What does the risk landscape look like today?
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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
THE REGULATORY LANDSCAPE
- 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.
LITIGATION RISK
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 https://www.cdsb.net/mandatory-reporting/1094/new-zealand-becomes- first-implement-mandatory-tcfd-reporting 38 Taskforce on Nature-related Financial Disclosures https://tnfd.info/ 39 Taskforce on Nature-related Financial Disclosures https://tnfd.info/why-a-task-force-is-needed/ 40 UN Environment Programme https://wedocs.unep.org/bitstream/handle/20.500.11822/34818/GCLR. pdf?sequence=1&isAllowed=y 41 LSE Grantham Research Institute https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2020/07/ Global-trends-in-climate-change-litigation_2020-snapshot.pdf
32 European Commission https://ec.europa.eu/clima/policies/strategies/2050_en#:~:text=The%20EU%20 aims%20to%20be,action%20under%20the%20Paris%20Agreement 33 The White House https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/20/paris-climate- agreement/ 34 Network for Greening the Financial System https://www.ngfs.net/en 35 Federal Reserve https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201215a.htm 36 Clyde & Co https://www.clydeco.com/en/insights/2020/12/climate-reporting-heats-up-with-uk-government-anno
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