserving against such costs, in the future. That could influence dividend payout levels and adversely affect price-to-earnings ratios and share prices.
Up to now, official efforts to bring corporate carbon dioxide emissions under control have focused on voluntary measures such as environment, social and governance and the United Nations’ sustainable development goals.
These moderate approaches have so far largely failed. The Paris Agreement on climate change in 2015 where 195 member countries of the United Nations pledged to limit global warming to less than 2 degrees Celsius, and preferably 1.5 degrees, above pre-industrial levels has already been breached in many places.
In 2021, a Dutch court ordered Royal Dutch Shell to reduce its total carbon dioxide emissions by at least 45% relative to 2019 levels by 2030. Shell appealed and last November, the Court of Appeal overturned the 45% reduction order, but confirmed that under Dutch law, Shell must achieve at least some reduction of emissions.
Official climate action gained significantly greater traction and credibility in July this year when the International Court of Justice at the Hague issued an advisory opinion stating that all countries have legal obligations under international law to protect the climate system and prevent harm from greenhouse gas emissions.
The landmark ruling declared climate change to be an “urgent and existential threat” and affirmed that nations are responsible for the climate impacts of both public and private actors within their jurisdiction.
The ruling supports more than 2,300 cases on climate litigation within national jurisdictions, according to international lawyer Neshan Gunasekera.
“This is a rule for the private sector to take notice of, specifically given that the International Court of Justice created obligations with private actors to live up to the international legal regime,” he said at a recent seminar on climate change in Tokyo.
He explained that while the ruling is not in itself legally binding, it does create a legal precedent that will allow individual or collective parties to sue corporations or governments that flout the ruling.
It comes as China and various European countries are perceived to be making tangible progress on battling climate change – including development of renewable energy sources – while the US under the Trump administration lags behind generally.
The advisory opinion “puts pressure on companies to commit to accelerate their climate actions under threat of legal actions from various parties”, Shigeo Kato, co-representative of the Japan Climate Initiative and senior adviser to the Tokyo-based Renewable Energy Institute, said at the seminar.
