When corporate engagement fails on climate change, legal action is preferable to divestment

Some courts are willing to force companies and governments to comply with international law

In 1931, the French government gave the French state company Mines Dominiales de Potasse d'Alsace, a license to dump salt from its potassium mines in the river Rhine. In spite of a 1976 salt treaty, the river continued to be heavily polluted by the French state. A long-winded legal action started by a dedicated NGO1 before a Dutch court, supported by the EU court in Luxembourg, determined in 1988 that the French state committed an unlawful act.

Compensations were paid. Salt dumping continues, although within narrower limits.  

Last May, a Dutch court decided that the climate undertakings of Shell were to be taken as binding, ordering intermediate goals, taking into account the CO2 emissions of its suppliers, to reduce its emissions by a net45% by 2030 according to a specific and verifiable plan. The case was started by six NGOs and supported by 17,379 Dutch citizens in a class action. The judge declared five NGOs admissible as plaintiffs.  

These examples show that at least Dutch courts are willing to force companies as well as governments to fulfil their undertakings under international law. In countries where precedents are considered as evidence (French law does not permit this), such cases will carry weight in court.   

This is more than “nice to know”. At this time, the Paris agreement hangs together with undertakings, rather than actions. With few exceptions (Google is such an exception) net zero is not more than a glint in the eye of states and companies. Yet, undertakings lead to action.   

Pension funds welcome such undertakings and try to expedite them by engaging with laggards. When the engagements yield results, they take them at face value. When not, they disinvest. They may very well be wrong in both cases. Anyone familiar with undertakings of development aid can tell you what undertakings are worth: very little if anything. Divestment is an option that cuts off communication with the divested company. The company will find other, like-minded investors and will end up with more freedom to continue the policies the pension funds objected to.   

Pension funds are loath to use legal action as an instrument. Some argue that it is a “nuclear option”. That argument overlooks that divestment is actually more severe than legal action. Legal action not only maintains communications; a court case won is a lesson in reality for both parties, as well as for companies and states in similar situations.    

Other pension funds say it is not in their culture to start legal actions. That argument overlooks that the trust from stakeholders they are now winning with their attention on climate change will be more than lost if companies and states renege on their undertakings and leave those trusting pension funds feeling confused and naïve, if not ridiculous.   

Pension funds can hedge their bets by starting legal action with a class action suit with other pension funds, which makes them co-plaintiff. This requires some organisation. They may need a formal platform to come up with legal alliances. Also, a typical class action is about a tort. In the Rhine pollution case, it was determined that the behaviour of the French government was a tort. In the Shell case, the judge based her verdict on a lack of due diligence. Typically, a class action tort case ends in settlement and indemnification, allowing lawyers to take a cut and work on a no-cure, no-pay basis. In other cases, the plaintiffs will have to make an arrangement with the lawyers. I would argue that such expenditure can be counted as “green”. Moreover, if the case is won, the risk of being invested in the company taken to court will be lower and stakeholder trust will increase. 

There is every reason for pension funds – and by extension asset managers – to leave their fear of courts behind them and start organising for legal action; both to convince today’s laggards to make undertakings and to turn those undertakings into tomorrow’s reality.   

Peter Kraneveld, former Chief Economist at PGGM, is a pension expert at PRIME bv.