How will new standards on climate change impact your business?

In our recent climate change liability risk report 'the coming wave of litigation' we explore the legal and liability risks that climate change creates for businesses, directors and officers.

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In this section, we explore how laws and regulations to reduce emissions and improve adaptation and resilience in line with the Paris Agreement have been implemented in jurisdictions around the world. Companies operating domestically and across borders will need to understand these emerging legal and regulatory standards and policy shifts, and adapt accordingly.

We also look at the impact of market pressures regarding climate change on investments and lending and the rise of ESG (environmental, social and governance) standards and benchmarks. We delve into the TCFD (Task Force on Climate-related Financial Disclosures) recommendations and associated tools and metrics. We examine how assessments of climate risk, resilience and the opportunities created by the transition to a low-carbon economy and adaptation to climate change are being increasingly integrated into business decision-making.

New Standards: Climate laws and regulation

Since the Paris Agreement in 2015, climate-relevant policy, law and regulation has been implemented at an extraordinary rate in jurisdictions across the world, meaning that companies must adapt quickly and carefully to shifting legal and regulatory landscapes.

International law

The Paris Agreement builds upon rules set out under the UNFCCC and Kyoto Protocol. It creates international legal obligations on ratifying countries to implement policies, laws and procedures to bring their emissions in line with global temperature targets and self-defined emissions reduction obligations.

National climate laws

Countries have implemented national climate frameworks to set medium and long-term targets consistent with their NDCs ('nationally determined contributions'); including mechanisms to domestic GHG emissions and to review national ambition on emissions reductions over time.

Globally, there are now over 1500 national laws and executive acts addressing climate change. Over 70% of global GHG emissions are now covered by nationally binding climate legislation or by executive climate strategies with a clearly designated coordinating body.

Carbon pricing

Carbon pricing instruments are now implemented in over 46 countries and 25 sub-national jurisdictions, covering around 20% of global GHG emissions.
For example, the EU emissions trading system, which covers around 45% of the EU's emissions, uses a 'cap-and-trade' system to control the total amount of GHG emissions from large-scale facilities in power, industry and aviation.

Environmental regulation

Around the world, national, state and municipal governments committed to a clean and safe environment are passing increasingly strict laws on the prevention and control of pollution, often underpinned by 'polluter pays' compensation regimes.

Future ambition: the move to net zero

Net zero is the target achieved when every tonne of CO2, emitted is matched by a tonne removed from the atmosphere. For example, Denmark has passed net zero legislation to achieve a carbon neutral society by 2050.

Year after year, climate-related law, regulation and policy have increased around the world. The aim of the Paris Agreement is to drastically accelerate this global process by requiring nations to implement new legal and regulatory frameworks.

Companies operating domestically and across borders must understand the relevant emissions targets and adapt to the changing landscape of law and regulation.

New Standards: Market pressures and the rise of ESG in investment and lending

Investment risks of climate change

To accurately price and to adequately evaluate the climate resilience of their investments, asset managers and institutional investors are increasingly demanding that companies demonstrate that they have identified and assessed the risks of climate change to their businesses. Climate-resilience governance is becoming an important investment metric.

The inevitable policy response

In September 2018, the UN PRI published a thought leadership paper on climate risk to investments: The Inevitable Policy Response. According to the paper, there will inevitably be an increase in policy ambition due to a combination of political, economic, social and ecological pressures.

It is postulated that a global response to climate change is likely to be announced by 2025, triggering the 'inevitable policy response'. The longer the world waits to reduce emissions the higher the need for rapid transition and forceful policy action to close the gap, with serious investment implications.

Investor action- from fringe to mainstream

Activist investors for climate change are becoming an increasingly mainstream investor concern. Support for climate-related corporate engagement and resolutions is coming from institutional investors such as endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies.

In April 2019, LGIM along with Hermes Investment Management, Allianz Group and others have asked the influential International Energy Agency (IEA) to update its benchmark modelling of the energy sector to take account of the cuts in carbon emissions that will be necessary to limit global warming.

Investors have also moved to divest entirely from certain carbon-intensive companies or asset classes. A number of global insurers have divested from coal and have limited their underwriting of coal projects.

Pensions

Pension providers are also recognising that climate change is financially material and that investment value may be reduced by climate change.

New FCA requirements came into force on 10th June 2019 compelling asset managers to disclose their policies on how they engage with each other and their invested companies and how their investment strategies create long-term value.

Credit and Climate

Climate risk may also affect the availability of credit and cost of borrowing. There are indications that ratings agencies and lenders are increasingly integrating climate risk and resilience into their analyses.

Multilateral lenders

Climate resilience will also affect the availability of capital for development projects, as pro-Paris policies are integrated into the lending decisions of multilateral development banks.

The World Bank has announced USD$200bn for its 2021-2025 climate investment programme, doubling the USD$100bn for its previous five-year investment plan up to 2020.

Tools for mapping climate risk

CDP

Formerly the Carbon Disclosure Project, CDP runs a global disclosure system for companies, cities, states and regions to measure and manage environmental impacts. CDP requests information on climate risks and low carbon opportunities on behalf of over 525 institutional investor signatories with a combined USD$96trn in assets.

ClimateWise

ClimateWise, based in the University of Cambridge Institute for Sustainability Leadership, is network of insurance industry organisations which share a commitment to reduce the impact of climate change on both the underwriting and asset management sides of their business.

ClimateWise members, including Allianz, Aviva and Zurich, are required to report annually on their individual actions in respect of the principles, allowing members to benchmark progress against their peers.

Principles for sustainable insurance initiative

This is a global framework for the insurance industry to address ESG risks and opportunities, launched in 2012.

In February 2019, PSI produced its guide to integrating ESG risks into non-life insurance transactions by supporting clients, intermediaries and other stakeholders to provide ESG-related information. The guide includes a heat map for ESG risks- including a heat map for ESG risks- including climate change risks- across economic sectors.

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