This post is part of our series on Climate Change Disputes. Our earlier posts include: Climate Change Disputes 101: An Introduction, a post on Australia (currently, the second most popular jurisdiction for Climate Change Disputes), a post on China Mainland, and a post on Singapore.
One of the hottest topics in the disputes space right now is climate change disputes. The number of disputes (quite like the temperature that is causing all of this havoc) has been rising first steadily then sharply over the past few years. As of February 2022, more than 2,280 climate change cases have been filed. The majority of those cases were filed in the United States (over 1,710), and the rest (over 570) were filed mainly in Europe and the Americas outside the United States.
But this post is about Hong Kong. Hong Kong does not rank in the top anything for climate change disputes…for now. That makes sense as far as legacy climate claims go, i.e. the sort that were trying to prevent a damage or a nuisance from occurring. But what Hong Kong lacks in land size and substantial carbon footprint, we more than make up for in being a centre of finance and commerce. We have a number of factors that make Hong Kong a likely jurisdiction for climate change disputes: (A) large China Mainland companies may be most exposed in Hong Kong, as claims against such companies are routinely brought in Hong Kong; (B) a large number of listed companies, whose listing status may provide for sufficient jurisdictional nexus to Hong Kong. In this regard, it is worth noting that the HKEx has in July 2020 launched certain mandatory and “comply or explain” reporting requirements, with climate change falling into the latter category; (C) a large number of banks and private equity funds that operate in Hong Kong. We address some of the possibilities of and hurdles to launching climate change disputes in Hong Kong, below.
What types of Climate Change Disputes are we likely to see in Hong Kong?
Climate change poses material risks to businesses and investors alike. Now more than ever, investors attribute increasing importance to climate change in their investments, as shown by the significant growth in sustainable finance across all asset classes. In particular, climate change can present physical risks (extreme weather events and gradual changes in climate) and transition risk (change in policy, technology, and consumer and market sentiment). As these risks are becoming more imminent, we anticipate clients (in particular, manufacturers, infrastructure companies, and financial institutions) will potentially face the following types of lawsuits:
- Actions against companies to compensate for the erosion of share values due to the companies’ non-adoption of sound strategies against climate change. These claims could be brought both in Hong Kong courts, or in arbitration (if the claims are brought under shareholder agreements which direct disputes to be resolved through arbitration). They can be initiated by genuine shareholders or well-funded impact funds which acquire a strategic shareholding in these companies.
- By the same reasoning as above, investors may also sue directors for breaches of directors’ duties by failing to adopt sensible strategies to respond to climate risk or comply with their disclosure requirements. In this regard, see Canada Climate Law Initiative’s commissioned legal opinion on Hong Kong here. The opinion considers Hong Kong’s responses to climate change and notes that the regulatory environment in Hong Kong relating to climate change is developing quickly. According to the opinion, directors must be reasonably and sufficiently informed and knowledgeable about climate change risks and, in discharging their obligations to the company, take into account these risks to the extent that these risks intersect and affect the interests of such companies. Listed companies must also follow the latest Environmental, Social and Governance disclosure regime under the Listing Rules. The opinion may serve as a basis for a party to launch lawsuits and recommendations for lawmakers to increase regulatory scrutiny on directors.
- Companies and financial institutions may face potential lawsuits by investing in fossil-fuel projects, as they expose these institutions to an increased risk of economic loss, reputation harm, and potential litigation. For instance, the claimants in the Polish case ClientEarth v Enea (See the summary of this case here) successfully annulled a resolution consenting to the construction of a coal-fired power plant, arguing it harms the economic interests of the company due to climate-related risks such as rising carbon prices, increasing competition from cheaper renewables, and the potential impact of government reforms.
- For reasons discussed earlier, financial institutions face mounting pressure in this space. Catering tothe rising demand, financial institutions risk over-stating the climate change or environmental credentials of their product, service or practice (i.e. greenwashing) to make it more appealing to their investors. However, these behaviours will not go unnoticed and may ultimately attract investigations and lawsuits. As an example, a German asset manager was under investigation by the German and US authorities and saw its stock price drop heavily last year on claims that it misled its clients about its sustainable effort in managing assets.
- Another area where we could potentially see a rise of disputes are actions arising out of carbon emissions trading, such as fraud and misrepresentation claims. Due to its lack of central regulation, the carbon credit industry is susceptible to fraudulent activity, and trials relating to multi-million carbon-trading fraud are not unheard of. Hong Kong is planning to establish a unified carbon emissions trading market in the Greater Bay Area. As the carbon trading market matures in these regions, the number of disputes on carbon trading will likely grow in parallel.
Litigation against the environmental impact assessment system
Aside from the above, we also anticipate challenges possibly being made against the current environmental impact assessment (“EIA”) system in Hong Kong, which currently does not take into account the impact on climate change from actions. The present EIA system is put in place via the Environmental Impact Assessment Ordinance (“EIAO”), which aims to protect the environment by assessing the impact on the environment of certain projects and proposals. Under the EIAO, designated projects must follow the environmental impact assessment process and require environmental permits for their construction and operation.
This system could use an update. While it addresses environmental impacts such as air quality, water pollution, and waste, they do not expressly address climate change and greenhouse gas (“GHG”) emission, which contrasts sharply with the EIA practice in other regions. By way of illustration, all European Union member states were required to integrate the consideration for the impact of GHG emissions in their EIA systems.
Roadblocks faced by Hong Kong
We identified several roadblocks to Hong Kong playing a more prominent role in the climate change disputes space:
- GHG emissions for Hong Kong comprise only a tiny fraction of global GHG emissions. The total GHG of Hong Kong in 2019 amounted to 40.1 million tonnes. In comparison, the United States emitted 6.6 billion tons of GHG in 2019.
- The characteristics of the legal industry in Hong Kong make it difficult for a party to initiate climate change disputes. For example, the costs of litigation are hugely expensive. Third party funding of litigation is not permitted (but third party funding of arbitration is – we expect that it is a matter of time before similar developments might be applied to litigation). Hong Kong also does not have a class actions regime, but admittedly a number of climate change disputes are not brought as class actions.
- The lack of special tools to support public interest litigation may also hinder the progress of climate change litigation in Hong Kong. Under the current legal framework in Hong Kong, the chief vehicle to pursue public interest litigation is judicial review. Other developing countries in Asia have more specialist tools in this area, for instance, the Writ of Kalikasan in the Philippines which provides a constitutional guarantee to a healthy environment.
Conclusion
As the global push toward decarbonisation intensifies, more and more individuals will turn to the courts to compel public and private entities to increase their climate action or hold them accountable for their insufficient action. Despite its robust legal systems, Hong Kong has yet to play a significant role in the global climate change dispute arena in Asia. Nevertheless, since the effects and threats of climate change become more prominent and evident, we expect that it is just a matter of time before we see a surge in demand for more far-reaching actions and stronger climate laws in Hong Kong. When that happens, Hong Kong, as a leading international financial centre, is poised to become a prime jurisdiction for conducting strategic climate change lawsuits against financial institutions and large companies.
