Analyst Insight: Climate litigation against companies for alleged climate-related violations by their supply chain partners is increasing, prompting businesses to manage risks by building climate awareness, integrating climate risk into management, engaging suppliers, creating a litigation response plan, and prioritizing transparency while preparing for regulatory interventions.

Climate litigation is on the rise globally. This includes individual and class-action lawsuits against companies for alleged climate-related violations by their supply chain partners, such as failure to address or disclose carbon emissions, and engaging in illegal deforestation. Litigation against giants like the Casino Group and Danone, imputing liability for acts or omissions both upstream and downstream in their supply chains, should be a wake-up call for companies to dive deep into their climate impacts across the full value chain.

Climate change litigation can be a big drain on resources, and cause companies financial and reputational harm. Managing climate litigation risks in the supply chain requires a proactive approach to environmental risk management. Here are five key strategies for businesses to manage climate litigation risks in their supply chain.

1. Build climate awareness and fluency among key stakeholders (executives, legal, procurement team, etc.), both within the company and among supply partners. Climate fluency refers to a deep understanding of the policies and frameworks related to climate change and their impact on the business environment. Without this understanding, it can be difficult for stakeholders to make informed decisions and fully appreciate the risks and opportunities associated with climate change. 

1. Understand and respond to company-specific risks arising from climate change. As a first step, companies need to understand where their business and climate interact. Frameworks such as the Taskforce on Climate-related Financial Disclosure (TCFD) provide a comprehensive categorization of climate-related risks and opportunities, and companies can use this information to develop their strategy to manage these risks, as well as to tap into the economic opportunities that a low-carbon economy could bring.  

1. Integrate climate risk into enterprise risk management (ERM). While many companies have set ambitious climate targets, not all put a lot of substance behind those commitments. This leaves them susceptible to litigation. It is critical for companies to forgo a standalone climate strategy in favor of integrating climate approaches into their overall business strategy and enterprise-wide management systems. By integrating climate risk management into ERM, companies can take a thorough and formalized approach to understanding the potential impact of climate change on their business and take appropriate action to mitigate these risks.  

1. Develop and implement a supplier “climate” engagement program. Engagement with supply chain partners is essential for achieving climate targets and promised emissions reduction. However, it is a demanding and complex task. The appropriate approach will depend on the strength of the supplier relationship and the objective capability of a supplier to achieve relevant emission reductions. If made a priority, it can be achieved within a reasonable timeframe and help create a more resilient supply chain. However, a robust master climate data management system for all processes involved is a pre-requisite. 

1. Develop a climate litigation response plan. Businesses should consider developing a climate litigation response plan to ensure they are prepared to manage any legal action related to their supply chain practices. This may involve developing protocols for responding to legal claims, identifying legal and regulatory requirements, and engaging with legal experts to develop a robust defense. 

In addition to these five key steps, businesses should also prioritize transparency and disclosure. Reporting emissions from supply chain partners is expected to become mandatory in the near future. In April 2022, the European Financial Reporting Advisory Group (EFRAG) and the U.S. Securities and Exchange Commission (SEC) proposed rules where publicly traded companies would be required to disclose their scope 3 emissions.   

So, What Next? 

Businesses need to prepare for regulatory interventions that stipulate climate action specifically aligned with the 1.5°C target set by the Paris climate agreement. For example, in the EU, the proposed Corporate Sustainability Due Diligence (CSDD) directive requires companies with more than 500 employees and a global net turnover of more than €150 million to adopt business models and strategies that are designed to meet the 1.5°C target. Similar requirements are also interwoven in the EU Taxonomy, Corporate Sustainability Reporting Directive (CSRD) proposal, and the climate change working paper for the European Sustainability Reporting Standards. It is likely that other jurisdictions will follow suit with similar requirements that oblige companies to align their climate strategy with the 1.5°C target.