Climate Change and Insolvency: An Undeniable Intersection

Climate-related insolvency risks arise in the process of transition toward a net-zero carbon economy. This transition includes changing public policy and regulation and market developments. Transition risks that can financially impact a business include technological innovations, market risks, investor preference shifts, reputational risk, regulatory policies requiring business to shift to lower emissions in production and energy use, and the ability to attract and retain employees. There are likely to be increased production costs as prices of production inputs change and as carbon pricing alters the price at which a business sells its products or services. Climate-related risks and opportunities may also change the profile of a company’s debt and equity structure, either by increasing debt levels to compensate for reduced operating cash flows or because of the need for new capital expenditures to meet changing regulatory requirements. Mitigation of these risks includes the exploration of the new green market opportunities and inevitable failures of start-ups.

The Redwater³ Precedent: Environmental Liabilities Trump Creditor Rights

In Redwater, the Supreme Court of Canada ruled that bankruptcy trustees cannot abandon environmentally contaminated assets to avoid cleanup costs⁴. Had the case passed, it would have allowed receivers and trustees of insolvent oil and gas companies to renounce or disclaim unprofitable assets and avoid a company’s legislative requirements that licensees would have had to follow if they were not in receivership or bankruptcy⁵. Instead, the Court ruled, regulators can enforce remediation obligations ahead of secured creditors⁶. Key takeaways are that we have a super-priority for environmental claims.⁷ This means that environmental liabilities, such as orphaned oil wells, now rank above secured creditors in insolvency proceedings. This upends traditional creditor hierarchies under the Bankruptcy and Insolvency Act⁸ (the BIA) and the Companies’ Creditors Arrangement Act⁹ (the CCAA), creating uncertainty for lenders. Redwater’s logic extends to Director & Officer liability directors who neglect climate risks (e.g., failing to budget for decarbonization) may face personal liability under environmental statutes. Insolvency lawyers now need to advise clients to quantify climate liabilities early in restructuring, as well as negotiate with regulators to avoid super-priority surprises that could derail rescues. The combination of the uncertainty that had been injected by Redwater and the cost and difficulty of identifying and appropriately gauging the extent of environmental damage meant every industry dealing with environmental remediation had to reassess its handling of these obligations

Mathur v. Ontario: Climate Litigation as an Insolvency Trigger

In Mathur, seven young plaintiffs successfully argued that Ontario’s weakened 2030 climate target violated their Charter rights¹⁰. While the case targeted government policy, its reasoning has dire implications for corporations as, among other things, it expands the scope of "Climate Nuisance" claims. If governments can be held liable for inadequate climate action, corporations may soon face similar suits for contributing to emissions. This line of reasoning came up in Milieudefensie et al. v. Royal Dutch Shell¹¹ Industries at risk include fossil fuel extraction, mining, heavy manufacturing, and even cryptocurrency (due to energy-intensive mining). These industries could face the possibility of becoming stranded assets, which would result in financial distress. Mathur reinforces that high-carbon assets are legally precarious, and the companies relying on them (e.g., coal suppliers) may face regulatory phase-outs (as we saw in Canada’s 2035 clean electricity standard).¹² Mathur also builds on Canadian case law recognizing the catastrophic effects of climate change including the Supreme Court of Canada’s decision in References re Greenhouse Gas Pollution Pricing Act,¹³ where the court held that “climate change is an existential challenge”¹⁴. Stronger language from the court around climate change will play out in the insolvency sector with the possibility of more investor abandonment with increased ESG divestment trends, and could be at risk for litigation-driven insolvencies through class actions resulting from climate harm.

Could a Mathur-style lawsuit or policy change trigger insolvency? The parallels between the two cases highlight the exposure that companies have to climate-driven insolvencies.

To understand this in the context of an industry that is highly exposed, we can consider a bitcoin miner relying on fossil fuels to generate new coins. This miner could face Redwater-style energy bill liabilities or Mathur-style climate lawsuits for excessive emissions. These issues are contemporary, and will continue to be relevant to insolvency lawyers as long as the world continues to grapple with the swiftly changing jurisprudence around climate litigation. Ontario lawyers can adapt strategic responses to protect clients in this new landscape by advising;

• Restructuring Strategies: Clients can employ ‘Green pivots’, converting high-carbon assets like retooling a gas plant for hydrogen. They can incorporate CCAA innovations, proposing ESG-linked plans including creditor payouts tied to carbon offsets.
• Litigation Defense: Clients can preempt climate claims by disclosing potential climate risks in financial statements. Leveraging Redwater, clients could argue proportionality in cleanup costs or a phased remediation to mitigate their exposure.
• Policy Engagement: Lawyers can help their clients advocate for clearer climate liability rules in insolvency law. This could include monitoring the outcomes of relevant legislation, such as Bill S-243, the Climate-Aligned Finance Act¹⁵, making the financial sector more compatible with climate commitments could heighten D&O duties.

Ultimately, climate litigation will continue to reshape the insolvency landscape because cases like Redwater and Mathur are not outliers—they are harbingers of a legal environment where climate inaction can increase insolvency risk. Ontario lawyers must treat climate liabilities  like  financial  debts,  because courts now do. They will need to anticipate litigation-driven insolvencies, especially in carbon-intensive sectors, and they will need to use restructuring tools creatively to align with climate imperatives. The message is clear: businesses that ignore climate risk will face economic and legal consequences.