New liability risks to businesses, directors and officers

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 focus on how businesses are vulnerable to climate change risk. There is a growing body of standards in law and regulation and increasing scrutiny of companies' approach to climate risk, from investors, lenders and regulators. Alongside the growing awareness of, and focus on, climate risk to business is a rising number of climate-related cases.

The Coming Wave: Litigation Hotspots

Although activist law firms internationally and the plaintiff bar in the US are bringing strategic and headline-grabbing climate cases, there is no longer any one discernible class or category of litigants: claims are being brought by property owners, insurers, municipalities, states, shareholders and public organisations.

Moreover, in jurisdictions like Australia, litigation funders have shown interest in becoming involved in environmental mass litigation.

In its 2019 report on Global Trends in Climate Litigation, LSE's Grantham Institute reports its findings that more than 40% of all climate-related cases in the US, and almost a quarter of cases across the rest of the world, have occurred over the last 2.5 years.

This rising tide of climate actions shows no signs of turning. As loss and damage due to climate change increases, new laws are enacted, and regulatory standards and duties of care are delineated, more claims will be brought.

The new horizon: strategies and opportunities

Scientists consider there are now 11 years left in which to limit the worst effects of climate change by reducing GHG emissions.

With a system of increasingly ambitious national targets under the Paris Agreement and the advent of net-zero policy around the world, it is likely to see even stricter emission reduction regulations and more stringent enforcement of existing environmental standards.

Opportunities

It is important to remember that climate change presents opportunities as well as risks. The world does not need to choose between averting climate change and promoting growth and development.

Changes in energy technologies and in the structure of economies have created opportunities to decouple growth from greenhouse gas emissions.

Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries.
The TCFD Recommendations include recommended disclosures for climate-related opportunities, including:

1. Resource efficiency
2. Energy source
3. Products and services
4. Markets
5. Resilience

Limiting global warming in line with the Paris Agreement will save vast future costs- to both life and property- and the transition to a low-carbon economy is considered key to the stability of international financial system as well as the planet on which it operates.

It is generally accepted that the cost of mitigation and adaptation to climate change is less than the cost of mitigation. Climate adaptation and resilience will also deliver green growth, with estimated economic benefits of US$36trn in the next 10 years, also generating over 65m new low-carbon jobs.

Early adopters of climate governance, green investments, or adaptation of existing assets may experience a first-mover advantage. There is also an argument that detailed climate disclosures will bring commercial benefits given the market demand and could reduce litigation risk.

Liability risk- what next?

There are a few important points to keep in mind:

1. Companies that understand their climate change physical and transition risks will be better placed to understand the potential liability exposures that flow from those 2 sources of financial risk
2. Liability risk will differ from jurisdiction to jurisdiction
3. As science becomes more certain and general knowledge grows around climate change effects, best practice will develop and professionals or company officers may be held to higher standards

In view of the wide range of possible liability exposure related to climate change, there is no simple or 'one-size-fits all' solution for companies that wish to limit their exposure to litigation.

What is certain is that as climate litigation grows in frequency, and new standards or rulings pave the way for new liabilities to emerge, it will become increasingly important for companies to understand, mitigate and, if appropriate transfer their liability risk.

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