Our second article of top picks from our 2019 article
archive, features six articles related to climate adaptation and the legal
services sector. As climate change and its impacts become increasingly
transparent, so has a rise in litigation and the emergence of climate-specific
national legislation and policies. With
exposure to legal liability an almost certainty resulting from a failure to
understand, disclose and manage climate risk, it is vital to look ahead in an
effort to reduce legal liabilities in a changing climate.
Climate risk disclosures remain a firm part of the voluntary disclosure landscape, due largely in part to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. In fact, recent analysis from accounting literature finds that firms following best practice through TCFD-style scenario-analysis and disclosures stand to benefit from minimising liability risk. Over the next decade, Acclimatise will continue to work on physical climate risk and adaptation with corporates and financial institutions helping them to identify and respond to physical risks.
Update to landmark legal opinion highlights growing
climate liability of company directors
By Robin Hamaker-Taylor and Nadine Coudel
The 2016 Hutley opinion set out the ways that company
directors who do not properly manage climate risk could be held liable for
breaching their legal duty of due care and diligence. An update by the Centre
for Policy Development reinforces and strengthens the original opinion by
highlighting the financial and economic significance of climate change and the
resulting risks.
Climate change could lead to great wave of legal
liability
By Nadine Coudel and Dr Richard Bater
New International law governing
the transition to a low-carbon society and responses to climate risk is driving
a rapid rise in climate-specific national legislation and policies, and an
increasing amount of litigation. For companies, governments and other
organisations these developments provide clear impetus to understand, disclose
and manage climate risk. Failure to do so will increase exposure to legal
liability.
Climate and law: Sarah Barker, Special Counsel and Head
of Climate Risk Governance at MinterEllison
By Will Bugler
In this Acclimatise Conversation on Climate Change
Adaptation, Sarah Barker, Special Counsel and Head of Climate Risk Governance
at MinterEllison, talks us through why it is so important, from a legal
perspective, for businesses to govern for the financial risks associated with
climate change.
Read the full article and listen to the podcast here.
Podcast: Global law firm Clyde & Co warns clients of
a ‘wave of litigation’ from climate change
By Acclimatise News
In this Acclimatise Conversation on Climate Change
Adaptation, we speak with Clyde and Co lawyers Wynne Lawrence and Nigel Brook,
about the emerging field of climate liability risk and the pioneering works
that the firm is doing to advise its clients about how to respond.
Read the full article and listen to the podcast here.
Podcast: Legal implications of climate change are a big
deal for corporates says legal analyst Marcela Scarpellini
By Acclimatise News
In this Accliamtise Conversation on Climate Change
Adaptation, we speak with Marcella Scarpellini, a lawyer and legal analyst at
right.based on science, a climate metrics and data services provider that is
helping companies manage the financial risks of climate change. Here she
discusses why legal implications of climate change are a big deal for
corporates.
Voluntary climate disclosures can reduce litigation risk
By Robin Hamaker-Taylor, Richard Bater, Nadine Coudel
With climate risk disclosures now a crucial part of the
voluntary disclosure activities of many corporates and financial institutions, questions
around the extent to which they may leave disclosures exposed to litigation
linger. Recent analysis from the accounting literature indicates that voluntary
disclosures can actually lead to reduced litigation risk.
In this Acclimatise Conversation on Climate Change Adaptation, we speak with Clyde & Co lawyers Wynne Lawrence and Nigel Brook, about the emerging field of climate liability risk and the pioneering work that the firm is doing to advise its clients about how to respond.
In September 2015 the Governor of the Bank of England, Mark
Carney, gave his seminal ‘Tragedy of the Horizon’s’ speech, to the insurance
market at Lloyd’s of London. In it, he highlighted the severe threats posed by
climate change to the financial system and warned the problem risked being
ignored because of institutional near-sightedness.
“The classic problem in environmental economics is
the ‘tragedy of the commons’… but climate change is a tragedy of the horizon,”
Carney said, “We don’t need an army of actuaries to tell us that the
catastrophic impacts of climate change will be felt beyond the traditional
horizons of most actors. It will impose costs on future generations that the
current one has little direct incentive to fix.”
The horizon for monetary policy goes out just a couple of
years, and financial stability only about a decade. Carney went on to outline
the three main ways in which climate change can affect financial stability:
Physical risks like storms and floods;
Transition risks associated with the transition
to a low carbon economy; and
Liability risks, legal claims by those suffering
losses due to climate change.
Much of the attention since then has been on the first two
categories, the physical and transition risks, but a growing number of lawyers
and pioneering legal firms are drawing attention to the third category, the
liability risks.
Their work has been reinforced by a growing number of international regulations and national laws and a growing body of case law. One such firm is Clyde & Co, a global firm that focusses on five key sectors: insurance, energy, trade and commodities, infrastructure and transport. The firm soon realised that climate change posed risks to all of these sectors, and so they set up a cross-disciplinary team on climate resilience. Listen to the full podcast to learn more.
As part of London Climate Action Week,
law firm Clyde & Co. hosted an event on 5th July, which is
indicative of the growing interest and understanding of climate-related
liability risks. While the first ever London Climate Action Week saw around 200
events relating to a wide range of aspects of climate change and action to
address it, the Clyde & Co. event was one of just a few relating to the legal
dimensions of a changing climate. Titled, ‘Climate Change Liability Risk
Conference’ the engaging event was well attended by company representatives
across various industry sectors, members of the financial services and legal
sectors among others.
The event coincided with the
release of a new Clyde & Co. report, the third of a report series focusing
on climate-related legal risks:
Climate change: Liability risks, a rising tide of litigation‘ explores the liability risks that organisations have faced and continue to face as plaintiffs attempt to use the courts to further their cause or sue for damages. The report provides a broad overview of the evolving litigation risk landscape arising from the effects of climate change, identifying some of the key themes, controversies and legal hurdles.
The third report, titled ‘Climate change: Liability risks for businesses, directors and officers – the coming wave of litigation’ delineates some examples of the physical and transition risks climate change poses to businesses across various sectors, explores the current sources of black letter and “soft” law, regulation and standards relating to climate change, surveys the current litigation landscape and indicates where liability risks could arise in the near future and discusses some high-level opportunities for businesses.
Acclimatise’s Nadine Coudel, John Firth and Dr Richard Bater were part of the external reviewer group for these reports the second and third Clyde & Co. reports, which were featured during he the Climate Change Liability Risk Conference. The event itself was divided into two main sessions: firstly, each of the three main categories of climate risks (physical, transition, liability) were explored with experts from each of these fields. Then in the second part of the discussion, the practical implications of climate risks for businesses, directors, and officers were addressed by a set of expert panels. Acclimatise’s Chief Technology Officer and co-founder Dr Richenda Connell sat on one of the panels.
The event highlighted many
important emerging liability risks associated with the effects of climate
change. Significant takeaways from the day are summarised below.
Liability risksgrow as
the climate continues to change
Presentations from experts in the
physical climate science and emerging policies and technologies kicked off the
event. Important background information around the physical and transition
risks associated with a changing climate was shared, serving as a stark reminder
of the scale of the challenge at hand.
Set against the incontrovertible
evidence of a climate system where fundamental and severe changes are already
underway, partners from Clyde & Co.’s offices in Sydney, New York, and
London discussed the overall trends regarding climate-related litigation,
regulation and standard setting. The number of climate-related litigation cases
is on the rise: there are currently more than 1000 pieces of climate
litigation, including federal statutory claims, over 300 state law claims, and
69 adaptation-related claims. The U.S., Germany, and Australia are currently
where most activity can be found on climate litigation.
The legal basis of claims includes public or private nuisance, product liability, or negligence. The fossil fuel industry, for example, is particularly exposed to liability risk as courts consider whether leading firms have done enough to enable the transition to a low carbon economy, in the face of evidence that the product that they are selling does harm.
The assertions at the event that there has been an increase in climate litigation are reinforced by analysis by Acclimatise, showing that there is simultaneously an increase in national legislation – translating countries’ commitments set out in their NDCs under the Paris Agreement into national laws and policies. Liability risks look to increase and advance in the future, as panellists suggested attribution science, supervisory or regulatory scrutiny, and investor interest, to name just a few.
Climate-related legal risks
stemming from physical risks
In the expert panel, ‘Indirect
exposures – the sleeping giant of liability risks to corporations’ the
discussion turned to the known and potential liabilities businesses, directors,
and officers are facing stemming from both physical and transition climate
risks. Dr Richenda Connell, made several salient points about climate-related
legal risks stemming from physical risks and climate adaptation that corporates
may not be immediately aware of, including the following:
For corporates with long-lived fixed assets, physical climate risk and adaptation is a relevant consideration at many stages in the asset lifecycle – from early concept, to site selection, design, construction, operation and through to decommissioning. But in many cases is not yet being considered. Existing physical assets may already have embedded risk and liabilities if physical climate risk was not taken into account;
Public-private-partnership (PPP) contracts are another area. These contracts are typically long term (ca. 20 years) and inflexible. A changing climate can stress the risk-sharing contractual obligations of all parties in a PPP. PPP contracts have provisions for unforeseen risks in “force majeure” clauses, for example. But today’s extreme weather events will be tomorrow’s new normal. Force majeure clauses do not adequately capture changing climate risks. Acclimatise produced a report with the World Bank which discusses these challenges in the management of climate risks in infrastructure PPPs; and
Contractual relationships in supply chains is another area. Supply chain disruption is relevant to many corporate sectors. The Thailand floods in 2011 showed how climate impacts in one part of the world can affect customers globally. Similar issues are relevant for supply chains reliant on agriculture, which is a particularly climate-sensitive sector. Contractual relationships for all actors in the supply chain, up to commodity traders, will be increasing stressed by a changing climate.
The direction of travel for
businesses, directors, and officers is clear
A growing number of organisations
have taken action on transition risks and have started to actively engage with
physical climate risks, albeit to a lesser extent. Yet, interest and action
relating to climate-related liability risks is still in nascent stages, so this
Clyde & Co. event was a welcome addition to the wider progress on climate
risks. In fact, the event signals the growing awareness of the legal dimensions
of climate change. The direction of travel was made clear during the event:
climate change is now a ‘c-suite’ issue and along with that comes liability to
engage with the issue.
As Acclimatise hasrecently written, company directors must not only adopt an enquiring posture toward their firm’s contribution to, and vulnerability to, climate change, but manage and disclose climate risks they face in a robust and transparent fashion.
Climate change and its impacts cause hundreds of billions of
dollars of damage each year. As the scale of losses increases, so too will the
number of legal cases apportioning blame to those most responsible. There have
already been over one thousand litigation cases related to climate change, a
number that is expected to rise dramatically as climate change continues, and
legislation and regulations increase. However, there is another factor driving
the number of legal cases: advances in climate science and the tools to
interpret it.
When it comes to litigation, it is important to be able to
identify some sort of loss, and also attribute that loss to the actions, or
non-actions, of a legal entity. In the past it has been difficult to apportion
blame for climate change impacts to individual companies or governments. It has
also been difficult to argue that their failure to act to build resilience to
climate change constitutes negligence that has led to a specific loss. However,
as the science of climate change advances, a new suite of tools is changing all
of this.
In this interview we speak with Marcella Scarpellini, a lawyer and legal analyst at right. based on science, a climate metrics and data services provider that is helping companies manage the financial risk of climate change. The company has developed its X-Degree Compatibility (“XDC”) tool, a science-based climate metric that estimates how many °C the Earth would warm by 2050 if all companies were to operate as emissions-intensively as the company under consideration.
The XDC tool can be used by companies, investors,
governments or others who want to better understand their contribution to
climate change, and gauge how to best respond. It is also useful for lawyers to
hold companies and governments to account, showing whether they are
contributing to a wold of 1.5˚C and in line with the Paris Agreement or a much
hotter world where climate damages will be significantly higher.
“For corporates [climate change] is going to be big” Marcella said “As climate change increases the search for culprits is also going to increase… we know that there is causality between emissions and climate change, so people are going to start pointing fingers. I think for companies it will be in the forms of fines and penalties, of course litigation, and even class action damages are expected.”
As climate change and its impacts become increasingly
apparent, the legal landscape surrounding our collective response is also
evolving at pace. New International law governing the transition to a
low-carbon society and responses to climate risk is driving a rapid rise in
climate-specific national legislation and policies, and an increasing amount of
litigation. For companies, governments and other organisations these
developments provide clear impetus to understand, disclose and manage climate
risk. Failure to do so will increase exposure to legal liability. So, what is
the state of play today with regards to the legal aspects of climate change?
And what should the response be?
International climate change law
In response to the global challenge of climate change, states have established an international climate regime whose treaties (the 1992 United Nations Framework Convention on Climate Change, the 1997 Kyoto Protocol and the 2015 Paris Agreement) created a system of climate governance. With the adoption of the latest global legal framework in Paris in December 2015, a post-2020 international climate regime was agreed on by the Contracting Parties to the UNFCCC. The Paris Agreement builds upon the Convention and – for the first time – brings all nations into a common cause to undertake efforts to combat climate change and adapt to its adverse impacts. Countries committed to holding the global average temperature rise to well below 2 degrees C, pursue efforts to limit the increase to 1.5 degrees C, and achieve net-zero emissions in the second half of this century.
Nationally determined contributions (NDCs) are at the heart of the Paris Agreement and embody efforts by each country to reduce national emissions and adapt to the impacts of climate change in order to achieve these long-term goals. Implementing the Paris Agreement also relies on translating countries’ commitments set out in their NDCs – that is, their post-2020 climate actions – into national laws and policies. Analysis undertaken by the Grantham Research Institute in 2018 demonstrates a lack of consistency between NDC commitments and targets in national climate laws and policies. Any delay in translating NDC commitments in nationally legislated targets potentially limits the effective planning and implementation of policies, reduces the ability to address climate challenges, adapt to climate impacts and avoid costly action at a later stage, and overall reduces the ability to track progress and hold countries accountable for their pledges.
However, the Paris Agreement has and will continue to lead to increasing climate change legislation and litigation as nations grapple with meeting the goals set-out in the agreement.
The rise of climate law. Credit: Anandita Bishnoi. Copyright: Acclimatise.
Legislation
Partly driven by the UNFCCC process, the volume of climate-specific legislation and policies has increased twenty-fold during the past two decades. According to the Grantham Institute, all 197 signatories of the Paris Agreement have at least one law or policy on climate change. This legislation can be roughly classified into mitigation-related and adaptation-related legislation. The former sets a country’s low-carbon transition plans in a legal framework (e.g. carbon markets), whilst the latter codifies standards or duties regarding how organisations adapt to the physical impacts of climate change. Laws relating to either type may be developed at the national or sub-national levels, and can also be targeted at specifics sectors. According to Columbia University’s Climate Case Law database, by 2018 there had been 1522 climate-related laws and policies enacted globally, of which 489 were related to climate adaptation. A total of 282 laws have come into force since the Paris Agreement, of which 109 are adaptation related.
Laws such as the UK’s Climate Change Act (2008) or France’s Article 173 place duties on Governments or corporates to advance the transition to a low-carbon economy or manage physical risks to assets and risks latent in portfolios. By placing clear duties and responsibilities on Government in respect of climate change, such laws have transversal implications for what activities are permitted to take place and where ultimately having economy-wide ramifications. Whilst such legislation can preclude much litigation, such as by clearly establishing ‘reasonable person’ expectations, it can also be a driver of litigation where the law remains ambiguous or where a state is alleged to have failed in its own duties.
The introduction of climate-related laws, regulation, and policy is dramatically shifting the compliance, disclosure, and due diligence landscape. However, climate law represents only one angle of the implications of climate change for legislation. As Alice Garton has succinctly noted, “It’s not the laws that need to evolve, it’s the understanding [of companies and investors] of how laws apply to new risks”.
First, it is increasingly recognised that the management of
climate-related risk falls within existing company law in many commonwealth
jurisdictions. Likewise, the duties that Directors, fiduciaries, officers, and
professionals are under regarding their responsibilities regarding climate risk
are also contained within existing law. In neither case would climate change
have been a consideration when laws were drafted, but in both cases the law is
deliberately flexible in order to accommodate an evolving environment and
standards of practice.
Second, the physical
impacts of climate change can raise implications for compliance with existing
laws and regulations across a host of areas, from health and safety (e.g.
worker exposure to heat), the environment (e.g. permissible discharges), construction
(e.g. building design) to corporate disclosure (e.g. the Martin Act). In all
cases, the physical impacts of a changing climate can give rise to liability
risks in connection with existing obligations that may have been considered to
be managed.
Developments in hard and soft law continue across jurisdictions also. In the United States, a proposed Climate Change Disclosures Act would require companies to disclose climate risks to assets to the Security and Exchange Commission. In the EU context, there are proposals to strengthen climate risk disclosure requirements in existing pensions regulations, laying the groundwork for possible future sustainable finance regulations. At the same time, driven by the recommendations of the Task force on Climate-related Financial Disclosures (TCFD), banking regulators are placing increasing pressure on financial institutions to manage and disclose climate-related financial risks.
Litigation
Most climate-related litigation to date has been
brought in the United States, with 761 cases reported by the end of 2017. Of these,
41 cases were connected with climate adaptation. According to the Climate Law
Database, by the end of 2018, 280 cases had been brought outside the US, of
which 14 related to adaptation; the majority of which was in the U.K.
There has been a marked increase in the volume of climate litigation, notably
outside the U.S.
Mis-representation, infringement of rights,
mis-sold or faulty goods and services, and failure to prevent harm are all
major potential causes for litigation.
The key drivers for climate change litigation are:
1.Climate change as a rights-based
issue: cases where governments fail to
act to protect their citizens from the impacts of climate.
Requiring governments or regulators to take action to meet national or international commitments challenging climate change-related legislation and policies, or their application. In Leghariv v. Republic of Pakistan, the plaintiff successfully sued the government on grounds that its failure to adequately implement the country’s National Climate Change Policy offended his fundamental rights.
2. Climate
change as a financial issue (raising awareness and exerting pressure
on corporate actors, regulators or investors)
‘Failure to mitigate’: cases that link the impacts of fossil fuel extraction to climate change and resilience by seeking to establish that an organisation’s emissions are the proximate cause of adverse climate change impacts. Several cases, brought by industries and municipalities against oil majors (e.g. Kivalina v. ExxonMobil Corp.), aim to limit future emissions of large emitters. Residents of an Alaskan island facing extreme erosion and other impacts have claimed damages from energy companies, arguing that the new and extreme weather patterns are attributable to changes driven by the defendants’ actions. Similarly, litigation has been brought in the US by cities and states against oil majors seeking compensation for the costs of adapting to climate change. Of all these types of cases, it has been asserted that ‘failure to prevent’ litigation against public bodies could be the most likely to succeed.
‘Failure to adapt’: cases that seek to establish liability for failure take adequate steps to adapt to climate change. Such claims could be brought against engineers, architects and other professional services for breach of their duty of care should they fail to design structures compatible with future climate conditions.
‘Failure to disclose’: Some organisations have shown reticence in disclosing climate risks in their financial reporting, partly for fear of increasing liability risk. However, Sarah Barker and colleagues have argued that such concerns are misplaced, and suggest that disclosing risks in line with, for instance, the TCFD recommendations will in fact reduce corporates’ and directors’ liability exposure. A key test case, settled out of court, was brought by shareholders in the Commonwealth Bank of Australia in 2017, alleging that the Bank failed to disclose material (climate) risks to investors, as is required by Australia’s Corporations Act (2001). Whether driven by new law, the reinterpretation of existing law or the demands asset owners, the onus is increasingly on companies and Directors to properly disclose climate risk.
3. Enforcement of existing legislation: cases that use existing non-climate related legal frameworks to bring climate-related litigation. The range of potential cases in this category is considerable, from failure to manage liabilities associated with fiduciary and Directors’ duties, to environmental regulations being transgressed owing to failure to adapt business practices to climate-related risks. Cases as diverse as ‘Dieselgate’, that uncovered fraudulent diesel emissions claims by Volkswagen, and Client Earth’s litigation against the British government, for its ‘unlawful’ air quality plans, represent precedents for how companies or governments could be held liable for false claims (e.g. carbon accounting) or failure to implement climate policy. Jurisdictions that widely apply the precautionary principle – such as the EU – could see litigation that tests how that principle applies to explicitly climate-related questions, including permitting, mitigation plans, and adaptation plans. Indeed, the precautionary principle was referred to in the ground-breaking Urgenda case. In the US, California energy utility PG&E is facing litigation for alleged hazardous negligence and breaching safety rules, whilst both the New York ‘Martin Act’ and consumer protection law has been invoked in litigation brought against ExxonMobil. Moreover, in some jurisdictions, litigation can itself precipitate policy. For example, the ‘Endangerment Finding’in the United States, in which greenhouse gases were ruled harmful pollutants under the Clean Air Act, became a key enabler of the Clean Power Plan.
The legal dimensions of climate change. Credit: Anandita Bishnoi. Copyright: Acclimatise.
Looking ahead – reducing legal liabilities in a
changing climate
Uncertainty about the future climate is not a reason for inaction. In fact, trends are already becoming apparent which fundamentally affect the strategic context that businesses will operate in during the coming years. These trends are manifold, and include the domino effect of actions to meet the objectives set-out in the Paris Agreement, which establishes a clear trajectory for how expectations for corporate action; investor diligence on climate-related risks; and the role of state and local authorities with respect to climate mitigation and adaptation will evolve. In broad terms, changing expectations and laws will catalyse shifts in the sectors and activities that are encouraged (or discouraged) and lead to new standards and duties. A changing regulatory landscape, and the effects it has on potential climate change litigation, is already forcing businesses to update their resiliency plans. In addition, judges are dealing more and more with climate-related arguments and facts that were previously not presented before courts.
There has also been progress in climate attribution science in understanding causal links between elements of the earth system and society. Scientific findings make it possible to attribute some extreme events to human-induced climate change and can already enable loss and damage associated with such events to be assigned country-level responsibility. Attribution science is often associated with foreseeability and responsibility, and therefore linked to discussions about liability and compensation. It is conceivable that attribution of climate change to particular ‘wrongdoers’ – such as polluters or emitters – could be placed high on the agenda of the global climate debate. Given the influence of climate-related hazards on displacement of people, this may further stimulate the debate on rights and duties in respect to climate-induced migration.
To date, much climate-related litigation has centred on assessments, permits, and emissions, with public bodies often the defendant. However, the variety of litigation and defendants is broadening, and beginning to affect corporates too. ‘Failure to disclose’, ‘false or misleading disclosure’ (e.g shareholder-led) and ‘failure to adapt’ represent types of litigation likely to be tested ever more in the coming years, particularly until clear legal precedents are established. With increasing documentation of physical impacts of climate change, third-party funded class action suits could finance previously out-of-reach scientific evidence in cases brought by those that experience preventable harm.
Scientific development is accompanied by an increasing demand for ‘climate services’, that translate the existing wealth of climate data and information into customised tools, products and informationin order to understand, manage, and communicate climate-related risks. As such, climate-related scenario analysis will play an increasingly important role with respect to disclosing forward-looking information and potential climate-related risks in order to avoid claims for misleading or fraudulent disclosures.
Company directors must not only adopt an enquiring
posture toward their firm’s contribution to, and vulnerability to, climate
change, but manage and disclose climate risks they face in a robust and
transparent fashion.
Learn more about Acclimatise’s work on climate risk disclosure here.
As climate related damages increase, the need to
allocate funds and apportion blame will inevitably follow. In this context, the
mechanisms used for determining responsibility are likely to become, to say the
least, very creative.
Pressure for proactive climate action and better response
is mounting thanks to legislation and regulation, litigation, shareholder
demands, citizens calling for more action, carbon taxes and concrete mitigation
and adaptation plans.
The status and intent of current regulations relating
to climate change and the legal infrastructure that is expected to support or
deter the transition to a low carbon economy, provide a good indication of the stringency
and certainty of the measures that will follow.
After Bank of England Governor Mark Carney’s famous warning in his 2015 speech regarding the threat climate change posed to our financial systems, financial institutions and governments started to wake up to the issue. This meant paying attention to – and developing an understanding of – how climate risks might play out and affect businesses future profitability and the stability of the wider financial system. In response, the G20’s Financial Stability Board established the Task Force on Climate-Related Disclosures (TCFD).
Point in time:
Disclosure
The TCFD‘s purpose is to provide corporates and financial institutions with a framework for climate risk disclosure in two key respects. First, with regard to the analysis of the physical and transition risks and opportunities they may face due to climate change. Second, with regard to the development of appropriate strategies to respond to the consequences of those risks materialising.
This initiative, which already has 513 official supporters across businesses, advisory firms, and financial institutions, is a voluntary framework. The main political intention behind it – in combination with the EU Directive on Non-Financial Disclosures, EU Shareholders Directive and other upcoming EU financial regulation – is to foster transparency by requiring corporates and financial institutions to disclose information on material impacts of the physical and policy risks (transition risks) connected with climate change.
The TCFD recommendations are just a first step. Increasing
transparency is a means to an end, not an end in itself: boilerplate and vague
disclosures will not cut it. The intention of climate risk disclosures is to
provide legislators with a broad understanding of the current state of
investments and business bets into a certain world, in order to come up with evidence-based
legislation that actually has a chance of reshaping our economies.
In this context, corporates and financial institutions
have started to work out the best ways to generate relevant disclosures. The
first attempts to generate this information using the TCFD framework have been released,
but there is still a long way to go.
Hot topic: scenario
analysis
One of the challenges of applying the TCFD framework
has been the use of scenario analysis. Scenario-analyses
are forward-looking tools intended to allow users to imagine how a range of possible
futures could look, the risks and opportunities entailed in those different
futures and get its users to pin down how their companies would be affected if
any of those futures materialized. The overarching purpose is to enable firms
to develop strategic and resilient business plans to incorporate envisioned or
possible changes.
A concrete way in which companies make use of scenario
analyses is by using them to understand how their capital requirements might be
impacted under a range of plausible scenarios. Using scenario analyses,
companies can peer into the future and build resilient responses to a world in
which extreme events and their financial impacts are no longer sporadic but recurrent.
Scenario analysis is a time and capacity consuming
challenge. Despite this, many companies, particularly within the oil & gas
sector, have been using these tools for some time, and companies in other
sectors are starting to do so too.
Another significant hurdle for companies performing scenario analysis stems from having to disclose the information generated. Many businesses are wary of this since, it is suggested, the information generated by scenario analysis is just hypothetical, which could, in turn, be misconstrued as a fraudulent, deceptive or incorrect disclosure, potentially opening the door to liability exposure. However, in reality, this constitutes a narrow view of the story.
Understanding risk
Properly understood, scenario-analysis is a risk
assessment tool, so the information derived from it is the same in nature as information
relating to other risks that might affect a company. Risks are hypothetical by nature
and gain validity when substantiated through evidence and justification.
What it takes to reduce disclosure-related liabilities
is a thorough and well-presented substantiation of the information provided,
with clear and precautionary wording regarding how this information ought to be
interpreted and construed.
A stream of forward-looking legal experts, within the Commonwealth Climate and Law Initiative, are of the opinion that disclosing forward-looking information in line with the TCFD Recommendations might, on the contrary, reduce liability exposure. Their claim is justified by understanding the core intentions of the TCFD’s recommendations, namely transparency and accountability. Therefore, firms able to demonstrate that they are acting to understand and manage climate risk will be acknowledged for that in the light of corporate responsibilities such as due diligence and good corporate governance. In understanding the purpose of disclosure, firms are allowed to make mistakes, though they are not allowed to be fraudulent, deceptive and manipulative about the future in order to ensure certain business interests.
As more firms get on board with the TCFD recommendations, using them as guidelines for disclosure, it is likely that they become reference points and that national laws start to be interpreted in light of the most advanced practices. In jurisdictions such as the UK, where an objective test applies to determine the extent and manner in which directors have exercised their duty of care and due diligence, this determination is likely to be done on the basis of what others in the industry are doing. If and when TCFD becomes best-practice, this is likely to become the yardstick against which these determinations will be made[1].
Good practice to
reduce liability
Scenario-analysis remains a beneficial tool, despite
the fact that it is still becoming an established best practice and mandated by
law. To reduce firms’ concerns around liability associated with
scenario-analysis, and to encourage them to start using it and disclosing climate
risk information prudently, a series of recommendations follows:
Use proper cautionary language.
Use a variety of scenarios, at least three would be advisable.
Place all scenarios within the same section and under the same fonts in your disclosure as to avoid that any be interpreted as being favoured.
Use multiple sources for data and narratives and seek insights from new sources.
Use current data and justify your choice of providers.
Ensure your scenarios reflect the variance (climate, political, social, regulatory) and are relevant to the entirety of the company´s operations.
Use information derived from scenarios in order to justify likelihood and not infallible certainty.
Not disclosing any forward-looking information under the false pretence that it might make your company liable is a greater risk than disclosing uncertain information.
If you are not sure of how to go about it, hire consulting services to guide you along the way.
Marcela Scarpellini studied law at the Universidad Católica Andrés Bello in Caracas (Venezuela) and has an LL.M. from the University of Stockholm (Sweden) in the field of environmental law. Within right.based on science (“right.”) she works at providing the legal context upon which right.´s X-Degree Compatibility (“XDC”) model and other metrics are developed.
right. based on science is a data provider founded in August 2016, which measures
a single economic entity’s contribution, be that of e.g. a company or a lending
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[1] Concerns misplaced: Will compliance with the TCFD recommendations really expose companies and directors to liability risk? Alexia Staker, Alice Garton & Sarah Barker. Commonwealth and climate law initiative.
Senators on the Senate Foreign Relations Committee have introduced a bill designed to increase the U.S governments’ understanding of the relationship between climate change and national Security. Brought forward on the 12th of March, The Climate Security Act of 2019 is wide ranging, examining the economic, environmental, and geopolitical impacts fuelled by climate change.
The Climate Security Act of 2019 was cosponsored by Senators
Ben Cardin (D-Md.); Jeanne Shaheen (D-N.H.); Chris Coons (D-Del.); Tom Udall
(D-N.M.); Chris Murphy (D-Conn.); Tim Kaine (D-Va.); Ed Markey (D-Mass.); Jeff
Merkley (D-Ore.); Cory Booker (D-N.J.); and Brian Schatz (D-Hawaii).
If adopted, the Act would create a new Climate Security
Envoy within the Department of State. The role would address climate security
vulnerabilities and serve as the primary federal contact for climate security
issues. The Climate Security Envoy would:
Work with climate scientists and security professionals to conduct analysis and risk assessments of the socioeconomic, geopolitical, and security risks associated with climate change.
Design climate security policies derived from those findings.
Develop and coordinate the application of climate security strategies that integrate climate policy seamlessly within the Department of State and across U.S. Embassies.
Develop and maintain relationships with other nations to address international climate security issues.
The Climate Security Envoy would also advise the President
of the complexities and dynamics of global security threats exacerbated by
climate. In addition, the bill would re-establish the Special Representative
for the Artic.
The bill comes at a time when the security risks of climate change are gaining national attention. The previous week, more than 50 former senior military and national security officials security officials, including former Secretary of State John Kerry and former Secretary of Defense Chuck Hagel, penned a letter to the President emphasizing the need to include climate change in national security planning.
In March 2019, Clyde & Co. launched its climate change report ‘Climate change: Liability risks, a rising tide of litigation‘. The report explores the liability risks that organisations have faced and continue to face as plaintiffs attempt to use the courts to further their cause or sue for damages.
The report provides a broad overview of the evolving
litigation risk landscape arising from the effects of climate change, identifying
some of the key themes, controversies and legal hurdles.
The authors suggest that the significance of this trend
should not be underestimated, with over 1200 climate change cases having been
filed in more than 30 jurisdictions to date. As both litigation approaches and
scientific evidence evolve, litigation increasingly represents a powerful tool
in the hands of those who seek to attribute blame for contributing to effects
of climate change or failing to take steps to adapt in light of available
scientific evidence.
In as much as the physical risks of climate change raise
both direct and indirect implications for a diversity of sectors, so too do the
associated legal risks. As Clyde & Co Partner Nigel Brook remarks, “As the
volume of climate change litigation grows and legal precedents build, new
duties of care are emerging and the liability risk landscape is undergoing a
shift which is likely to affect a wide range of commercial sectors”.
The authors classify litigation which has been emerging over
the last two decades into three broad categories:
1. Administrative cases against
governments and public bodies;
2. Tortious claims against
corporations perceived as perpetrators of climate change;
3. Claims brought by investors
against corporations for failing to account for possible risks to
carbon-intensive assets or for failing to account for or disclose risks to
business models and value chains in financial reporting.
The report also addresses novel approaches that claimants
are adopting when bringing climate litigation, as well as the practical and
legal considerations that these give rise to.
Finally, the report looks at global trends in climate
litigation and their implications for businesses in different industries around
the world, highlighting the issues which should be on companies’ radars over
the months and years to come. The authors indicate that climate change
litigation has already been deployed against companies beyond the oil and gas
majors and suggest that this trend is likely to continue.
Litigation has advanced far from being targeted at first line ‘emitters’ to being used as a means of holding companies accountable for how they respond to the physical and financial risks of climate change. Clyde & Co. plans to explore these liability risks in greater depth in future reports.
An update to the landmark
2016 Hutley opinion has been released by the Centre for Policy Development (CPD) on
29th March, 2019. The 2016 opinion set out the ways that company directors
who do not properly manage climate risk could be held liable for breaching
their legal duty of due care and diligence.
The supplementary opinion, provided again by
Noel Hutley SC and Sebastian Hartford Davison on instruction from Sarah Barker,
reinforces and strengthens the original opinion by highlighting the financial
and economic significance of climate change and the resulting risks, which
should be considered at board-level. It puts an emphasis on five key developments
since 2016 that have built up the need for directors to take climate risks and
opportunities into account and reinforced the urgency of improved governance of
this issue. While the 2019 opinion is rooted in the Australian context, just as
the 2016 opinion, it has much wider applicability, as much of the developments
discussed in the update have been simultaneously happening in jurisdictions
outside of Australia.
The five areas of development covered in the 2019
supplementary opinion include:
Progress by financial supervisors: The 2019 opinion suggests statements made by
Australian supervisory organisations such as the Australian Prudential
Regulation Authority (APRA), Australian Securities and Investments Commission
(ASIC) and the Reserve Bank indicate they now all see the financial and
economic significance of climate change. Similar realisations have been
happening among supervisory organisations in the UK, with the Prudential
Regulation Authority (PRA) due to imminently release a supervisory statement on banks’
and insurers’ approaches to managing the financial risks from climate change,
following a public consultation on the matter in late 2018 / early 2019. At the
European level, the wider sustainability of the financial system is under review
with the European Commission rolling out its
Action Plan for Financing Sustainable Growth;
New reporting frameworks: Three new reporting frameworks have emerged since 2016. The most
broadly applicable is The Task Force on Climate-Related Financial Disclosures
(TCFD) recommendations. In June 2017, the TCFD, a task force set up by
the Financial Stability Board in 2015, published its final
recommendations to help companies disclose climate-related risks and
opportunities. The Principles
for Responsible Investing (PRI) and CPD frameworks have now both aligned their
climate-reporting frameworks with the TCFD recommendations. The other two
reporting frameworks mentioned in the 2019 supplementary opinion are more
relevant for the Australian context, and include the new recommendations on
assessing climate risk materiality from the Australian Accounting Standards
Board (AASB) and the Auditing and Assurance Standards Board (AUASB), as well as
the updated guidance from the ASX Corporate Governance Council;
Mounting investor and community pressure: Investors and community groups are increasing
voicing concern around climate risks;
Development of the scientific
knowledge: The UN Intergovernmental Panel on Climate Change (IPCC)
published a special report
on the impacts of 1.5 °C warming in 2018. The opinion recognises this as a “notable
development in the state of scientific knowledge” that affects the gravity and
probability of climate risks which directors need to consider; and
Advances in attribution science: Important developments in
attribution science have now made it easier to identify the link between
climate change and individual extreme weather events.
The opinion
suggests management of climate risks will require engagement with company
directors in certain sectors in particular. These include banking, insurance,
asset ownership/management, energy, transport, material/buildings, agriculture,
food and forest product industries.
CPD CEO Travers McLeod, explains the
implications of this supplementary opinion for company directors, stating “the
updated opinion makes it clear that the significant risks and opportunities
associated with climate change will be regarded as material and foreseeable by
the courts. Boards and directors who are not investing in their climate-related
capabilities are exposing themselves and their companies to serious risks”,
according to a press statement.
Mr Hutley and Mr Hartford Davis write “the
regulatory environment has profoundly changed since our 2016 Memorandum, even
if the legislative and policy responses have not” […]“These developments are
indicative of a rapidly developing benchmark against which a director’s conduct
would be measured in any proceedings alleging negligence against him or her.”
The 2019 update to the 2016 landmark Hutley opinion also
provides ample evidence as to why company directors all over the world not only
need to be aware of their firms’ contribution to climate change – it is just as
important to assess and disclose their potential climate risks in a transparent
manner. It is therefore vital to ensure that future business plans are in line
with the Paris Agreement and to also anticipate and prepare for climate change
impacts, both in terms of risks and opportunities. The voluntary TCFD
recommendations provide a framework for both corporates and financial
institutions for assessing and disclosing climate risks and opportunities, and
mandated disclosures are on the horizon.
Acclimatise – experts in physical risk assessment and disclosures
Acclimatise has worked on physical climate risk and
adaptation with corporates and financial institutions for over a decade,
helping them identify and respond to physical risks and to take advantage of
emerging opportunities generated by a changing climate. We have witnessed the
corporate, societal and environmental benefits stemming from the promotion of
resilience-building strategies.
To discuss how your organisation can meet TCFD or other disclosure requirements, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com
They are not the first to confirm that there is a statistical
association between the likelihood of drought, or heat extremes, and
violence. Evidence of cause for any civil or international conflict is
always complex and often disputed.
But researchers now say that mathematical techniques provide an
indirect connection between formally-established drought conditions and
recorded levels of applications for asylum.
“In a context of poor governance
and a medium level of democracy, severe climate conditions can create
conflict over scarce resources”
The link is conflict, of the kind observed in Tunisia, Libya, Yemen and Syria.
They then matched the patterns of asylum bids against conditions in their parent countries, using a measure that scientists call the Standardised Precipitation-Evapotranspiration Index, which provides a guide to the gap between rainfall and heat and drought.
They next assembled a tally measure of battle-related deaths collected by the Uppsala Conflict Data Programme in Sweden. Then they modelled other factors, such as the distance between the countries of origin and destination, the sizes of populations, the migrant networks, the political status of the drought-stressed countries and the known divisions into ethnic and religious groups.
And they found that – in specific circumstances – climatic conditions
do lead to increased migration as a consequence of conflict exacerbated
by the more severe droughts.
But there is often little or no direct testimony from the faraway
past, and no surviving voice to offer a challenge. The connection
between climate conditions and human response is less certain in a
disputed world.
So the IIASA finding is a cautious one, backed, the scientists say,
by statistical rigour. This identifies climate change, and migration
flow, and finds conflict as the causal mediator which links the two,
most obviously in the events in the Middle East and North Africa since
2006.
“Our results suggest that climatic conditions, by affecting drought severity and the likelihood of armed conflict, play a statistically significant role as an explanatory factor for asylum-seeking exclusively for countries that were affected by the Arab Spring,” they write.
Tim Radford, a founding editor of Climate News Network, worked for The Guardian for 32 years, for most of that time as science editor. He has been covering climate change since 1988.
Cover photo by Christian Michelides/Wikimedia Commons (CC BY-SA 4.0): Refugees at the bridge connecting Braunau (in Austria) with Simbach (in Germany) waiting and freezing.
