Liability and the evolving litigation landscape
When risks, companies may also need to bear in mind the emerging trend for product liability actions. These are based on the extent to which polluting businesses can be held liable for the existing and future costs of climate change. We look at this liability in its own right in the next section. In effect, companies could face litigation over their actions (or lack of action) insofar as they have contributed to climate- related damage. Transition risks may be even harder, but no less important, to quantify. Nigel Brook puts it: “As we pivot away from fossil fuels, there will be winners and losers in the global economy. If that happens rapidly – and nobody quite knows how fast this will happen – there could be some significant shocks ahead, with investments being written off.” A range of factors, from government policy changes to the falling price of renewables and increasing consumer demand for electric vehicles, could accelerate this shift. Of major concern is the risk of so- called “stranded” or “trapped” assets, where it becomes uneconomic for oil and gas majors to realise all the assets on their books – with potentially severe consequences for their share prices. considering physical
Outside of oil & gas, companies risk being left behind in this transition to a low carbon economy on the one hand, and making the wrong bets on investments on the other. Investors too need to exercise caution and could find their investment models under threat, especially those that track major indices. For instance, almost a third of the FTSE100 (by value) is made up of oil & gas, chemicals, basic resources and industrial goods and services companies 14 . When it comes to financial statements, accounting properly for risk as it could affect asset values is vital – but can be very challenging, given the uncertainties surrounding future trading conditions and given that there are currently no international standards on disclosure. However, voluntary standards do exist, developed by the Taskforce on Climate- related Financial Disclosures (TCFD), and financial regulators are pushing for best practice. Where standards exist, courts may take a dim view of corporate failures to disclose relevant risks should litigation alleging that asset values have been mis- represented arise. The scale of damages in such claims could prove extremely costly, both for companies and their directors.
14 Source: FTSE Russell factsheet 31 September 2018 https://www.ftse.com/Analytics/Factsheets/temp/44779198-d364-4272-acbd-b6ca6a9cd2ea.pdf
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