Climate Change Risk & Liability Report - 2nd Edition

In April this year, we released our Climate Change Risk and Liability report, titled “Stepping up good governance to seize opportunities and reduce exposure”, which explored a range of developments in this area and sought to help businesses navigate the complexities involved in the transition to a low carbon economy. As we approach COP26, we have re-launched the report with a new prologue that reflects on the developments made to date.

Stepping up good governance to seize opportunities and reduce exposure Climate change risk and liability report 2021

Second edition – October 2021 First published – April 2021


Prologue October 2021

In Spring 2021, Clyde & Co published its Climate Change Risk and Liability report “ Stepping up good governance to seize opportunities and reduce exposure” , to help businessesnavigatesomeof thecomplexities involved in the transition to a low carbon economy. By setting out how the landscape is changing in terms of physical, transition and liability risk, and how this might impact on critical issues such as reporting requirements and corporate governance, our aim was clear: to provide insight on how to mitigate those risks, meet evolving duties of care and help companies position themselves to capitalise as opportunities rose. Six months on, as world leaders, policy- makers, businesses and others gather for the COP26 international climate summit, the issues addressed in this report are as pertinent as ever. Progress has been made and challenges in the battle to tackle climate change have continued to develop. Pledges by governments to deliver net zero carbon emissions are being supported by plans to invest more in green technologies and jobs 1 , such as those in the pipeline in the US 2 , China 3 and the EU 4 , and there are now almost 2,350 climate laws and policies in existence 5 . Despite this, concerns remain that still not enough is being done to achieve decarbonisation, with international commitments made to date on course

to reduce emissions by just 12% by 2030, instead of the 45% needed to keep global warming to 1.5˚C or below 6 . ACTIVISMAND LITIGATION Against this backdrop, activism continues to gather pace and take new shape. As of October 2021, almost 1,900 climate-related litigation cases are ongoing or have been concluded globally 7 . Such activism is only likely to be fuelled by landmark rulings such as the decision in the Milieudefensie et al. v. Royal Dutch Shell PLC case in May. This resulted in the oil major being ordered to make a 45% reduction in emissions (both its own and its end-users’) by 2030 on the basis that it owes a duty of care under Dutch law. While that decision is under appeal, it has already inspired similar rights-based cases against motor manufacturers and an oil firm in Germany. In the US, climate change lawsuits have been mired in procedural issues with the energy defendants fighting to keep the cases in federal court, which is seen as more favourable for the petroleum industry. In this regard, the energy defendants received a boost via the Supreme Court’s decision in BP PLC v. Mayor and City Council of Baltimore in May wherein the Supreme Court held that a lower court had wrongly limited its review of the energy defendants’ request to keep the case in federal court. Although the

1 Clean energy investment could create 10 million green jobs,World Economic Forum, 9 July 2021

2 Inside Biden’s Plan To Create Over 10 MillionWell-Paying JobsWith His Clean Energy Initiative, Forbes, 23 April 2021

3 China pours money into green Belt and Road projects, Financial Times, 26 Jan 2021 and China expected to favour green tech over coal in new five-year plan, Thomson Reuters Foundation, 1 March 2021

4 EU invests 122m to help bring low carbon technologies to market, Energy Live News, 29 July 2021

5 Climate Change Laws of theWorld

6 For a livable climate: Net-zero commitments must be backed by credible action, United Nations

7 Climate Change Laws of theWorld


justices declined to address the overarching arguments that climate torts against energy companies belong in federal court, this decision provides the energy companies with a possible (but not guaranteed) path to stay in federal court that did not exist before. Governments too continue to be held to account via administrative actions. The Constitutional Court in Germany is among the latest to find in favour of claimants, ruling in April that the country’s Federal Climate Protection Act was incompatible with citizens’ rights, due to insufficient greenhouse gas reduction targets (this immediately prompted the government to adopt more ambitious targets). In all, 37 cases challenging governments’ perceived lack of action or ambition on climate targets and policies, on the basis that controlling emissions is a state’s‘systemic’ responsibility, had been identified around the world by May 2021 8 . Meanwhile in France in September, the first ever legal action against a state for its alleged failure to protect biodiversity has been initiated by two NGOs, relating to the authorisation of pesticides. Although this is not a climate lawsuit per se, there are clear links between climate and biodiversity issues (as pointed out in a recent report co- authored by the Intergovernmental Panel on Climate Change 9 ), and distinct parallels in the litigation strategies adopted. This signals that a new type of litigation risk may be emerging, and demonstrates the growing importance of biodiversity alongside climate change as a critical issue when it comes to protecting our environment in the years ahead. TAKING RESPONSIBILITY AND DRIVING INNOVATION The growing focus on biodiversity and natural capital is echoed in the rising prominence of the newTaskforce on Nature- related Financial Disclosures (TNFD), which

is developing a framework for corporate reporting on nature-related risks. Launched earlier this year, its work is already supported by more than 100 organisations 10 . Its inception builds on the success of the Taskforce on Climate-related Financial Disclosures (TCFD), which in June received its most widespread endorsement yet, when G7 finance ministers and central bank governors agreed to make climate-related financial reporting mandatory, in line with TCFD recommendations. Shareholdersarealsoturningupthepressure on companies to improve their approach to, and performance on, environmental protection and sustainability issues. This summer, investors voted in favour of activists’ moves to compel US oil company Chevron to cut its carbon emissions, and for the first time ever voted new directors onto ExxonMobil’s Board against its wishes. Insurers too are signalling a clear direction of travel, with the launch of the Net-Zero Insurance Alliance (NZIA) at the G20 Climate Summit in July, in which eight major insurance and reinsurance companies pledged that their underwriting portfolios would be net zero by 2050 11 . In a similar vein, on 30 June 2021 a group of leading law firms including Clyde & Co. LLP launched the Net Zero Lawyers Alliance (NZLA), a coalition committed to accelerating transition to net zero emissions by 2050, both through their own policies and by assisting their respective clients’ paths to net zero. Regulators, activists and others remain on high alert for potential ‘greenwashing’, where organisations misrepresent their eco- friendly credentials in corporate statements or marketing activities. Over the summer, the International Organisation of Securities Commissions (IOSCO) published reports on climate-related sustainability disclosures in a bid to combat greenwashing, while the Australian Securities and Investments Commission (ASIC) is undertaking targeted surveillance of financial products to identify

misleading ESG statements 12 . In August, the world’s first court action challenging the credibility of a company’s clean energy claims and its net zero emissions targets was launched against Santos, an Australian oil and gas company by shareholder advocacy group the Australasian Centre for Corporate Responsibility 13 . However investors, and companies themselves, are also increasingly aware that as well as posing major risks, the global transition to net zero throws up significant opportunities to be grasped. In the energy sector, global corporates who previously focused their expertise on fossil- based systems of energy production are accelerating their move into the renewable energy sector, particularly offshore wind and solar. The significant increase of renewable energy in the energy supply mix, the continuing progress of electrification, improvements in energy storage systems, and the development of ‘new’ energy sources such as hydrogen are all key drivers of the energy transition. Substantial investment is required to develop and scale the disruptive new technologies that are required to achieve net zero. Corporates, start-ups, investors and funding agencies

are having be more pragmatic and creative to match ‘climate tech’ ideas to capital in new ways, enabling cutting-edge innovations to reach commercialisation and critical mass, as our recent Climate Tech Investment Report outlines. Time is of the essence in the fight against climate change. Though there have been significant developments since we published our Climate Change Risk & Liability Report 2021 , in the wake of the COP26 summit we will need to start seeing even more rapid and radical change. With the much delayed COP15, the UN’s equivalent biodiversity conference, finally due to take place in 2022, the impetus for governments and businesses to face up to a wide variety of environmental, social and governance obligations is growing. But so too is the chance for industry tobepart of the solution by developing innovative new products and services. This report is a vital tool to help companies build resilience and play their part in the orderly and just transition to net zero that is essential if we are to protect the planet and the people and ecosystems within it, while maintaining stability in the global economy.

8 Global trends in climate change litigation: 2021 snapshot, LSE, July 2021

12 Corporate governance update: climate change risk and disclosure, Australian Securities & Investment Commission, 14 October 2021

9 Biodiversity and climate change, June 2021

13 Greenwashing case against Santos shifts the dial on climate lawfare, Financial Review, 2 September 2021

10 Global businesses and financial firms join TNFD to tackle nature-related risks, Taskforce on Nature-related Financial Disclosures, 30 September 2021

11 Net-Zero Insurance Alliance (NZIA) launched at G20 Climate Summit: more insurers are joining, 12th July 2021





Much has changed since we published our first climate risk report two years ago, at a time when it was still a relatively nascent boardroom issue for businesses outside the energy sector. The countdown to net zero carbon emissions has now truly begun and developments around climate change risk and regulation are accelerating, with implications for all industries. More than 110 countries have now committed to becoming carbon neutral by mid-century, including major emitters such as China (by 2060), the EU, the UK, Japan and South Korea, and around two thirds of total emissions now fall under such pledges 1 . But global emissions need to almost halve by 2030 from 2010 levels, if the world is to have a chance of keeping warming below 1.5 degrees 2 , and policies to achieve that are lacking. Governments are increasingly being held to account if their actions are deemed not to live up to their pledges. Public perception of climate change is shifting rapidly, and growing numbers of people, young and old, are adding their voices to calls to tackle the issue faster. More and more companies of all shapes and sizes are starting to see that beyond the damage caused to the planet, climate change could pose a threat to their business models. They recognise the need to be ahead of the curve to avoid a disorderly transition to a low carbon economy and face up to social, economic, legal and regulatory demands.

It’s a lot to think about, at a time when many othermajor issues – notably the impact of the COVID-19 pandemic – are also clamouring for attention on the boardroom agenda. Despite the challenges,apathway toprogress is essential. This year’s United Nations COP26 climate change summit in Glasgow is likely to set the pace in terms of defining and strengthening the policy response. Since achieving net zero will require significant investment as well as regulation, this could create major opportunities for businesses, as well as risks. As companies build resilience, the importance of good governance cannot be overestimated. Putting climate risk awareness at the heart of decision-making and embedding it into both strategy and culture at all levels of an organisation is an important step. Since legal considerations extend beyond environmental law and regulation to areas like asset management, finance, insurance, tax and many more, businesses are looking to their lawyers for deep knowledge of all the issues and out-of-the-box thinking to guide them through the transition. At Clyde & Co, we have developed market- leading expertise and a reputation for innovation in this space. In this report we look at all the key issues, from recent and emerging developments in this area, to how organisations can best position themselves to withstand shocks and seize the initiative, so that they can help to deliver a future that is sustainable for themselves, and for all of us.

07. Introduction

09. What is the impact of COVID-19 onthe climate change agenda?

13. What does the risk landscape look like today?

25. Reporting requirements: what dobusinesses need to know?

31. How can good governance help address climate risk?

37. What are

40. Conclusion

41. Contributors

the insurance implications of these issues?

UN News


2 UN Climate Change


What is the impact of COVID-19 on the climate change agenda?

The COVID-19 crisis has vividly demonstrated how suddenly the world we live in can change and how quickly policymakers, companies, and individuals can adapt when forced to do so – setting a precedent for climate change transition. Sucha“blackswan”eventthatunexpectedly exposes businesses’ vulnerabilities may provide a foretaste of the kinds of shocks that climate change or a disorderly transition could create in specific industries or economies. Businesses may be surprised by the speed of the changes it triggers, with associated implications for boards’ duty of care in terms of assessing, mitigating and reporting on risk. At the same time, increasingunderstanding of the interplay between climate change and catastrophic events such as floods and wildfires makes the frequency of this type of event more foreseeable. This has obvious implications on parties’ commercial obligations, from force majeure clauses to insurance policy coverage that is predicated on a certain event or peril being unforeseeable. The novel coronavirus has also focussed attention on how changes in landuse and theunsustainable exploitation of nature can give rise to sudden and catastrophic loss around the world.

Managing COVID-19 may have given businesses a playbook for how to deal with fast-moving challenges or created a sense that major enterprise-wide risks that were previously thought too big or too difficult to deal with can now be addressed. It has in some ways proved that organisations can make rapid and large-scale changes if the will to do so is there, moving climate risk further up the list of priorities. In particular, digital transformation has been fast-tracked, speeding up the adoption of sophisticated tech tools which enable smarter, more efficient processes and better products to be developed in a whole host of sectors, from energy and construction to insurance and law. We can expect to see innovations such as parametric insurance, smart contracts that respond to weather data and offsite building component manufacture gain traction as this happens – all of which have the potential to improve climate risk resilience significantly.

What is the impact of COVID-19 on the climate change agenda?


However, many companies will emerge from the pandemic in a much weaker financial position, impairing their ability and willingness to make costly changes to their core operating models. After years of discussions, organisations should be prepared for the international response to the climate “emergency” to develop more rapidly now, too. The coronavirus-induced delay to the COP26 summit may have increased the likelihood that a united front will be achieved and meaningful action agreed, especially now that the United States is back on board. Indeed, the economic recovery from COVID-19 is closely tied to action on climate change in the minds of many, in terms of finding creative ways to drive growth via investment in low carbon technologies. A range of initiatives, such as “greening” existing housing stock, building the infrastructure for electric vehicles or developing the hydrogen economy, have significant potential to create real value and sustainable jobs for the future. Several of the planet’s most pressing problems could thereby be tackled in tandem.


What does the risk landscape look like today?


The 2020s are a critical decade in the fight against climate change. Global average temperature will continue its upward trajectory until emissions finally reach net zero. At the same time, the journey to net zero has only just begun (emissions were still rising until the pandemic hit 3 ), and there is still extensive scope to make changes that could contribute significantly to decarbonisation. Climate change creates physical risks, in which changing weather patterns, more extreme events and rising sea levels (alone or in combination) cause damage to property and infrastructure, impacting asset values and insurance premiums and disrupting supply chains. And the shift to a low-carbon economy will strand assets and may undermine business or investment decisions; if the transition is disorderly it may give rise to “carbon shocks”. Both act as a potential catalyst for a third type of risk: litigation risk.

The physical effects of climate change – and its human cost – are clearer than ever. The decade 2011–2020 was the hottest on record 4 , culminating in the worst wildfires in modern history which devastated large parts of the USWest Coast and Australia 5 . In fact, climate-related natural disasters spiked by 83% in the past 20 years compared to the previous two decades 6 . COVID-19 and the resulting shutdowns and economic crisis sharply reduced consumption of fossil fuels around the world, particularly in the transport sector. Even so, the resulting drop in emissions was only 5.8% globally 7 . Though that was the largest percentage drop sinceWorldWar II, it still falls short of the 7.6% annual reduction required this decade in order to get on track towards the 1.5°C temperature goal of the Paris Agreement 8 . And the early signs are that emissions will rebound this year.



4 World Meteorological Organization three-warmest-years-record

5 New York Times

Yale Environment 360


7 International Energy Agency

8 United Nations Climate Change next-decade-to-meet-15degc-paris-target-un-report

What does the risk landscape look like today?


The physical impact of climate change in numbers

2.7–3.1˚C Projected rise in global temperatures by 2100 based on current policies in place around the world 10

5.8% Due to the response to the COVID-19 pandemic 15

2020 Tied with 2016 as the hottest year on record 9

500million – 0.5 billion

fall in global emissions

People are now living in areas that are turning into desert 16

2.1˚C An optimistic scenario for the rise in global temperatures by 2100 if the latest net zero promises and plans by governments around the world are kept 11

13% The amount that the annual minimum area of Arctic sea ice is declining per decade 12

1/5th More than one-in-five people live in regions that have already seen warming greater than 1.5˚C in at least one season 17

6% The cost to GDP in some regions from water scarcity 18


6,681 Climate-related natural disasters between 2000–2019, up from 3,656 between 1980–1999 14

natural disasters

The global mean sea level increase from 2018 to 2019 (the rate of change is increasing) 13

9 NASA 10 Climate Action Tracker pathways%20global%20average,are%20consistent%20with%20IPCC%20SR1 11 BBC News 12 NASA 13 NOAA sea-level#:~:text=Global%20mean%20sea%20level%20has,of%20seawater%20as%20it%20warms 14 Yale Environment 360

15 International Energy Agency 16 New York Times 17 NASA 18 World Bank and-the-economy

What does the risk landscape look like today?



At the same time, some oil majors are writing off assets and capping oil wells early despite the significant costs involved. Though it may be too soon to call “peak oil”, the direction of travel is clear, particularly as sales of electric vehicles increase, as some countries such as the UK and Norway propose bans on the sale of new petrol and diesel cars (in the UK’s case by 2030 and 2025 for Norway 23 ).

According to a recent survey 25 , almost 70% of US and UK consumers would or might boycott a brand because of poor or misleading corporate social responsibility (CSR) information, of which environmental concerns are a key part.

Investor interest in climate change issues is not merely predicated on managing risk: it’s becoming clear that environmentally responsible investment strategies can also deliver financial rewards by backing businesses with sustainable models in growth markets. The impressive performance of environmental, social and governance (ESG) investing 30 has pushed it into the mainstream.

Transition risk comes frommany potential sources: market movements, commercial and consumer trends, investor pressure, or political and regulatory drive.



Investor pressure for action on climate- related risks and resilience is intensifying. There are now many groups of investment managers and asset owners subscribing to sustainability and tackling climate change. Principles for Responsible Investment (PRI), has over 3,000 signatories, representing over USD 100 trillion of assets under management 26 . Investment managers behind Climate Action 100+, an initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change, represent over half of all global assetsundermanagement 27 . Moreover, 2020 saw the launch of the net zero Asset Managers initiative which brings together 30 of the world’s largest asset managers in a commitment to achieving net zero across their portfolios by 2050 28 . The list of sustainable finance initiatives in which investors can participate goes on, including the United Nations-convened net zero Asset Owner Alliance 29 and the Institutional Investor Group on Climate Change.

Renewable energy has become increasingly affordable. For projects with low-cost financing, solar power “is now the cheapest source of electricity in history”, according to the International Energy Agency 19 . New solar electricity costs have decreased by as much as 80% in the last ten years and new wind costs by around 60% 20 , beating even themost optimistic estimates of a decade ago – and both continue to fall. Shares in renewables businesses have outperformed the market overall, and the energy sector specifically; for example, solar companies had doubled in value in less than a year by October 2020 21 . Could this be a tipping point? In some countries, companies themselves are now increasingly setting the pace on the green transition – putting pressure on governments to legislate and on rivals to keep up. For example, Australia’s major energy companies have been calling on their government to be more ambitious with the country’s net zero commitments 22 .



Many consumers are keen to make green choices in what they buy, to the extent that product lines and even entire business models may need to adapt. For example, a survey by Accenture found that more than half of consumers say they would be willing to pay more for sustainable products 24 . Alongside risks, this presents a major commercial opportunity for new products or new markets, which will require foresight and agility from businesses that wish to harness them. Reputational risks cannot be ignored. Activists, the media, regulators, shareholders, employees and the public are increasingly scrutinising what companies are saying about their green credentials, asking if it is credible and who is accountable.

Increasingly, governments around the world want to be seen as leaders in the battle against climate change, and not just for political purposes. Other factors at play include a recognition of the longer- term economic benefits of developing new energy technologies domestically, and (in some regions) a rise in high-profile litigation for failing to take sufficient action. Examples of this include cases such as the Urgenda litigation in the Netherlands (which we examine in more detail later in this report). China (the largest emitter) has committed tonet zero 31 , the EUhas set out anambitious “Green Deal” plan towards the same goal 32 , and the new US administration has re- entered the Paris Agreement 33 . Taken in combination, this could be the catalyst for real progress.

19 Carbon Brief 20 Financial Times 21 International Energy Agency 22 The Guardian coalition-to-set-target-of-net-zero-emissions-by-2050 23 of-sale-of-new-petrol-and-diesel-cars-by-2030 24 Accenture sustainable-products-designed-to-be-reused-or-recycled-accenture-survey-finds.htm



26 Bloomberg NEF 27 Climate Action 100+ 28 Net Zero Asset Managers Managers%20initiative%20launched%20in%20December%202020,goal%20of%20net%20zero%20emissions 29 United Nations-convened Net Zero Asset Owner Alliance 30 Financial Times 31 Nature

What does the risk landscape look like today?


The prospects of keeping global warming “well below” 2˚C as set out in the Paris Agreement, which looked bleak, might now be improving, spurring other governments to make ambitious pledges. However, it is far from clear that the world will muster the collective ambition required to halve emissions by 2030.

Besides placing restrictions on businessmodels, regulation acts as an incentive to support transition by emphasising that these issues need to be addressed by company leaders, both internally and externally, setting the tone for cultural change from the top.

Upping the ante, in 2021 a new Taskforce on Nature-related Financial Disclosures will be launched, operating in parallel with the TCFD to develop a framework for corporates and financial institutions to assess, manage and report on their dependencies and impacts on nature, aiding in the appraisal of nature-related risk and the redirection of global financial flows away from nature- negative outcomes and towards nature- positive outcomes 38 . This reflects a growing realisation that biodiversity loss and environmental degradation can have a massive impact on the economy (vividly demonstrated by the COVID-19 pandemic), and that action to reverse the damage could generate substantial business value and jobs in this decade 39 .

While the majority of litigation is against governments, the number of claims against companies is on the rise. The range of allegations is diverse: from claims of greenwashing, inadequate disclosures, product liability, nuisance and fraud claims, to human rights arguments and allegations of procedural failures 41 . Some types of claim – and some jurisdictions – are progressing faster than others, but a critical mass of successful claims has yet to materialise. COVID-19 has held up a lot of progress in the courts, but the litigation landscape is definitely more concerning for companies than it was even two years ago. We’re by nomeans seeing an avalanche of claims, but there aremore actions, new arguments. Claimants are getting smarter about strategy, and new funding mechanisms are emerging, from litigation funding to crowdfunding. - Emma Ager, Partner, Clyde & Co, London


- Dr. Henning Schaloske, Partner, Clyde & Co, Dusseldorf

Regulators are increasingly adopting a joined-up approach in addressing climate risk in the financial sector. For example, the Network for Greening the Financial System (NGFS) is a coalition of regulators and supervisors who share best practices and contribute to the development of environment and climate risk management in the financial sector 34 . Launched three years ago, the NGFS now has 83 members across five continents, including the US Federal Reserve, which joined in December 2020 35 . Last year, the UK 36 and New Zealand 37 became the first countries in the world to announce that compliance with the reporting requirements of the international Task Force on Climate-related Financial Disclosures (TCFD) would become mandatory. We may well see others start to follow suit, paving the way for a truly global framework.

With artificial intelligence (AI) tools being used to monitor performance, increasingly there will be nowhere to hide. Moreover, there are three types of emissions that are under scrutiny: – Scope 1 emissions that are directly created by a company’s activities and within their own control such as vehicle fleet fuel consumption; – Scope 2 emissions that are indirectly created, via electricity use; and – Scope 3 emissions that are created in other indirect ways such as via business travel or in the supply chain.


Both the number and type of claims relating to climate change litigation are expanding. The total number of climate change cases has almost doubled since 2017, with more than 1,500 claims filed in 38 countries by mid-2020, up from fewer than 900 in 24 countries in 2017, according to the UN Environment Programme 40 .

37 Climate Disclosure Standards Board first-implement-mandatory-tcfd-reporting 38 Taskforce on Nature-related Financial Disclosures 39 Taskforce on Nature-related Financial Disclosures 40 UN Environment Programme pdf?sequence=1&isAllowed=y 41 LSE Grantham Research Institute Global-trends-in-climate-change-litigation_2020-snapshot.pdf

32 European Commission aims%20to%20be,action%20under%20the%20Paris%20Agreement 33 The White House agreement/ 34 Network for Greening the Financial System 35 Federal Reserve 36 Clyde & Co

What does the risk landscape look like today?



Shareholder actions against companies and their directors and officers, alleging a failure to anticipate, act on or disclose the risks, for continuing to invest in projects or assets that contribute to global warming or for alleged greenwashing have yet to gain significant momentum. However, with climate risks firmly in the spotlight, this is an area we expect will develop in the future.

This novel approach has now spawned similar claims in other jurisdictions, with human rights arguments being used against several governments including those of Brazil, Mexico, Canada, Germany, Pakistan, and Ireland 44 . It’s not just governments that are facing such strategic actions. A group of activists has launched legal action against Royal Dutch Shell (Milieudefensie et al. v. Royal Dutch Shell plc) seeking an order that the company takes more ambitious action to cut CO 2 emissions – which would likely require an overhaul of the company’s business model 45 . Nor is it just oil majors who are affected. Last year Australian pension fund REST settled a test case brought by one of its fund members, who alleged it had breached corporate law and its trustee obligations by failing to disclose climate risk in its investment portfolio adequately 46 . No financial loss was alleged: the suit was aimed at enforcing duties of care and improving conduct in the future. Claimants are turning to novel mechanisms to fund legal action. While the rise of third- party litigation funding could have an impact on how some loss-recovery claims are funded going forward, some activists are turning to crowdfunding to meet the costs of litigation.

For example, a group of Portuguese children and young people have used crowdfunding to launch a claim directly in the European Court of Human Rights demanding that 33 countries cut emissionsmore ambitiously 47 – a case that the court has accepted and fast- tracked. New regulations around climate change and a sense that the pandemic has created a window of opportunity for change is galvanising activists, pressure groups and politicians alike.

To date, claims against companies and/ or their directors and officers have largely been focussed on recovering projected costs for preventative works which claimants allege will be required to mitigate the effects of climate change in the future, as well as those concerned with recouping losses already incurred. For example, in the United States, the highest-profile and largest cases take the form of cities and states suing oil majors to recover the costs of infrastructure projects and urban development plans required to enable them to withstand the impact of more extreme weather events or rising sea levels. These claims, which typically cite petroleum as a “defective product”, represent a trend which has developed significantly since the first cases emerged in 2017. Plaintiffs in the US have become smarter about how they structure their claims in an effort to ensure that they are heard in state courts, which they see as a more favourable arena than federal courts. The US Supreme Court will rule on this key jurisdictional issue in BP P.L.C. v. Mayor and City Council of Baltimore 42 . Plaintiffs and defendants are watching closely.


Recently we have also begun to see the emergence of strategic actions designed to force a change in behaviour, be that in business strategy and operations or in government policy. Claimants are increasingly using domestic legislation and treaties that are not climate-related to achieve climate goals. Human rights arguments are a case in point: these are increasingly being deployed as the basis for seeking to force changes in behaviour. The 2019 decision by the Dutch Supreme Court in State of the Netherlands v Urgenda was a landmark in this respect, upholding lower court rulings that the government had to reduce emissions more rapidly than planned in order to comply with Dutch citizens’ human rights, including the right to life 43 .

- James Cooper, Partner, Clyde & Co, London

44 US Climate Change Litigation database page/2/?cn-reloaded=1 45 Forbes historic-lawsuit/?sh=31b297b214be 46 Reuters fund-settles-landmark-climate-lawsuit-idUKKBN27I0DT 47 The Guardian over-climate-change-at-european-court#:~:text=The%20crowdfunded%20legal%20action%20 breaks,fossil%2Dfuel%20extraction%20and%20outsourcing

42 Climate Case Chart 43 Cambridge University Press law/article/state-of-the-netherlands-v-urgenda-foundation/567B9E3AD5B1712EC8F138195EC53995

What does the risk landscape look like today?



All these developments signal growing ambition and creative thinking on the part of claimants, and there is plenty of scope for these nascent trends to develop in the decade ahead. However, Neil Beresford, an insurance partner at Clyde & Co, makes the point that the litigation landscape is evolving fast, and technological developments are also likely to drive changes to duties of care. The liability risk associated with old technologies increases significantly as technology improves. The less reliant the world becomes on fossil fuels, the more emboldened will be the judiciary to scrutinise historic technologies and behaviours, and the more likely it becomes that companies will be held accountable for the ‘sins of the past’. - Neil Beresford, Partner, Clyde & Co, London

Claimants are also relying on established legal principles to achieve their goals. In 2019 ClientEarth successfully used company law to overturn a decision by the board of utility Enea to approve construction of a new coal-fired power station in Poland: the Polish Court ruled that the board had failed to follow the correct procedures (the project has since been abandoned) 48 . Procedural flaws were also the focus of recent moves to block the British government’s approval of a third runway at Heathrow. Construction is now set to go ahead, after the UK Supreme Court last year overturned an earlier ruling which had blocked it on the grounds that ministers had failed to take the UK’s carbon reduction commitments into consideration 49 . Drax recently abandoned its plan to build Europe’s largest gas power plant at its site in North Yorkshire in the UK shortly after a legal challenge against government approval was rejected by the Court of Appeal 50 .

48 Financial Times 49 [2020] UKSC 52 50 BBC News


Reporting requirements: what do businesses need to know?


A plethora of voluntary reporting standards exists, including the TCFD as well as those from the Carbon Disclosure Standards Board (CDSB) 51 , Global Reporting Initiative (GRI) 52 , the Sustainability Accountancy Standards Board (SASB) 53 and various industry-specific frameworks. However, standards bodies are increasingly converging on the TCFD framework. Its reporting requirements are fast becoming the globally accepted standard for reporting on climate-related risks and mitigation activities. While only two countries so far have declared that it will become mandatory 54 , investors and other stakeholders are increasingly pressing companies to adopt the standard, not least to help them assess and compare companies’ exposure to climate risk. Standardised reporting is generally seen as a positive move to create an established disclosure framework. However, it is not a panacea for businesses looking for absolute clarity on their climate change reporting obligations, for two main reasons.

Firstly, the TCFD does not explicitly tell companies what risks to measure or how to measure them, largely because it is inherently difficult, if not impossible, to come up with a single set of specifications that would suit every type of business. The risks faced by an investment fund are inevitably very different from a global consumer goods brand, a major housebuilder or a hospitality and leisure chain. Not to mention insurers, who face some of the most complex risks of all, as both insurers of risk and holders of assets. Each business will need to work out what its own reporting requirements and metrics are. Climate-related risks can be direct or indirect, moreover since they are by no means the only risks companies are facing, it is important that companies and their directors realise that they can interact with other elements of a company’s risk register in unexpected ways.

Carbon Disclosure Standards Board


Global Reporting Initiative


53 Sustainability Accountancy Standards Board

54; Clyde & Co

Reporting requirements: what do businesses need to know?


Climate change can act as a threat multiplier. Do your assumptions around

Failure to show intent to improve, let alone positive performance, could expose companies and their directors to negative publicity, leading potentially to loss of customers and contracts and difficulties attracting and retaining the best talent. Credit ratings could be downgraded, and a more challenging investment landscape could emerge, especially as ESG investing becomes prevalent. And though it has not happened yet, in the future, poor credentials in this area could influence the availability and pricing of financing and insurance, particularly as banks and insurers come under increasing pressure from regulators and other stakeholders to assess and manage climate risks in their portfolios and actively support the transition to net zero. Not to mention potential litigation against companies and their directors arguing they have not done enough to address climate change risks, be it physical or transition (as in the above-mentioned examples of strategic litigation against companies). At the same time, scrutiny over perceived greenwashing is increasing, with internal andexternal stakeholdersalikekeentoknow how reliable businesses’ green statements are. Last year, such issues were brought into sharp relief by the EUR 5m fine imposed on Italian energy giant ENI by the country’s Competition and Markets Authority over claims that its diesel containing 15% treated palm oil was green, despite the fact that palm oil production is a well-known cause of deforestation 55 .

Activists, investors, regulators and even customers themselves are on the alert for discrepancies between companies’ statements and their actions, heightening the risk of litigation. At this time of mounting consumer expectation and protection, ESG mis-statements constitute a legal and reputational vulnerability. In a world of increasingly accessible litigation funding and an ever more sophisticated claimant bar with access to collective consumer redress remedies and class actions, consistent, accurate reporting around climate, sustainability and ESG promises is essential.

For all these reasons, boards should be focussing not just on TCFD requirements, but on how climate change issues interplay with their duties of care. They need to ensure risks are identified and mitigated proactively and to report accurately — and to spot opportunities arising that could create value, such as developing new market offerings. If your business is ignoring climate change and the opportunities and risks it presents, the business is exposing itself to being left behind at best, but also possibly being subject to potential regulatory issues and litigation.

physical risks consider climate modelling? Can you keep up with changing standards? Have you considered how climate risks could impact business demand? Directors have a duty to consider all these risks.

- Jacinta Studdert, Partner, Clyde & Co, Sydney

Secondly, while TCFD is ultimately about disclosure, a great deal of groundwork needs to be laid first (some say this is a three-year exercise). Fundamentally, climate change has to be integrated into key governance processes and the risk management function. Beyond that, a company would identify and (perhaps) quantify the potential financial impacts of physical and transition risks on all parts of the enterprise; run climate scenarios; determine how the risks identified are to be managed; consult investors about the climate-related risks and opportunities they need to know about; rigorously check the information to be reported; and decide whether to integrate this information in its annual reports or disclose it separately.

- Vikram Sidhu, Partner, Clyde & Co, NewYork

The benchmark for assessing what directors and officers (and their professional advisers) should know or have known has altered significantly in recent years. Boards need to be aware not just of current risks, but future risks, too, and must influence how risk mitigation actions are operationalised throughout the business. Good governance has a critical role to play in anticipating and responding to all these challenges and possibilities, as we explore in the next section.

- Simon Konsta, Partner, Clyde & Co, London


There are of course many other legal obligations companies and their directors must consider: financial services regulations, company law, environmental laws, health and safety requirements, contract and procurement issues and directors’ duties among others.

55 Wall Street Journal

Reporting requirements: what do businesses need to know?



– Understand and manage legal issues associated with TCFD (or other relevant reporting standards), including obtaining legal advice on risk mapping exercises and stress testing – Monitor and respond to changes in the regulatory and litigation landscape, including impacts on directors’ duties or changes to financial disclosure rules or environmental laws – Implement compliance measures and deploy crisis management best practice in the event of a breach, including communications with regulators and third parties – Consider legal requirements and recommendations to address climate risks in all new projects and activities – Develop due diligence frameworks and review policies and procedures in relation to workforce, assets, operations and transactions

– Consider insurance coverage issues in light of climate-related exposure – Provide training to directors and officers on legal issues associated with climate risks – Review supply chains to identify potential sources of business disruption due to the physical impacts of climate change and to minimise scope 3 emissions – Review contracts with suppliers: are they bound to provide relevant information and held to appropriate climate-related standards? 56 – Focus on governance to embed best practice from the top down and align organisational culture with corporate goals

56 The Chancery Lane Project, with pro bono input from Clyde & Co and other law firms, is continuing to build an open library of clauses that can be added to commercial contracts:


How can good governance help address climate risk?

The TCFD’s focus on disclosures is welcome but reporting is only part of the story: it’s governance that dictates what actions underpin those disclosures. Good governance formulates business processes that create value. Through good governance, businesses will find the silver lining among the storm clouds of climate change in terms of identifying new opportunities.”

Though many corporate governance frameworks already include obligations around social or environmental concerns that would incorporate climate change, either explicitly or implicitly, now the dial is being turned up on what boards are expected to do. Inevitably, some companies are more advanced in pushing climate change up the board agenda, aware that the potential to outperform competitors or the market at large is a powerful reason to incorporate it into decision-making. Other companies may tend to take a more reactive approach to tackling risks in general and climate change particularly. Or they may underestimate its implications, unaware of how climate- related issues touch everything, from physical risks to property, to merger and acquisition activity, supply chain resilience and brand goodwill. Though the issues are complexand therewill be some potentially major decisions ahead, it’s worth noting that there are also many common-sense steps that can be taken to improve performance and satisfy directors’ obligations. “Re-inventing the wheel may not be necessary”, says Elks.

- Richard Elks, Partner, Clyde & Co, London

While good governance has always underpinned company performance, the pervasive and unpredictable nature of climate change risks, the more onerous reporting obligations and the complexity and long-term horizon of these issues make it more important than ever.

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