Climate Risk report
The world is preparing for COP26, and as it does so we see institution after institution making stronger commitments to what is now broadly seen in most countries as a common goal: to reduce global carbon dioxide emissions. International commercial lawyers have a crucial role to play in the debate. Not only in terms of how we conduct our own operations but also by being guardians of the rule of law and facilitators of business and trade. We are at the centre of discussions on what our clients are required to do, and also on what they should do in light of wider societal and reputational considerations. It is in our clients’ interests that we guide them toward outcomes in line with wider societal ambitions. To do otherwise would, among other things, risk placing them at a competitive disadvantage as the world pivots toward a clearer climate mitigation agenda.Climate Risk is a broad term and covers a multitude of concepts. This report focuses in on three discrete risks. First, of financial institutions holding corporates to account over perceived climate risks. Second, the risk to corporates on what they do and say about the impact on their business from (or from their business on) climate change. Finally, risk of litigation against corporates relating to climate change.As lawyers, what we see is broadly a great desire among our clients to be part of the solution on climate change. Almost all major corporate clients that we speak to wish to take positive steps that are in line with the desire for climate action, and also to capitalise on the opportunities presented as we transition to a net zero economy. We find that, among the investment community, vast capital is ready and available to be deployed on infrastructure and other projects that will push the agenda forward. The question is whether there is sufficient clarity on the agenda, the rules and the risks involved.As this report shows, a key driver of Climate Risk for corporates revolves around information. Both quantifiable information about the potential direct impacts of climate change on particular sectors and businesses. And also consistent, comparable and reliable information about the companies themselves. Companies are producing reports that are deluging investors on how they are measuring and managing their impact on and from climate change. However, there is some distance to go before investors can compare the information across the economy to make informed decisions.Organisations such as Baringa, who have kindly contributed to this report, support the same clients from a parallel perspective. They help investors and corporates to assess climate risk exposure by using Baringa’s Climate Change Scenario Modelling. Tools such as these are invaluable for making the best decisions from the information available on risks to companies and the credibility of their adaptation and transition plans.On climate litigation, this is a direct and growing risk to corporates who fall under the spotlight of a variety of potential claims against an increasing number of potential claimants. It is prudent to actively manage this risk through dispute avoidance strategies, having plans in place to deal quickly and effectively with the situation where a claim is brought, and understanding the key features that are typically at play in such litigation.Corporates are well aware that climate risks are an integral feature of their business planning. What some occasionally criticise is the lack of long term certainty. Making knee jerk decisions based on woolly political sentiments that could change tomorrow rarely makes good business sense. Clearer long term policy statements from governments and inter-governmental institutions can help on this, as well as clearer policies on how governments see the shape of the future zero carbon economy, and the pathways to it. All eyes will be on COP26 over the coming weeks to see whether the governments of the world commit to deliver that clarity. Notwithstanding the outcome of COP26, we anticipate that the issue of Climate Risk will continue to rise and rise up boardroom agendas.