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Climate law poses emerging challenge for shipowners

8 March 2023
Climate litigation could herald new legal risk for shipping. Credit: Ekaterina Bolovtsova

The increasing trend and scope of climate litigation could herald new legal risk for shipping companies and directors, legal experts have warned. According to the Grantham Institute, the number of actions has grown year-on-year over the past two decades and increasingly targets corporations rather than governments, with businesses now defending half of all cases.

A recently launched lawsuit against directors of Shell for failing to protect the business from climate-related risk highlights the trend. The case, brought by climate activists Client Earth, argues that Shell directors neglected their duty to shareholders by setting climate targets below those needed to reach Paris Agreement targets.

The claim against Shell’s directors is based on the company’s alleged failure to consider physical and energy transition risks to the business. The company is also claimed to have failed to comply with an order in a Dutch court to redress its strategy, which a third-party report assessed had no short-to-medium term plan to tackle emissions from consumers using its products.

The Shell case, the first of its kind in the UK, is part of a trend for ‘derivative actions’ against directors. Diana France, a partner at law firm HFW, told ICS that stock listed, multinational ship operators carrying fossil products were the most likely targets due to their trade’s involvement in the oil and gas industry.

Other shipowners could face different climate litigation in different jurisdictions, as could other shipping stakeholders that could be viewed as having defined climate requirements.

“If you can point to a compulsory obligation that’s not being complied with, that’s very helpful for a claim,” France said. “But the detail depends on where you are in the world and exactly what the claim is.”

Winning the case may not be the point, as groups often use “strategic litigation” to apply pressure on companies to decarbonise faster. Translated to shipowners, this could lead to interrogation of sustainability reporting and compliance planning, including choices of technology and fuels to meet future climate obligations.

Haris Zografakis, a partner at law firm Stephenson Harwood, told ICS that climate compliance plans that are justified, specific, “and above all, acted on” are the best defense. To dissuade actions, plans for compliance may need to be more concrete than the potential future improvements listed in a vessel’s Ship Energy Efficiency Management Plan.

“Compliance with the IMO regulatory framework is not necessarily sufficient to ward off climate litigation of the type that is seen in other industries, especially as the IMO target is at present not aligned with net zero goals of companies and governments,” said Zografakis.

While only directors of stock-listed companies are open to derivative actions, there are wider grounds for climate litigation that could affect all shipowners. Litigation could cover corporate frameworks, contractual arrangements and greenwashing claims, operating across supply chains and investment portfolios as well as core business activities. Risk to shipowners could also be multiplied due to the many national, regional and global climate frameworks that could be applied to mobile assets.

Contractual disputes are also expected to proliferate as climate obligations play a bigger role in shipping. Owners competing for a tender could bring an action if their rival’s green credentials are material in securing the contract and then shown to be untrue, for example. The Carbon Intensity Indicator is also ripe for dispute. For example, if operators refuse work contracted by charterers because it would affect their vessel’s CII rating, they could be sued for not fulfilling their employment order.

The potential impact of climate law on shipping should not be underestimated, said Zografakis. The terms on which shipping conducts business has been “forged in the hot crucible of litigation”, he said, filling the gaps in the industry’s regulatory framework. As climate case law evolves, those courts are likely to play a similar role in the decarbonisation of shipping.

A recent study from the Maersk McKinney Møller Center for Zero Carbon Shipping highlights that the world’s biggest ship owning companies are already making public efforts to highlight compliance with forthcoming climate obligations. A survey of the biggest 95 owners revealed that 35% have already pledged to comply with either IMO’s 2050 greenhouse gas reduction target or committed to net-zero emissions by 2050, in line with the Paris Agreement.