ESG – Environmental, Social & Governance

At COP26 institution after institution came forward to make stronger commitments to what is now broadly seen in most countries as a common goal: to reduce global carbon dioxide emissions. In particular, the private sector stepped up to the plate. For example, the Glas­gow Fi­nan­ci­al Alliance for Net Zero posited a potential USD 130tn of private capital to accelerate the green tran­sition. COP26 also escalated the role of climate disclosures in achieving net zero. To achieve global comparability, the In­ter­na­tio­nal­Sustai­na­bi­li­ty Standards Board (ISSB) is to deliver a global baseline that gives investors in­for­ma­tion about the climate and sustainability risks in relation to companies they (may) invest in. Further, the UK introduced requirements for all listed companies to produce net-zero transition plans by 2023. These are seen as drivers for achieving climate-positive investing. International commercial lawyers have a crucial role to play in navigating and implementing the frameworks that emerge from COP26. Being guardians of the rule of law and facilitators of business and trade, lawyers will be 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 on three legal 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. Quite apart from the outcomes of COP26, with the private sector committing en masse to the climate agenda and the ability to scrutinise the private sector’s re­spon­se through climate disclosures, net zero plans and other actions they take, we anticipate that the issue of Climate Risk will continue to rise up boardroom agendas.