- CMS launches its Climate Risk report, focussing on corporate accountability, climate impact reporting and litigation risks relating to climate change
- Financial institutions are holding corporates accountable over perceived climate risks
- Climate litigation is a direct and growing risk to companies – there’s a need for risk assessment, dispute avoidance strategies and corporates need better data on their climate change impacts
With COP26, the 26th United Nations Climate Change Conference, imminent, and corporates making stronger commitments to reduce their carbon footprint, climate risk has become a top priority.
That’s one of the key messages of Climate Risk, a timely new report from global law firm, CMS.
“As the world pivots toward a clearer climate mitigation agenda, corporates need to understand and quantify the risks facing them, and put in place clear mitigation strategies, not just to avoid litigation and penalties, but to obtain a license to operate and gain competitive advantage,” says Munir Hassan, Partner and Head of Energy & Climate Change Group, CMS.
The report highlights three key types of risk. First, of financial institutions holding corporates to account over perceived climate risks. Second, the risk to corporates on addressing and reporting their climate impact. Thirdly, the risk of litigation against corporates relating to climate change.
Financial institutions engaged with clients’ climate risks
Corporates face physical and transition risks from climate change, along with regulatory and investor pressures. Consequently, as the CMS report notes, banks and investors are rapidly incorporating climate change into their lending and investment decisions, assessing companies’ climate risk and decarbonisation plans. In short, the banks are less likely to lend to companies that may increase their climate risk exposure.
In future, we can expect further engagement between banks and investors and their clients, and increased scrutiny over transition plans and reporting.
Growing financial risks from climate change
“Firms that choose not to address climate change, or fail to act quickly enough, will continue to face material financial losses” says Laura Houët, Partner, CMS. “Central banks, regulators and policy makers recognise that climate change is a source of financial stability risk and have been responding with unprecedented levels of standards, regulation, and legislation.”
As the report observes, there is increasing litigation and activism appearing, holding companies responsible for environmental damage or lack of behavioural change. The majority of solutions have focused on disclosure, governance and risk resilience.
According to Laura Houët, “Financial institutions should monitor international regulatory developments, identify compliance challenges early, and do more than they need to. It’s vital to manage the reputational and legal risks as closely as the physical and transitional risks of climate change.”
Litigation on the rise
Climate change litigation is becoming a greater risk, with NGOs and individuals increasingly turning to the courts. The Climate Risk report focuses on two key categories of climate change litigation: human rights and judicial review claims, brought by NGOs and environmental groups, and claims seeking damages for environmental harm.
Kenny Henderson of CMS says that climate litigation is a direct and growing risk to corporates. “It’s prudent to actively manage this risk through dispute avoidance strategies, with plans to deal quickly and effectively with claims, and to understand the key features at play in such litigation. A robust international risk assessment and crisis management process can help to tackle possible class actions at an early stage.”
Measuring and reporting climate change impacts
As the Climate Risk report shows, information is an essential tool in addressing climate risk. This includes quantifiable data about the potential direct impacts of climate change on sectors and businesses, as well as consistent, comparable and reliable information about the companies themselves.
Many companies are producing reports measuring their climate impact, but with a host of different reporting standards, making it difficult for investors to compare performance across an industry.
It’s hoped that COP26 will result in greater clarity over climate reporting and other issues raised in the CMS report, in particular how governments see the shape of the future, zero carbon economy, and the pathways to it.
As Munir Hassan concludes: “Climate risks have become an integral feature of business planning. What corporates are now seeking is greater certainty over these risks, which can only come from clearer climate policy statements from governments and intergovernmental institutions.”
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