The green economy: identifying primary risks and key opportunities

In February 2020, BP’s new CEO Bernard Looney announced that the company needed to ‘reinvent’ itself as part of ‘a rapid transition to net zero’ carbon emissions. His pledge comes at a time when big oil, along with other corporates and investors, is making concrete commitments to address its contribution to climate change.

With the current concerns over the coronavirus drowning out all other issues, there will be questions asked about whether green initiatives are timely. But the shift in public sentiment on climate change, including the louder voice of younger generations, is shaping public and corporate policies. The trend towards greening the economy seems part of a much longer trend than the more immediate shock to the global economy from COVID-19. For example, the BP statement came just weeks after the major UK newspaper The Guardian announced that it would no longer accept advertising from oil and gas companies.

Yet while the climate change debate is more intense in certain parts of the world, its effect has been felt worldwide. Renewable energy projects are being rolled out from major offshore wind developments in Taiwan to hydroelectricity initiatives in Chile.

New lines of risk

Companies have many opportunities to get ahead in the new green economy, but once the world economy returns to a semblance of normality, they will face profound risks if they don’t grasp the opportunities.

The emphasis is on ensuring a timely transition to a carbon neutral economy. Companies and consumers can gradually adjust their behaviour, thereby avoiding the disruption to the economy caused by either a delayed transition or no transition at all. This was the message set out in the Bank of England’s 2019 proposed framework for the 2021 Biennial Exploratory Scenario (BES) exercise. This focuses on testing the resilience of the largest banks and insurers to the physical and transitional risks associated with different possible climate scenarios, and the financial system’s exposure more broadly to climate-related risk.

Michelle Radcliffe, a Senior Associate in the Insurance and Reinsurance Group at CMS in London, says that, Insurers are looking at the exposure to climate change across different lines of business, not least due to the growing tide of climate change litigation, particularly in the United States, Australia and Europe.

This includes the potential for claims against directors, banks, pension trustees, asset managers, design professionals, insurance brokers, solicitors, managing agents and auditors. Until recently, few would have thought that auditors would be challenging their clients’ management teams to assess and report the impact of climate change to their business.

Michelle Radcliffe refers to the significant growth in environmental law charities, which are either bringing or assisting individuals to bring targeted pieces of litigation – not to claim significant sums of damages, but to change patterns of behaviour and hold organisations to account. The developments in attribution science are also assisting litigants to evidence the extent to which companies are responsible for climate-related damages.

Shares are being purchased in organisations not solely to bring shareholder actions, but also to influence corporate strategic decisions. ShareAction, a charity seeking to promote responsible investment, collaborated with other investors to file a climate-related resolution at a European bank, seeking to force the bank to bring its energy financing in line with the aims of the 2015 Paris Agreement.

Tilman Niedermaier, a Dispute Resolution partner at CMS in Munich, believes that, There will be a continuing upswing in climate change cases based on human rights claims and that states will also likely face administrative law claims.

He points to a claim brought by Greenpeace Germany and three families against the German Government for failing to meet its commitment to reduce greenhouse gas emissions under Aktions-programm Klimaschutz 2020, its minimum obligations under the European Union (EU) Decision No. 406/2009/EC, as well as its obligations under the Paris Agreement. “More often, however, claimants will use the steadily increasing regulatory requirements as a lever and assert the violation of contract law,” he says, singling out the class action lawsuit against a major car manufacturer over the Dieselgate scandal. “Typically, in this latter category of cases, there will be multiple claimants with similar if not identical claims, making this category attractive for collective redress.”

Establishing green finance

ShareAction’s efforts to influence the bank’s financing strategy is very much aligned with radical changes in the investment segment. Financial institutions are gradually retreating from investments in polluting industries and are seeking climate-friendly investment strategies. In January 2020, BlackRock, the world’s largest fund manager, announced significant changes to its investment approach in an effort to promote sustainable investing. ESG funds are becoming increasingly attractive.

“Notwithstanding the current shock from the coronavirus, there is no shortage of available capital given the vibrancy and attractiveness of the clean energy sector, but there is a shortage of places to put it,” observes Munir Hassan, Head of the CMS Energy & Climate Change Group.

Longer term investing represents an even more challenging prospect. Identifying businesses that will stay relevant in a greener economy is not a straightforward task. Munir Hassan asks, “Who would invest in a car manufacturer that was not transitioning towards electric vehicles (EVs)? Do you want to invest in a business that won’t even exist in ten to 15 years?”

He believes that the world is entering an unprecedented phase where the key debates are not being framed by governments, but by the public at large seeking to play an active part in reducing and reversing climate change.

Driving cross-industry change

The value of many assets is becoming increasingly linked to their green credentials. Real estate, for example, may see a diminution of value if it is not carbon efficient.

CMS is putting itself at the heart of the debate. The Energy & Climate Change Group has established the Net Zero Forum, an initiative that brings together people from a variety of industries to share best practice. At the beginning of 2020, the group launched its Energy Transition: Evolution or Revolution report. Munir Hassan comments, “Management and board-level executives are alive to the short-term and long-term view of what profit and survival means in relation to these issues. Nobody wants to be one step behind.”

He believes that CEOs and senior executives are coming under increasing pressure from younger generations, including their children and family members, to address emissions and to minimise carbon footprints. Moreover, as businesses seek to attract the best graduates and younger talent, they are discovering that candidates are making choices based on a company’s ESG policies and strategies.

Of course, public commitments made by BP and others go beyond PR and the advancement of reputation. The need to reverse climate change has been portrayed as an existential crisis by the teenage climate change activist Greta Thunberg and others. It is not just vulnerable communities and environments that are under threat. The future of established global brands has been placed in the balance too.