Environmental, social and governance (ESG) standards are an increasingly prominent way of measuring an organisation’s transparency and accountability. Regulators are taking ESG aspects into account in their decision-making processes and they are also a useful framework identifying short-, medium- and long-term risks as well as opportunities.
From the aviation industry’s point of view though, the environmental element of the ESG framework can seem like a challenge that is simultaneously very large but also a long way from day-to-day activity. With COVID-19 and all the other hurdles that the aviation industry has faced over the last few years, it can be tempting to think that the climate and environmental crises can always be next year’s challenge.
Postponing action could come with significant risk. With ESG considerations moving up the public and regulatory agenda globally, the risk of climate-related litigation is growing.1 It could be that 2023 is the best opportunity to enhance practices, improve efficiency and protect reputations.
There has tended to be an assumption that the risk of climate-related litigation is mostly on the shoulders of the carbon majors in oil and gas, and that aviation, which is estimated to only contribute around 2.5% of all human-induced CO2 emissions2, is relatively low on the list of sectors that could face legal enforcement, particularly given that the industry is already enhancing its practices3.
It should be pointed out however, that as the gap between the developed and the developing world narrows, the demand for air travel is likely to increase. This could mean that aviation begins to make a larger contribution to global energy-related CO2 emissions right at the point where scrutiny is increasing and other sectors are reducing their contributions.
Some of the climate-related litigation is not simply about loss and damage, but seeking to enforce behaviour change. As a result, there could be a situation where major airport expansion projects that are either planned or in progress to meet the increasing demand for air travel find themselves challenged in court.
The question of environmental responsibility is being dealt with in different ways in different parts of the world. For some, particularly in Europe, it is high on the corporate agenda not least because the relatively tight regulatory system makes the potential for enforcement very real. Elsewhere, regulatory regimes have tended to be lighter touch, but it may not be safe to assume that this will continue to be the situation given the sheer volume of cases that are currently making their way through courts globally.
According to a recent report by Clyde & Co., a global corporate law firm that specialises in insurance, transport, energy, infrastructure, and trade and commodities, the political debate around ESG commitments is intensifying and there are several new regulations coming into effect. As a result, there is potential for an increase in ESG-related regulatory activity and shareholder actions against companies and their leadership teams in the near term.4
This suggestion is backed-up by a recent report by the Centre for Climate Change Economics and Policy (CCCEP), an educational hub that brings together researchers on climate change economics and policy, which suggested that while it is hard to predict how the legal landscape will evolve, “…the increase in litigation against agricultural companies may suggest that other high emitting sectors such as heavy-duty industry (e.g. steel and cement), textiles, shipping and aviation may be the next targets for litigants”.5
This is a complex and fast evolving area, but from a risk perspective, exposure to climate liability could be moving from a question of if to a question of when. As ever, the first step to mitigating risk efficiently is to understand the exposure.
1 Why 2023 will be a watershed year for climate litigation
2 Climate change and flying: what share of global CO2 emissions come from aviation?
3 Commitment to Fly Net Zero
4 ESG claims under D&O policies will increase significantly in 2023
5 Global trends in climate change litigation 2022