Clyde & Co Change Liability Risk conference, Friday 5 July 2019
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Clyde & Co Resilience Conference: Squaring up
On any measure, climate change is now a C-suite issue.
- Simon Konsta, Senior Partner, Clyde & Co
July 2019 In a video opening Clyde & Co’s recent Climate Change Liability Risk conference, leading climate scientist Dr Emily Shuckburgh of Cambridge University made this powerful statement: “The impacts on businesses from climate change are often thought to be far in the future, but they’re actually already here today.” Marking the end of London Climate Action Week, 280 delegates packed the auditorium to hear experts from the law, insurance, finance, academia, regulation, advisory and risk analysis speak about the critical climate change-related issues facing businesses and their directors and officers.
Clyde & Co Senior Partner Simon Konsta introduced the event by explaining its premise: that businesses need an appreciation of the present and future risks posed by climate change in their various forms; an awareness of what developments might drive policy going forward; and a toolkit to help them navigate the years ahead. It is, he pointed out, a highly complex and fast-changing issue that needs to be addressed at the highest level in businesses across every sector.
to the business risks posed by climate change
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Counting the commercial cost of physical and transition risk
Setting the scene on the physical risks of climate change, Hélène Galy, Willis Research Network Director of Willis Towers Watson put the issue into sharp business (and environmental) perspective. In addition to the clear damage to biodiversity and human populations from extreme heat, for instance, critical transport routes such as the Rhine are at risk of becoming impassable, planes may be grounded, and productivity is likely to suffer. If extreme weather events, such as last year’s “Beast from the East” or recent severe flooding in Asia become regular occurrences, the implications for sectors like retail or for the supply chains servicing any industry could be significant. “All continents will be affected,” she said, “but there will be winners and losers. Some areas can adapt, but others can’t. It’s existential.” While acknowledging that uncertainty makes decision-making difficult, Hélène advised looking at how risks develop over time, rather than taking too narrow a snapshot, and utilising frameworks that are currently being developed by regulators, standard-setting bodies and others to help identify and report on risk. Focussing on the transition to “net-zero” emissions, Michael Liebreich, CEO of Liebreich Associates, an adviser on clean energy and transport, climate finance and sustainable development, looked ahead to
the “three-third world of 2040”. This is when, based on current trends, he argued, we will see one-third of electricity being wind or solar-generated, one-third of vehicles will be electric and the economy will be one-third more energy efficient. Getting there will certainly not be hurdle- free, however. Though the cost of solar and wind power are falling exponentially, their variability makes them problematic. “Regulators are struggling to re-write the rule book to ensure that markets are benefitting from these cheap technologies but also that other systems are in place to keep the lights on,” he said. “The structure of power supply will have to evolve.” For Michael, the answer lies in new technologies such as pumped storage, biomass/biogas and demand response as well as batteries, based on fully digitised systems into which AI or Blockchain could be integrated. Similarly, green engines could revolutionise transportation – not just electric cars, but trucks, ships and planes. He’s confident that individual sectors can move quickly – citing the rapid shift to LED light bulbs that happened in just a few years as an example. Themessage: forward-thinkers can take the lead in whole new markets – those that don’t may get left behind or simply make the wrong strategic decisions, with value-destroying results.
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Looking through the liability lens: who’s in the line of sight?
Lawsuits for contribution to climate change are being launched on the basis of public/private nuisance, negligence – and increasingly – product liability. Such claims allege probably the biggest causal chain that has ever been argued. Importantly, claims are being made for future, as well as current, losses, for instance, from cities and one state claiming for lost tax revenue or the cost of strengthening infrastructure. When it comes to fiduciary duties, Ned Kirk, Partner in Clyde & Co’s New York office pointed to the high-profile claims against ExxonMobil in the US, where it has been alleged that directors and officers made false and misleading statements around climate change, as an example of the types of claims we might start to see more of. Moreover the point was made: “Duty of care is not static. Claims could be viewed very differently in hindsight to the way they are now.” In terms of liability risk, again, jurisdiction is an important factor. As Neil Beresford put it: “For insurers and underwriters, it’s worth noting that not all sectors are born equal: some are higher risk than others. The same is true for different jurisdictions: some have less restrictive rules oncausationormoredeveloped litigation funding markets, more vocal activists or a wider base of heavy industries.”
To highlight how fast the legal landscape is evolving as policymakers strive to meet the ambitious targets set out by the Paris Agreement, Jacinta Studdert, Partner in Clyde & Co’s Sydney office, pointed out that there are now over 1,500 climate-related laws in force around the world. Two decades ago there were 70. Not only are these becoming more ambitious as governments start to adopt more stringent emissions targets, enforcement of existing standards is also becoming tougher. In Australia,requirementsforcompaniestocarry insurance to cover environmental damage are increasingly a condition of operating licenses, while in China, “polluter-pays” laws and their enforcement by authorities have been strengthened. “Clearly, this poses major challenges for businesses, particularly global ones with cross-jurisdictional operations,” Jacinta said. Answering the stark question: “Who’s going to get sued?”, Neil Beresford, Partner at Clyde & Co in London warned: “A variety of businesses and individuals could be in the frame, and not just the oil majors. Climate change litigation arises in curious places. For instance we’re seeing the first negligence allegations against auditors signing off on accounts that don’t make provision for climate risks. And although the US actions by municipalities against oil majors are very much the ‘poster boys’ of climate change litigation, this is a worldwide phenomenon.”
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Addressing the practical agenda
During panel sessions, the discussion turned to the practical implications (both risks and opportunities) for businesses, directors and officers. Carlos Sanchez, Director Climate Resilience Finance fromWillis Towers Watson observed that “legal considerations will shift from being the enemy to being a friend” in conversations around evaluating, mitigating and pricing risk. A panel discussion among Richenda Connell, CTO and Co-Founder of specialist advisers Acclimatise Group, Miroslav Petkov, Head of Financial Services Environmental and Climate Risk at S&P Global Ratings and Professor Ben Caldecott of the University of Oxford’s Sustainable Finance Programme covered “indirect exposures” arising out of climate change that are hard to predict but that could pose liability risks to corporates. Chaired by Clyde & Co Partner from Sydney, Avryl Lattin, the panel addressed topics such as: what should business managers be doing, how to identify operational risks, and how to predict where exposures might come from. The session resulted in some suggestions for practical steps companies could take including: –– Make the best use of the latest scientific evidence and understand how that integrates with your business model. Sophisticated tools/models are available to develop bespoke projections –– Don’t overlook chronic risks (ie long-term, sustained changes) and the impact on capex/opex - extreme events should not be the only focus
–– Be transparent and give investors and other stakeholders the best possible information –– Consider your contracts. For example, supply chain resilience is likely to be tested more and more, putting contractual relationships under stress, and there is embedded liability yet to be tested in PPP contracts. Check terms to ensure that climate-related risks are taken into account –– Technology is set to open up liability issues – e.g. satellite data that is cataloguing multiple data points will enable claimants to go back in time and see what companies were doing, or DNA-decoding techniques will enable samples of soil/water to be used in future cases –– For insurers, understanding the impact of climate-related risk across businesses is vital. Putting the right exclusions in policies or defining new areas of cover is difficult until it’s better understood what the risks are. There are many opportunities for insurers to be involved in risk management conversations and risk transfer –– Investment in physical defences can create winners and losers – problems (and resulting liability exposures) simply be moved somewhere else –– Green credentials will come under increasing scrutiny. Misselling of financial products is one issue – reputational damage from perceived “greenwashing” is another. Regulators must get the methodology right
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Boardroom lessons
Looking more closely at fiduciary duty, climate disclosures and litigation risk, a second panel discussion was chaired by Anthony Hobley, Co-Chair of the think-tank Carbon Tracker. He sought the views of Kevin LaCroix, Attorney and Author of the D&O Diary blog, Nadine Robinson, Technical Director of the Climate Disclosure Standards Board and Will Martindale, Director of Policy and Research at the UN’s Principles for Responsible Investment (PRI). The point was made that fiduciary duty has in the past been seen as a reason not to address climate change or to disclose its potential risks. Now that it’s clear that climate change- related losses are real and significant, that argument has become harder to sustain. “If you don’t tell your own story via transparent disclosure, someone else will tell it for you,” was Nadine Robinson’s warning. Will Martindale summed it up like this: “We’ve moved from the idea that fiduciary duty stops at sustainability, to the idea that fiduciary duty requires sustainability.”
He added that many businesses who are signatories to the UN PRI believe that at some point there will be major policy disruption – that “policymakers will one day realise that they will have to phase out combustion engines, put a meaningful price on carbon, move away from coal and gas power. So if fiduciary duty right now is looking at 20, 30, 40-year liabilities, it’s entirely appropriate - arguably a requirement - to be considering that ‘inevitable policy response’ and putting in place action now to mitigate any financial dislocation that results from that.” Panellists pointed to a whole raft of global developments to demonstrate why climate change is such a core component of fiduciary duty: from the UK’s leading commitment to net-zero by 2050 to the Canadian Expert Panel’s recent Report on Sustainable Finance, legislative changes in South Africa and Brazil, and Chinese policymakers’ increasing focus on the importance of sustainability to financial regulation.
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Kevin LaCroix pointed out that there is a tendency to look in the rear-view mirror, but that directors and officers needed to be more forward-thinking if they are to limit their exposure. He drew a parallel for the potential spread of climate risk thinking in boardrooms with the relatively short length of time it took boardrooms to recognise cyber-security risks – now a top priority. There was a sense that until there are more D&O claims, the full scale of the issue will continue to be under-appreciated. Nonetheless, actions are being taken now that could be actionable in the future. “Don’t get hung up on the fact that aren’t many D&O climate change liability claims today,” Kevin said. Are boards up to the task? Panellists questioned whether most boards had the requisite skills, awareness and background mix to grapple with these issues, which poses a real risk for D&O insurers. Getting the right board composition to manage all the diverse risks faced by any given business is a challenge, but training, such as modules which are available and will be rolled out by the TCFD (Task Force on Climate-related Financial Disclosures) and others could help.
Mandatory disclosure was another hot topic. The feeling from panellists was that “we have to get to mandatory” climate-related corporate disclosures, and that although it was important to get the standards right first, the pace needs to speed up.
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Facing the realities
The overall message was clear. Boards need to take the lead in managing the environmental, financial and liability risks to their organisations’ activities, and to mitigate the climate change risks and liabilities they could be exposed to – both corporately and in their capacity as fiduciaries. The risks are real - but speakers at the event also sounded a note of optimism: that despite the challenges, commercial opportunities exist for those with innovative solutions or an ability to harness the rapidly-emerging new economy that the global response to climate change is creating.
As the rhetoric in the public debate moves from climate change to climate emergency, the fact that the event was so well attended by delegates from such a wide range of spheres demonstrates how far the issue has risen up the corporate agenda.
Duties of care already exist today, but the standards against which companies are measured are becoming more demanding, and that will play through into liability.
- Nigel Brook, Partner, Clyde & Co
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Contacts
Nigel Brook Partner, London T +44 (0) 20 7876 4414 E nigel.brook@clydeco.com
Neil Beresford Partner, London T +44 (0) 20 7876 4495 E neil.beresford@clydeco.com
Jacinta Studdert Partner, Sydney T +61 2 9210 4930 E jacinta.studdert@clydeco.com Avryl Lattin Partner, Sydney T +61 2 9210 4425 E avryl.lattin@clydeco.com Ned Kirk Partner, NewYork T +1 212 710 3960 E edward.kirk@clydeco.us
To find out more about Clyde & Co and resilience visit www.clydeco.com/ resilience where you can read our latest insights, blogs, events and you can join the resilience conversation. As a global law firm with a unique understanding of risk, Clyde & Co are well positioned to assist you to understand the legal and regulatory implications of developing new approaches to risk management.
Clyde & Co LLP is a limited liability partnership registered in England andWales. Authorised and regulated by the Solicitors Regulation Authority.
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© Clyde & Co LLP 2019
J466335 - July 2019
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