Climate litigation risk rises after German verdict on RWE

A Peruvian farmer’s attempt to sue RWE, the German electricity company, for the risk to his home from climate change was blocked on Wednesday by a German appeal court. But climate activists backing the suit believe it has established a precedent that companies which emit high quantities of greenhouse gases can be held liable for damage from global warming.

That opens up potential risks for capital market investors.

(*This story published on May 28 was updated on May 30 with extra comment by RWE to GlobalCapital.*)

“The court made very clear that in principle these kinds of claims are possible under German law,” said Noah Walker-Crawford, a research fellow at Imperial College London who advises Germanwatch, a German NGO that backed the suit. “So this is a real turning point, and gives an important tool to communities around the world who are affected by climate change, because it means now that companies have a responsibility, a legal duty, to take responsibility for their emissions and for climate harms.”

Although RWE is transitioning to cleaner forms of energy, it has often been a target of climate protests due to its large size and heavy historic use of hard coal and lignite to generate electricity.

The company generated 118 TWh of electricity last year at the cost of 53m tonnes of CO2 emissions, roughly equivalent to those of Bulgaria.

Saúl Luciano Lliuya took RWE to court in 2015, alleging that because of climate change, glaciers in the Andes have melted, swelling a lake above the city of Huaraz and creating a risk of damage to his home from flooding.

Luciano Lliuya (pictured above) is also a mountain guide. The lake has got substantially bigger since 1975 and this “has dramatically accelerated from 2003 onwards,” according to a summary of the case by Climate Change Litigation Databases.

Wednesday’s ruling was on an appeal, after Luciano Lliuya lost his first case.

In a statement after the verdict, RWE said the Hamm Higher Regional Court had “dismissed the plaintiff’s appeal as unfounded” and that “Mr Luciano Lliuya’s lawsuit to create a precedent for holding individual companies responsible for the effects of climate change worldwide under German law has failed”.

Luciano Lliuya and his legal team disagree. The Hamm court dismissed the case on the grounds that the threat to the farmer’s home was not severe enough.

In RWE’s words, “following an extensive hearing of evidence, the court-appointed experts put the probability of flood risk to Mr Luciano Lliuya’s property at ‘1% over the next 30 years’. From the court’s point of view, there is therefore no reason to investigate the existence of a causal link between RWE’s CO2 emissions and the alleged danger to the plaintiff’s property.”

But Walker-Crawford said in a press conference after the verdict: “the head judge… made very clear that this duty… for large emitters to take responsibility for the impacts of their emissions is given under property law, under the very simple legal provisions that say anyone has a right to live freely, to enjoy the use of their property, and under property law anyone in the world has the right in principle to make a claim against a major emitter.”

Since the greenhouse effect has been known for a long time, Luciano Lliuya argued that RWE had knowingly contributed to climate change, and therefore bore some responsibility.

He presented several arguments, Climate Change Litigation Databases said, including alleging that RWE’s emissions were a nuisance which he had incurred costs to mitigate, specifically for the risk of flooding from Lake Palcacocha (pictured in 2002).

Luciano Lliuya sued RWE for €17,000, arguing this was 0.47% of the cost to him and local authorities of building flood defences. This percentage is an estimate of RWE’s contribution to total global greenhouse gas emissions since the industrial era began in 1750.

RWE said: “The court of first instance ruled that it is impossible to substantiate a motion for injunctive relief against the company, as the individual effects of climate change cannot be traced back to certain emitters due to the large number of polluters.”

But in its rejection of the appeal, the higher court did not repeat that argument. It was persuaded instead by evidence about the specific level of risk to the plaintiff.

“I’m satisfied,” said Luciano Lliuya, addressing the press conference from his home in Huaraz. “What we wanted to achieve was a precedent. Of course it’s a pity that RWE will not be held responsible. But nevertheless, we were able to establish a precedent … that there is a responsibility.”

Walker-Crawford said the case did not open the way to suits against every company. “But this means specifically that there’s a threshold, that it’s large emitters like RWE who’ve made a substantial contribution to global warming… who have this legal duty," he said. "The court explained that it’s been foreseeable since at least the mid-1960s that greenhouse gas emissions would lead to harm … and impacts around the world… Even if in this case the lawsuit didn’t quite meet the threshold of the level of risk that’s required to bring a case… in principle it’s possible to use … climate science to establish legal causation and legal responsibility.”

About 60 climate lawsuits are under way around the world, but Walker-Crawford said “This is the one that’s gotten the furthest” and added “We’ve never, ever heard anything like this in a verdict from a court anywhere in the world.”

Asked about the implications of the case, Larissa de Barros-Fritz, senior fixed income strategist at ABN Amro in Amsterdam, said: “Risks of legal liability related to environmental and social issues have always been a major risk that investors must take into account when evaluating a company. There are several cases in Europe, for example, on noise pollution and health risks.”

In 2021 a Dutch court ordered Shell to cut its emissions by 45% to fulfil the Paris Agreement. It ruled in favour of a suit by Friends of the Earth and 17,000 Dutch citizens arguing that climate change infringed their human rights and high emissions constituted hazardous negligence.

In November, the court of appeal in the Hague overturned the ruling.

Last May, three NGOs and eight individuals in Paris took a different tack, filing a criminal complaint against the directors and main shareholders of TotalEnergies for offences including involuntary manslaughter. The public prosecutor dismissed the case in February.

But an older case against Total is still live. France’s duty of vigilance law of 2017 requires companies to identify and mitigate their impacts on the environment and human rights.

Sixteen local authorities and six NGOs — including since 2022 the cities of Paris and New York, according to a summary by the Business and Human Rights Resource Centre — sued in 2020, alleging that Total had not included in its vigilance plan detailed steps it would take to cut its emissions in line with the Paris Agreement. After many twists and turns, the Paris Court of Appeal ruled last June that the case is admissible and can go ahead.

“It should be on investors’ minds that there is a risk from litigation related to climate change,” said de Barros Fritz. “As the occurrence and magnitude of physical [climate] risks increase, there will always be someone looking for the person or company to be held accountable.”

She was sceptical that judges would rule against companies for climate change, however, “as you need to prove causality on an issue where everybody has done their fair share of damage.”

De Barros Fritz said what could be more pressing for investors than litigation risk is “the high exposure to transition risks that these companies have from changing regulation requiring [them] to emit less. Hence, a comprehensive materiality assessment on ESG risks is a must-do for investors, regardless of the outcome of the RWE case.”

RWE said it “has always considered such civil ‘climate liability’ to be inadmissible under German law. It would have unforeseeable consequences for Germany as an industrial location, because ultimately claims could be asserted against any German company for damage caused by climate change anywhere in the world.”

RWE cut its emissions 8% last year and aims to be carbon-neutral by 2040. From 18 lignite power plants in 2021, it now has seven.

The company pointed to German courts of first and second instance having dismissed similar cases against Volkswagen, Mercedes-Benz and BMW.

“It would be an insoluble contradiction,” said RWE, “if the state were to allow CO2 emissions, subject them to detailed statutory regulations and actually call for them in certain cases, while ordering the assumption of civil liability for them retroactively.”

Nevertheless, the Hamm judge in his summary of the verdict, whose full 180 pages will soon be published, likened Luciano Lliuya’s case to someone who lived by a river, where upstream was someone else who periodically dumped a lot of water in the river, causing flooding.

The analogy asserted that responsibility exists.

RWE's statement did not address Luciano Lliuya and Germanwatch's argument that the Hamm judgment had established the principle that big emitters like RWE could be held liable for harms caused by climate change.

Asked about this by GlobalCapital, an RWE spokesperson said: “The decision of the Higher Regional Court of Hamm regarding a potential liability of German emitters does not set a precedent as it is understood in the UK legal system.

"Three other higher regional court decisions have taken a different legal view and already ruled on a similar matter. The Higher Regional Court of Hamm cannot overturn or overrule these decisions.

"Furthermore, the Higher Regional Court of Hamm only addressed the first question of evidence regarding the imminent threat to the plaintiff's property. Since this was denied, there was no need to take evidence or discuss the second question of evidence, which would have concerned the causal link between RWE's historical emissions and the assumed risk.

"Therefore, the court did not examine and therefore did not rule on whether and to what extent RWE can actually be held legally responsible for the effects of climate change as a result of its emissions.”

Luciano Lliuya said: “Another thing that is a pity is that a month ago we had a landslide, and four people were killed, and that was not taken into account. But… I respect the decision that the court made.”

About 10km from the Palcacocha lake that the case hinged on is a small lake, newly formed by glacial retreat. Rocks fell into this lake, causing flooding, four deaths and significant damage in Huaraz.

“If a similar event were to occur at Palcacocha, which is a much bigger lake, the damages would be much more devastating. There are many thousands of people in Huaraz who are affected by an even higher risk than Saúl,” said Walker-Crawford.

About an hour after the court’s verdict, in Switzerland a large piece of a glacier broke off and destroyed much of the village of Blatten. The inhabitants had been evacuated nine days ago but one person is missing, the BBC reported.

“We live with this risk," said Luciano Lliuya. "It’s not only rock slides [and] possible floods. There is also the risk that the glacier melts, and this forms more lakes, which might also overflow. [And] if the glaciers disappear, there will be less and less water also for agriculture.”

Picture of Lake Palcacocha CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=496719