Focus on climate change: the current legal landscape

With the UN Climate Change Conference (COP26) recently wrapping up in Glasgow, we thought it timely to touch on some of the issues on the horizon for Aotearoa.  COP26 is the first major test of the 2015 Paris Agreement, the global pact to keep the earth’s temperature from rising beyond 1.5 degrees of pre-industrial levels.

Eventually the world will exit its Covid fog.  But unfortunately, the chaos caused by this pandemic will pale in comparison to the climate change emergency. 

While Covid has dominated our headlines for the last few years, the political, legal, and economic landscape is rapidly changing as countries grapple with avoiding catastrophic climate change that is expected over the coming decades.  So far, Aotearoa has done very poorly on meeting its climate goals and is one of the world’s worst performers on emission increases.  It has relied heavily on purchasing carbon credits from other countries, meaning that high carbon-emitting activities have continued unabated.  However, in one space, it is leading the charge with expectations on private companies to disclose climate change risks.

Legislative response 

In September 2020, James Shaw, the Minister for Climate Change announced the Government’s intention to make reporting on climate risks compulsory for the financial sector in Aotearoa, including for insurers.  The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill received the Royal Assent on 27 October 2021.  Aotearoa will become one of the first countries in the world to require such reporting.  

The new rules will apply to large insurers, banks, publicly listed companies, listed issuers and investment managers.  At present, most of these large entities provide little information on what the climate crisis and global heating might mean for their future operations.  By forcing them to disclose that, the law hopes to ensure the effects of the climate crisis are constantly considered in business, investment, lending and insurance underwriting decisions.

The new law will require around 200 large financial institutions covered by the Financial Markets Conduct Act 2013 (the Act) to start making climate-related disclosures for financial years commencing in 2023, with disclosures being made in 2024 at the earliest.  The disclosure requirements require a consideration of both risks and opportunities of climate change in light of physical and transitional risks. 

Physical risks are risks that will directly and physically impact a business such as increased likelihood of coastal flooding due to rising sea levels.  Transition risks are risks associated with changes to markets and economies from actions taken to reduce climate change, such as the costs associated with moving to cleaner energy sources.  Transition risks can also include the reputation risks of being associated with industries producing high levels of greenhouse gasses.

While the Act only applies to large financial institutions and does not come into force until 2023, it is certainly arguable that all directors have an obligation (even without compulsory requirements) to at least consider whether climate risks are potentially material to their company, and to take steps to manage such risks. 

Insurers’ response

The Climate Sigma Report which came out in 2020, makes for fairly bleak reading.  It concluded that with very small increases in the mean sea level, insurance costs would increase substantially within fifteen years, leading insurers to reduce available cover or look to share more of the risk with policy holders.  Alarmingly, even though the risks of climate change are now clear, New Zealanders continue to move into and build their homes in flood plain areas. 

Tower Insurance recently announced that it was investing in detailed modelling revealing the current risk of flooding from rain and rivers for homes across the country and would be making flood risk ratings public.  Over 675,000 New Zealanders live in areas already prone to flooding, with a further 72,000 living in areas where some of the most dramatic effects of sea level rises are expected. 

It is not just Tower changing how it assesses risk.  Both AA Insurance and IAG (the country’s largest home insurer), have announced that premiums will be more closely linked to the risk of natural disasters and storms.   With Aotearoa already rated as the second-riskiest country in the world for natural disasters, it seems that this pricing will become the norm as the risks of damage to coastal property increase over the coming years.  The move towards this risk-based model seems to have reasonable support, with a poll by IAG finding that 47% of those surveyed saying that they thought insurers should raise premiums for homes that were at higher risk of events like floods.   

Litigation as an instrument of change

While large companies are changing their behaviour to reflect things like disclosure requirements and changing risks, good old-fashioned litigation has been used to not only shine a light on climate change issues but, in some cases, effect meaningful change. 

In 2017, a law student, Sarah Thompson (and former Fee Langstone employee), commenced proceedings against the then Minister for Climate Change Issues.  While the Court’s decision was not a “win”, neither was it a loss.  As Sarah said at the time, litigation may be the public's only chance to scrutinise current emissions targets. 

It is not just litigation against the Government that may effect change.  In March 2020, the High Court rejected two claims brought against major greenhouse gas emitters, alleging that the defendants’ actions constituted public nuisance and negligence.  The High Court dismissed part of the claim but was not prepared to strike out the plaintiff’s claim that alleged the defendants have a duty to cease contributing to climate change.  The plaintiff appealed the decision to strike out the other two causes of action, and the defendants cross-appealed the Court’s decision that this cause of action should proceed to trial.  The Court's decision is the first of its kind at appellate level in the Commonwealth, and it is an illustration of an individual attempting to use the law in a novel way to combat climate change. 

In October 2021, the Court dismissed the plaintiff’s appeal, holding that tort law was not the appropriate vehicle for dealing with climate change.  The Court noted that common law changes incrementally over time, and to recognise such a duty would be a major departure from fundamental principles of common law.  The Court reiterated its role in supporting and enforcing the statutory scheme for climate change responses and in holding the Government to account.  It has been reported that leave is to be sought to appeal to the Supreme Court. 

The Courts are being used to challenge other issues relating to climate change.  In August 2021, climate and transport advocates filed an application for judicial review of Auckland Transport and Auckland Council’s Regional Land Transport Plan. 

Earlier this year, climate and transport advocates commenced court proceedings against Waka Kotahi/NZTA and the Government in relation to a $3.5bn project that would have widened Mill Road.  That project has since been abandoned by the Government, citing cost and climate change concerns. Large scale infrastructure projects such as the Auckland Light Rail project are also being heavily scrutinised about their impact on carbon emissions.  

Comment (Sam Learmonth)

In May 2021 the Climate Change Commission delivered its advice to the Government about how Aotearoa can reach its emission reduction targets through to 2035 and beyond with the aim of agreeing an Emissions Reduction Plan.  The Government is now considering the Commission’s advice and the submissions received as a result of recent consultation before making the plan available this year, and which will set out action to reduce gas emissions across a range of areas, including energy, transport, waste, agriculture, construction, and financial services.  

It is clear that there is growing anxiety about the climate change emergency and that individuals and entities will seek out remedies, where they can, to drive change.  Insurers are likely to have a direct impact by the imposition of increased premiums, to reflect the increased risk.  Whether litigation based on common law actions like negligence and nuisance will have any effect remains to be seen. 

But given increasing scrutiny on public and private organisations, it is likely that the legal landscape will look very different over the coming decades. 

Sam Learmonth is a Senior Associate at Fee Langstone