Climate change event: liability risk forecast to 2050
In collaboration with Willis Towers Watson and Chapter Zero
Turning up the heat in the boardroom from now to “net zero”
An interactive seminar highlighting critical considerations for NEDs, Executive Directors, Company Secretaries and General Counsel as they navigate climate risk and build resilience in the decades ahead. Action on climate change will require a fundamental re-wiring of the world economy. Businesses that don’t anticipate and adapt to the carbon shock that’s coming will find themselves exposed. Those that do adapt could profit massively.
Hosted by Clyde & Co, in association with Willis Towers Watson and Chapter Zero – the Directors’ Climate Forum, the event addressed a board-level audience and outlined key recent developments and future considerations in regards to climate change which could impact businesses in the coming decades. The event was comprised of three parts: 1. an overview of the current physical
and transition risk landscape, and how this is translating into trends in climate change litigation
2. an interactive climate risk scenario in which delegates were the "Board" of a fictional company, and voted live on key climate risk-related decisions the company needed to make over a 30 year period 3. a panel discussion of senior executives from Tesco, the Financial Reporting Council, the Adaptation Committee on Climate Change, and Willis Towers Watson on current standards of care, changing thresholds and what may be next for companies impacted by climate change – and how liability risk might evolve.
Nigel Brook, Clyde & Co
This assessment of the realities facing businesses across all geographies and in all sectors set the scene for an interactive event aimed at bringing the issues around climate risk to life in a practical and thought-provoking way.
Resilience climate change event
Introduction – strategies for resilience
Businesses need a strategy for future resilience, based on a clear recognition of the potential challenges and ways to overcome them, said Clyde & Co Senior Partner Peter Hirst as he got proceedings underway. Nick Dunlop , Managing Director at Willis Towers Watson, added that quantifying the scale of the issue via risk modelling and impact assessments is essential so that boards can make well informed decisions around issues such as capital allocation and risk mitigation. It’s an imperative that has yet to hit home for many.
“Meeting the UK’s net zero target requires a transition strategy, and many Boards are yet to develop this,” said Julie Baddeley , Chair of the Chapter Zero Steering Committee. However, she is confident that business can solve this looming “emergency” though innovation and adaptiveness, recognising their duty to stakeholders to act now to protect asset values for the future.
Meeting the UK’s net zero target requires a transition strategy, and many Boards are yet to develop this,
Julie Baddeley, Chair of the Chapter Zero Steering Committee
First vote — Is climate change one of the top 10 issues in your companiy’s boardroom?
Yes - always
Sometimes - other issues often take precedence
No - rarely discussed
Resilience climate change event
CLIMATE CHANGE LIABILITY – CURRENT TRENDS
The first session of the event focused on the 3rd risk – liability, with Clyde & Co's Global Head of Climate Risk, Nigel Brook highlighting the ever-growing body of climate-related law and regulation, increasing scrutiny from regulators and enforcement bodies, strategic climate litigation and emerging duties of care that are giving rise to new liability risks. The range of potential claims categories is wide, from failure to adapt operations, product liability and disclosure-based claims to health and safety issues and greenwashing allegations. New standards are emerging all the time with which businesses and their directors and officers must comply, and as regulatory, investor and activist pressure intensifies, so decision-making will be re-shaped. Courts are also becoming more receptive to these kinds of claims. The speed of change is so rapid that "decisions made five years ago, could be seen as negligent [if made] today".
Key risks to business around climate change fall into three categories:
– Physical – The immediate risks arising from weather-related events as well as slow onset climatic changes. These physical impacts are already significantly impacting companies’ assets, investments, workforce, supply chains, input costs and outputs, and the costs of capital and insurance – Transition – The financial risks arising from the transition to a low-carbon economy. Regulation, policy, changes in consumer habits and investor pressure carry the potential to devalue or ’strand’ carbon-intensive assets, product lines, plants and business models – Liability – The risk of actions initiated by claimants who suffer loss and damage arising from climate change
Nigel Brook, Clyde & Co
SCENARIO ANALYSIS: FORESEEING THE FUTURE
The interactive debate covered a 30 year time-span, highlighting potential issues such as:
"As humans, we find it very hard to foresee a future that is radically different from the past, and we expect change to come gradually," said Clyde & Co’s Natalia Dorfman . “Business as usual needs to change but that’s hard because we don’t know exactly what the future looks like.” This is where scenario analysis comes into play – to help us consider the range of possibilities the future might hold, and to start thinking in a different way – outside the realm of the day to day – in terms of how to respond. The event took the audience through a scenario plotting different challenges faced by "Chapter Willis Clydes", an imaginary global diversified manufacturing company which pledged to become carbon-neutral by 2050. The audience voted in advance on the future "environment" our company would face, with Scenario C – "It's getting hot in here" being the chosen future with 49% of the vote. As humans, we find it very hard to foresee a future that is radically different from the past.
– Central climate risk committees - should the company have a central climate change risk committee or delegate responsibility to individual heads of departments? – The value of creating a climate risk register – to assess current and future physical risks. Sophisticated tools can be used to measure the cost/ benefit ratio of certain mitigation measures, map risk and evaluate and forecast hazard and exposure, so that companies are fully informed and can adapt strategy accordingly – Balancing competing duties and risks – while obtaining information on climate risks is vital, it can create dilemmas in terms of how to respond. With several real-life proposed investments being challenged in the courts, decision making must be well-documented to avoid exposure to liability risk – Avoiding “greenwashing” – as companies strive to meet net zero goals, reputational risk could result from allegations of “greenwashing”. Companies keen to demonstrate their green credentials as a source of competitive advantage beware: make sure you can deliver
Natalia Dorfman, Clyde & Co
Resilience climate change event
– To disclose or not to disclose? – as pressure to disclose emissions increases, businesses will have to grapple with how much information to make public, with an eye to the fact that disclosing too much, or too little, both come with their own liability risks – Contracts and supply chain issues – contracts must comply with the law but there are many voluntary standards that are not well defined. Contracts must also be underpinned by good procedures, so the advice
– Innovative risk transfer solutions – as climate related events such as floods or hail increase in frequency or severity, they may be recategorized from “secondary” to “primary” risks and repriced. Alternative risk
transfer solutions are coming to the fore, such as “cat” bonds and “parametric” insurance
Balancing competing risks and duties is not straightforward. Therefore, climate change modelling must be part of the day-to-day focus of the board. Decision-making must also be documented to ensure the business is not exposed to liability risks.
was to agree a taxonomy for sustainability. Look at Tier 1
relationships and ensure that Tier 2 and 3 suppliers are being held to those same standards. Implement audit rights and future-proof contracts with “change of law” terms against which costs are allocated. Termination is the ultimate recourse – Considerations when changing suppliers – if a supplier is compromised in some way and cannot continue to provide goods or services, termination and compensation rights will depend on whether this was beyond the suppliers’ control (force majeure) or whether a breach of contract occurred
Simon Konsta, Partner, Clyde & Co
CLYDE & CO CLIMATE RESILIENCE EVENT – TOP TWO VOTED AUDIENCE QUESTIONS 1. Is it possible that oil and gas will be divested by investors and cease to be underwritten by insurers in a similar way to what we have seen happening with coal? There’s a big distinction between coal and oil & gas. The latter have a smaller carbon footprint, plus green technologies are not expanding fast enough to take over from them. So, while getting out of coal is priority, we’ll need to keep using oil & gas for some time to have an orderly transition. For investors, engagement is a better way to influence change than divestment. Shareholders can encourage reporting and support the shift to net zero, voting against boards if necessary. Demand for oil & gas shares remains strong, as for shares in carbon-intensive sectors like steel or automotive. For insurers, difficult issues can arise if companies are involved in other activities as well as oil & gas, further complicated as businesses have different timescales for green commitments. Insurers will need to ask themselves: where do they draw the line? Energy specialists need to think about what their book of business will look like in ten years’ time and if it should be reconfigured. If their fossil fuels business diminishes, will renewables replace it? Credit insurers need to consider the impact if carbon pricing gains momentum. Companies operating on tighter margins may be at risk of being downgraded by ratings agencies.
2. Is there an emerging view on “day zero” for D&O awareness of climate risks? I.e when is it
reasonable to assume boards know and understand the risks they face?
“Day zero” is the date when directors and officers should reasonably have been aware of the potential risks of a decision or action. If a case can later be made that they should have known, they are negligent. The lawhas not changed, but the standards against which duties are judged have. Five years ago, backward-looking box- ticking may have been adequate when signing off a new project, but not today. Now directors need to know more and look ahead. Given the amount of information available relating to transition risks, regulation etc, “I didn’t know” is no defence. Failure to seek out knowledge or take account of it is not the only risk. If directors exaggerate the company’s green credentials or preparedness for climate risk – or are silent about those risks - they could be exposed to claims.
Nigel Brook, Partner, Clyde & Co
Resilience climate change event
Panel discussion: The view from the top
THE INFORMATION REVOLUTION
A panel discussion switched the focus of the event from theoretical examples to back to practical considerations for today’s boards. Moderator Dean Carrigan , Partner in Clyde & Co’s Sydney office, pointed out that in Australia, where climate change is rapidly jumping up the political agenda, “ Prudential and market regulators are expecting the tone to be set from the top. Board engagement is vital. ”
In terms of what outputs are required to ensure that reporting is appropriate, David Rule said that although consensus among industry is growing that the TCFD is the right approach, many companies are struggling to understand what they need to do, especially since many of the guidelines are recent and because this is an evolving area. “ There’s a real need for consistent information, ” he said. “ Assurance around financial statements is a key issue, especially around metrics, so that stakeholders know they can trust what companies are saying. Investors also need this for their own reporting. ” Looking ahead, he said that the FRC will be looking at company reporting and audits ahead of the COP 26 UN Climate Change Conference in Glasgow later this year. Information was also front of mind for Rowan Douglas, Head of the Capital Science and Policy Practice at Willis Towers Watson. He anticipated the information revolution that is set to happen in the next 10 years, re-shaping what business understand about themselves and what others understand about them. He added that although the regulations are in place, the quantification methods and metrics have not yet been standardised and forecast that it could take a decade for risk factors to be fully embedded into organisations. When it comes to information and reporting, Rosalyn Schofield’s advice was: “ Be honest in your reporting. Say how challenging this is and what you are prioritising. Be open and transparent. ”
Asked how boards should be approaching climate change issues, David Rule , Executive Director of Supervision at the FRC said, “ This is existential for most businesses, so the board has to take leadership, with a comprehensive approach across the business. ” Referring to the earlier scenario question about whether there should be a centralised board committee, his view was that individual executive leadership is important as well. Alan Stewart , CFO at Tesco, also flagged up the importance of executive responsibility in feeding strategy from the top down into business lines. He urged, “Boards must think about how to make this work from the inside out, rather than the outside in. Only when it becomes important to individuals do you get real change.” Companies can impact the legislative agenda by doing more voluntarily – mitigating the need for governments to increase regulation, argued Rosalyn Schofield , member of the Adaptation Committee of the Committee on Climate Change.
MOVING THE DIAL
Despite the many unknowns, Douglas argued that there are “knowns” that businesses can and must respond to: the most obvious being the very fact that global warming is happening and how quickly. “ The most predictable business and political risk we face is climate change, ” he said, explaining that despite our efforts, there’s a lag on global warming just as there is when you turn up the thermostat in a house. “ The laws of physics reign supreme. By 2050 [the target date for net zero in the UK] we’ll have stopped turning the thermostat up, but we won’t have turned it down, ” he reminded delegates. To help businesses plan for such “predictable” risks, Schofield pointed to the usefulness of data sources like the Met Office which can forecast, for instance, the likely impact of a 4˚ temperature rise on operations in Bangladesh. The event closed on an optimistic note: that ultimately we will create an economy that can thrive in a low-carbon environment. Getting there presents an enormous challenge, but plenty of commercial opportunities will be created along the way. Dean Carrigan summed it up like this: “ While there is certainly much to be done, there is also a lot of scope to move the dial on this issue. ” Forewarned is forearmed, and delegates left the event with plenty to think about.
For more information on the issues raised here, please contact:
Chapter Zero Julie Baddeley E firstname.lastname@example.org
Willis Towers Watson
Nick Dunlop; Rowan Douglas; Richard Baudin E email@example.com E firstname.lastname@example.org E email@example.com
Clyde & Co
Nigel Brook , or our Resilience hub E firstname.lastname@example.org
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