Climate change:

Liability risks for

businesses, directors
and officers
The coming wave of litigation
Contents

01 05 09 19
Introduction Climate change: Climate risks to Climate risks to
The facts business: Physical business: Transition

27 37 51 67
New standards: New standards: Climate-related New liabilities:
Climate laws and Market pressures financial Liability risks
regulation and the rise of ESG disclosures: From to businesses,
in investment and TCFD towards directors and
lending regulation? officers

85 90
The new horizon: Contributors
Opportunities and
strategies

Introduction
BUSINESS CAN NO LONGER IGNORE
CLIMATE CHANGE
The physical impacts of climate change,
such as extreme weather events and
changes in precipitation, are already
significantly impacting companies’ assets,
investments, workforce, supply chains,
input costs and outputs, and the cost of
capital and insurance.
To limit the worst effects of climate change,
the world must smoothly yet rapidly
transition away from fossil fuels. Regulation,
policy, changes in consumer habits and
investor pressure carry the potential to
devalue or ’strand’ carbon-intensive assets,
product lines, plant and business models.
In response to climate change, there is also
an ever-growing body of climate-related
law and regulation and increasing scrutiny
from regulators and enforcement bodies.
New laws and regulations, strategic climate
litigation and emerging duties of care are
giving rise to new liability risks.
Companies that fail to adapt to this changing
risk landscape may see impacts to their
profitability for a variety of reasons. They may
not be able to bear the costs of physical risks
to their operations or infrastructure. They
may become unable to attract investment.
They might fail to keep pace with changing
law and regulation, or they may simply fall
below the emerging best practice standards
set by their peers and become uncompetitive.
1 IPCC, Special Report: Global Warming of 1.5°C, Summary for Policymakers, 2018, https://bit.ly/2QzNDgw and Climate Action
Tracker, December 2018 Update, https://bit.ly/2XfHxpO
1
NIGEL BROOK
PARTNER, CLYDE & CO
PRESSURE IS BUILDING
In the last year we have witnessed a definitive
step change in momentum on climate action.
The effects of climate change are hard to
ignore: successive extreme weather events
have caused devastation around the world
and captured the public’s attention. The
international scientific community has warned
that a warming of even 1.5°C above pre-
industrial levels will have grave impacts on the
world’s ecosystems. Following current policies,
it is estimated that we are currently on track
for 3.3°C warming above pre-industrial levels
by the year 21001 and scientists are pressing for
urgent, concerted action to prevent irreversible
damage to the planet.
Against this backdrop, a Swedish schoolgirl’s
decision to strike from school every Friday
has spawned a global movement: the
children’s climate strikes. Adults are risking
arrest by taking direct action in the streets
and beyond with Extinction Rebellion.
Campaigners target the offices and branches
of banks, retailers, local authorities and
universities which continue to invest in coal
or other fossil fuels. Governments of the UK,
France, Canada and Ireland have all declared
a climate emergency, as have numerous
city councils, including London and Sydney.
A growing number of countries, cities, states
and companies are declaring ever more
ambitious net zero emissions targets.
A network of central banks and financial
regulators have expressed concern about the
impact of climate change on the financial
system and are pushing for greater and more
detailed climate-related financial disclosures.
Many high-profile institutional investors
with trillions of dollars under management
are looking for tools to understand their
portfolios’ climate risk and carbon exposures.
Climate change is the defining
issue of our time – and we are
at a defining moment. We face
a direct existential threat.
- António Guterres, Secretary General of the
United Nations2
Shareholder activism on climate change
is going mainstream. The biggest global
engagement initiative of institutional
investors is now focusing efforts to change
the behaviour of the world’s biggest
greenhouse gas emitters and deliver more
aggressive climate-related resolutions during
the annual general meeting season.
This year also saw the world’s largest
sovereign wealth fund committing to
divest from fossil fuels. The costs of clean
technology continue to tumble, making
incumbent high carbon technologies and
business models increasingly uncompetitive.
2 United Nations Secretary-General, Secretary General’s remarks on Climate Change, 2018, https://bit.ly/2oYV7Kl
3 Clyde & Co LLP, Climate Change: A burning issue for businesses and boardrooms, 2018, https://bit.ly/2X58ebw
4 Mark Carney, Speech: Breaking the Tragedy of the Horizon – climate change and financial stability, 29 September 2015,
https://bit.ly/2KQ1gFG
THE THREE-FOLD RISKS OF CLIMATE
CHANGE TO BUSINESS
When Mark Carney steps down as Governor
of the Bank of England next year, a key part
of his legacy will be his clear delineation of
the risks of climate change to business:
– Physical: the immediate risks arising from
weather-related events and slow onset
climatic changes
– Transition: the financial risks arising from
the transition to a lower-carbon economy
– Liability: the risk of actions initiated by
claimants who have suffered loss and
damage arising from climate change4
Physical climate risk consultancies, insurers,
and associations are assisting companies in
mapping their physical risks. International
organisations, regulators, standard-setting
bodies, investor groups and asset managers
are seeking to establish standards for
transition risks to be integrated into
investment decision-making.
Climate-related liability risk is less well
understood and less explored, however, this
is likely to change as climate change-related
litigation becomes more common.
Our first report on climate change risk:
A burning issue3 provided an overview of the
litigation and liability landscape.
 3

Our second report A rising tide5 traced – Surveys the current litigation landscape
the advent of strategic climate litigation and indicates where liability risks could
connected to greenhouse gas (GHG) arise in the near future (p.67)
emissions, from administrative and
– Discusses the opportunities for businesses
human rights cases, to the current raft
who can adapt their strategies to
of litigation being brought against oil
capitalise on them (p.85)
majors in the US by cities, states, and
private citizens. We welcome commentary and engagement
on the contents of this report.
This report, The coming wave:

– Delineates some examples of the

physical (p.9) and transition risks (p.19)
climate change poses to businesses
across various sectors

– Explores the current sources of black

letter and “soft” law, regulation and
standards relating to climate change
(p.27) through:

• National framework climate legislation,

carbon pricing, environmental
regulation, and net zero policy-making
(p.27)

• The rise of ESG factors in investment

and lending (p.37)

• Climate-related financial disclosures

(TCFD) (p.51)

5 Clyde & Co LLP, Climate Change: Liability Risks – A rising tide of litigation, 2019, https://bit.ly/2KCb5Hj
 5

Climate change:
The facts

Climate change is a change in global heaviest precipitation over continental

or regional climate patterns. It has
become synonymous with the term
“global warming”, an observed rise in
the average temperature of the Earth.
This rise is having serious environmental
consequences including rising sea levels,
more ferocious storms and more frequent
flooding and wildfires.
Scientific evidence indicates that the leading
cause of climate change over the last half
century is the increase in the concentration
of atmospheric GHGs, including carbon
dioxide (CO2), chlorofluorocarbons,
methane, tropospheric ozone, and nitrous
oxide. These GHGs absorb and radiate
heat, the “greenhouse effect”, resulting in
the current abnormal rate of rise in global
temperature. NASA’s Goddard Institute for
Space Studies estimates that the rate of
temperature increase has nearly doubled in
the last 50 years.6
Human activity in burning fossil fuels
and rapid deforestation increases the
concentration of GHGs in the atmosphere,
leading to the warming of the atmosphere
and oceans, intensification of the
areas, increasing upper-ocean acidity,
increasing frequency and intensity of
daily temperature extremes, reducing
Northern Hemisphere snow and ice and
raising global sea levels. Global warming
is having, and will continue to have, a
significant and detrimental impact on the
Earth and its entire ecosystem. CO2 stays
in the atmosphere for thousands of years
and the more GHGs that are put into the
atmosphere, the more serious the climate
effects will be.
There is growing concern about a climate
change tipping point: that the effects of
climate change could cause a cascade. A
Columbia University School of Engineering
and Applied Science paper published
in Nature in January 20197 considered
how changes in the hydrological cycle
(droughts, floods and drying) may already
be affecting the capacity of the Earth’s
vegetation to trap atmospheric carbon.8
In light of other research funded by NASA,
there is also concern that a thawing of
the permafrost in the Arctic will unfreeze
Arctic lakes storing methane, a GHG.9

NASA, Global Warming, 2010, https://climate.nasa.gov/vital-signs/global-temperature/

6 

Green, Seneviratne, Berg, Findell, Hagemann, Lawrence, and Gentine, Large influence of soil moisture on long-term terrestrial
7 
carbon uptake, 2019, https://go.nature.com/2G4dfMH
Holly Evarts, Climate Change Tipping Point Could Be Coming Sooner than We Think, 2019, https://bit.ly/2S3zw3I
8 

Ellen Gray, NASA, Unexpected future boost of methane possible from Arctic permafrost, 2018, https://go.nasa.gov/2wqkPe9
9 
Climate change: The facts

Reducing the amount of GHGs emitted

by human activity and (in time) removing
these gases from the atmosphere appears
to be the only way to avoid much of the
projected warming and its associated
global-scale effects.

According to the Fifth Assessment Report by

the Intergovernmental Panel on Climate
Change (AR 5), global emissions will need
to be cut by at least 40% in the next two
decades to keep temperature increase
below 2°C above pre-industrial levels. To
keep temperature increase below 1.5°C10
there will need to be net zero carbon
emissions by 2050.11

According to AR 5, reaching net zero

emissions will require action in four areas:

1. Decarbonisation of electricity

2. Rapid electrification using clean

electricity and switching to lower-
carbon fuels

3. Greater efficiency and less waste

in all sectors

4. Improved carbon sinks12

Measures to adapt buildings and

infrastructure to rising temperatures and
their effects could ameliorate some of the
impacts of projected climate change on
economies and human health.

10 Intergovernmental Panel on Climate Change

Special Report: Global Warming of 1.5°C, 2018,
https://www.ipcc.ch/sr15/
11 Intergovernmental Panel on Climate Change,
Fifth Assessment Report (AR 5),
https://bit.ly/2RKP6yB
12 The World Bank, Decarbonizing Development:
Three Steps to Zero-Carbon Future, 2015,
https://bit.ly/322874o and see: IPCC Fifth
Assessment Report, https://bit.ly/1mBK9EO
7
 9

Climate risks to
business: Physical

Climate change poses significant physical Slow onset events evolve gradually from
risks to business. From reliability of supply incremental changes occurring over many
chains, through to a greater need for years, whereas a rapid onset event may be
cooling and refrigeration, to an increased a single event that occurs in a matter of
likelihood of extreme weather events, days or even hours.
companies need to be aware of the key
Businesses are affected by long-term
physical risks to their business and to the
changes (sea level rise; changes in
economy generally.
temperatures and precipitation; ocean
Physical risks resulting from climate change acidification; glacial retreat ; salinization;
can be event-driven (acute) or stem from land and forest degradation; loss of
longer-term shifts in climate patterns (chronic). biodiversity; desertification) and extreme
events, all of which are impacts of
climate change.13

GLOBAL ECONOMIC LOSSES FROM EXTREME WEATHER EVENTS HAVE INCREASED14

Insured and uninsured losses North atlantic

Yangtze river flood

Hurricane Sandy
Thailand floods

hurricanes including
The great flood (US)
Hurricane Andrew

Katrina, Rita and Wilma

$250bn

$200bn

$150bn

$100bn

$50bn

$0bn
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Note: The labelled events contributed significantly but not exclusively to losses in those years

Intergovernmental Panel on Climate Change, Key Economic Sectors and Services, 2018, https://bit.ly/31XZAPS
13 

Bank of England, KnowledgeBank, Climate change: what are the risks to financial stability? https://bit.ly/2W6kkBW
14 
Climate risks to business: Physical

Acute events can cause loss of life, physical damage Potential change in enterprise value
to infrastructure, interruptions to water and from climate change, worldwide, %
electricity supply, and effects on transportation,
-20 -15 -10 -5 0
all seriously disrupting economic activity.

Chronic changes to the climate can cause long- Oil & gas

term risks to the reliability of supply chains and

increase operating costs. For example, longer- Utilities
lasting or more widespread droughts can impact
water availability, which can diminish output from Chemicals
many industries and increase overheads as water
is brought in. An overall increase in temperature Goods &
services
can affect the safety and reliability of physical
infrastructure, the longevity and operations of Technology
physical assets, operating costs (for example, an
increased need for cooling and heating), transport
Listed company, March 2018 Median
needs and employee productivity or safety.
Source: Schroders
A Schroders study in August 2018 found that
properly accounting for physical risks to
corporate assets could on average shave 2-3% INDUSTRY-BASED RISKS
off the total market value of over 11,000 globally
listed companies.15
In a globalised world, no industry or
business can avoid the physical effects
of climate change and the impacts, already
ubiquitous and significant, are growing. Each
industry will exhibit different vulnerabilities.

15 The Economist, Business and the effects of global warming, 2019 https://econ.st/2ZRrAmg
see also: Schroders, Climate Progress Dashboard, https://bit.ly/3233N54
 11

IMPACT ON INDUSTRY SECTORS AGRICULTURE / FOOD

IS UNEQUAL
Agriculture is already deeply affected
Industries exhibit different by climate change. Shifting seasons,
vulnerability profiles heatwaves and cold snaps are modifying
the quantity and quality of crops. Changes
Materials
in soil drainage caused by drought,
Utilities flooding or diversion of water courses may
Pharmaceuticals bring about soil erosion and reduction
& biotechnology
in crop diversity. Traditional crops may
Food, beverage
& tobacco increasingly become unsustainable in
Semiconductors parts of the world.
Technology hardware Extreme weather events – wildfire,
& equipment
Commercial & windstorm, flooding – can damage
professional services crops and disrupt supply chains. Water
Energy shortages lead to increased operating
Household & costs and difficulties in irrigation.
personal products
Changes in weather could also lead to an
Capital goods
increase in pest or insect populations and
Consumer durables encourage the growth of bacteria, causing
& apparel
harm to crops and food in storage and
Food & staples retailing
increasing the costs of properly treating,
Consumer services transporting or preserving food.
Automobiles
& components One of the most salient examples of
Health care equipment climate change’s effect on business is
& services
the wine industry – with climate change
Real estate
posing risks to established vineyards
Transportation in California, France, Chile and South
Africa. This industry, so sensitive to heat
Diversified financials
and irrigation, has been grappling with
Telecom services the effects of chronic changes such as
average temperature levels and increased
Retailing
incidence of extreme weather events,
Insurance such as drought, hailstorm and frost.16
Media

Software & services

Banks

0 20 40 60 80

Operations risk Supply chain risk Market risk

 bby Schultz, Barron’s, How Climate Change is

16 A
©2017 Four Twenty Seven, Inc. All rights reserved.
Affecting Fine Wine, 2019, https://bit.ly/2ECrjLa
Climate risks to business: Physical

A secondary effect on agriculture is the Electricity production at nuclear

public shift in some countries away from
consuming food that is carbon-intensive,
primarily meat, while promoting the
consumption of alternative products
like legumes, nuts and seeds. Shifting
preferences could lead to profound
changes to agricultural operations.17
sites can be halted because of high
temperatures20 and drought conditions
also expose utilities to fire risk. Australian
telecommunications company Telstra has
expressed concerns about the risks to over
10,000 phone towers – about half of its
national network – from bushfire.21

UTILITIES AVIATION

Thermal and nuclear power plants rely
on water for cooling. As water supplies
become intermittent, utilities will incur
higher costs for pumping, treatment and
road transport. If water sources warm,
the efficiency of cooling mechanisms
decreases, lowering the longevity and
raising the costs of running physical assets.
Because of the need for water cooling, many
power plants are located near shorelines,
making them more vulnerable to extreme
coastal weather and sea-level rise. For
example, in the US, nine nuclear-power
plants are located within two miles of the
ocean.18 According to the US Department
of Energy, 44 power plants were in areas
flooded by Hurricane Irene and 69 were in
areas flooded by Hurricane Sandy.19
The aviation industry stands to be affected
by changes in temperature, precipitation,
storm patterns, sea level and wind patterns.
Temperature change affects aircraft
performance, infrastructure and demand
patterns, while changes in precipitation
patterns could increase delays and
cancellations. More frequent, stronger
storms will disrupt flights, and rising sea
levels could reduce airport capacity and
cause network disruption. Changing wind
patterns could increase turbulence and
affect travel times.22
The aviation sector has committed to
carbon-neutral growth from 2020.23
However, air traffic growth is currently
outpacing efficiency improvements,
meaning carbon neutrality will require
airlines to offset climate impacts,
increasing their costs.

17 Damian Carrington, The Guardian, Huge reduction in meat-eating ‘essential’ to avoid climate breakdown, 2018,
https://bit.ly/2yqcKaq
18 McKinsey & Company, Why, and how, utilities should start to manage climate-change risk, 2019, https://mck.co/2IPstHH
19 Ibid.
20 Reuters, France EDF may halt four nuclear reactors due to heatwave, 2018, https://reut.rs/2Lkzhxu
21 Australian Broadcasting Corporation, This is the climate change future according to Australian corporations, 2019,
https://ab.co/2KG6JyM
22 CAPA, Climate change: its impact on aviation. The time to plan is now, 2019, https://bit.ly/31UZd8U
23 IATA, Climate Change: Three targets and four pillars, 2019, https://bit.ly/2YiUI5v
IATA Pressroom, Bold Industry Commitment on Environment, 2009, https://bit.ly/2Nftegp
 13

CONSTRUCTION SHIPPING

Climate change will compound the
already significant impact of weather on
the construction industry. Flooding and
excessive heat can impact the safety and
operation of construction sites, as well
as the durability and performance of
building materials.24
The cost of insurance premiums may
be affected too. For example, Australian
Dexus Property Group notes that insurers
have increased the costs of insuring
specific Far North Queensland properties
due to cyclone risk, with the deductible
for ‘high risk’ properties now up to
AUD 100,000, as compared with a more
standard excess of AUD 10,000 per event.25
Architects, engineers and project managers
are increasingly considering sustainability
in the design and construction phase of
projects and reconsidering the viability of
future building sites in light of increasing
risks of sea level rises, flooding or
desertification. They are also considering
the operating parameters of buildings
that may be subjected to more extreme
heat or cold.
A rise in sea levels, storm surges and
high winds can imperil ports, particularly
in less sheltered areas, as well as ports
with crane operations;26 while high
temperatures can jeopardise river
shipping. A case in point was the 2018
drought in Germany, which made crucial
waterways like the Rhine impassable to
ships. It is estimated the drought shaved
0.7 percentage points off the country’s
growth that year.27
Calls for the shipping industry to reduce
GHG emissions pose challenges and
increase costs as well as presenting
opportunities for the development and
exploitation of new technologies.28 The
industry is already working to adapt
to the new International Maritime
Organisation regulations to reduce
sulphur oxide emissions from 1 January
2020.29 Further regulations may be on
the horizon: countries at the IMO agreed
in 2018 to at least halve emissions from
shipping by 2050.30

24 Mark Stewart, Xiaoming Wang and Minh Nguyen, Climate Change Impact and Risks of Concrete Infrastructure
Deterioration, 2010, https://bit.ly/2XG3P3h
25 Australian Broadcasting Corporation, This is the climate change future according to Australian corporations, 2019,
https://ab.co/2KG6JyM
26 Paul Wright, Marine Climate Change Impacts Partnership: Science Review, Impacts of climate change on ports and
shipping, June 2013, https://bit.ly/2XbFvHa
27 Leonid Bershidsky, Bloomberg, Opinion: Is climate change drying up German rivers – and growth?, Bloomberg, 2019,
https://bloom.bg/2Jc7I6M; William Wilkes, Insurance Journal, Climate Change, Shrinking Glaciers Threaten Rhine River
Shipping Access, 2019, https://bit.ly/2xi7XYg
28 International Maritime Organization, UN body adopts climate change body for shipping, 2018, https://bit.ly/2EJEh7R
and IMO, UN agency launches new global project to tackle maritime GHG emissions, 2019, https://bit.ly/2E5XyDa
29 IMO, Sulphur 2020 - cutting Sulphur oxide emissions, https://bit.ly/2nxohAh ; Jonathan Goldberg and Jason Bordoff,
Financial Times, Opinion: Oil market in flux amid uncertainty over shipping’s fuel rules, 2019, https://on.ft.com/2Hj9UIR
30 UN Climate Change News, World Nations Agree To At Least Halve Shipping Emissions by 2050, 2018, https://bit.ly/31TT5xx
Climate risks to business: Physical

RETAIL AND MANUFACTURING BANKING

Extreme weather events have also taken
a toll on the retail and manufacturing
sectors. For example, in 2017, hurricanes
Irma and Maria caused significant damage
to pharmaceutical manufacturing
operations in Puerto Rico (which account
for nearly 30% of the island’s GDP) and
prompted drug manufacturers to plan
for future disasters by putting in place
more robust communications and power
systems.31 During the 2017 hurricane
season, the American pharmacy and retail
chain CVS Health reportedly suffered USD
57m in losses as 1,263 of its 9,800 locations
experienced short-term closures due to
the storms.32
Banks increasingly recognise climate
change as a mainstream financial risk and
consider environmental and social risks in
assessing risk for credit facilities and capital
market transactions. Mortgage portfolios,
for instance, are susceptible to climate risk
from acute or chronic perils such as flooding,
storms, mud-slides and water level rise.35
The UK Committee on Climate Change has
estimated that rising sea levels alone will put
1.5m properties in the UK at risk of coastal
flooding while those threatened by coastal
erosion will rise almost 15 times by 2085
compared with today.36 Many other types of
portfolio lending may also be impacted by
climate change.36

Extreme weather can impact any industry’s
supply chains. A paradigm example is the
floods in Thailand in 2011, which had
a global impact on computer and car
production, because the production of key
component parts for those industries was
concentrated in the flooded area.33 Global
insurer Allianz has warned that disruption
to supply chains as a result of climate
change has already led to an increase in
business interruption insurance claims.34
Reflecting the risks to UK banks, in
September 2018, the Bank of England’s
Prudential Regulation Authority published:
Transition in thinking: the impact of climate
change on the UK banking sector outlining
the risks of climate change (both physical
and transition) that the industry should
be considering, including credit, market
and operational risks.37 Further, in his
Mansion House speech in June 2019, Mark
Carney announced that in autumn 2019
the Bank of England will begin to stress

Lisa Jarvis, Chemical & Engineering News, Hurricane Maria’s lessons for the drug industry, 2018, https://bit.ly/2NR3yFP
31 
Karen Langhauser, Pharma Manufacturing, Puerto Rico Pharma: Battered by Unbroken, 2018, https://bit.ly/2Yajnt7
Leslie P. Norton, Barron’s, An Exclusive Look at the Companies Most Exposed to Climate Change Risk — and What They’re Doing
32 
About It, 2019, https://bit.ly/2XzmXQn
Haraguichi and Lall, International Journal of Disaster Risk Reduction, Flood risks and impacts: A case study of Thailand’s floods
33 
in 2011, International Journal of Disaster Risk Reduction, 2014, https://bit.ly/2Nmdbx2
34 James Fernyhough, Financial Review, Climate change hits supply chains: Allianz, 2019, https://bit.ly/2Z9gjyi

University of Cambridge Institute for Sustainability Leadership, Physical risk framework: Understanding the impact
35 
of climate change on real estate lending and investment portfolios, 2019, https://bit.ly/2V5XUje
ECO SECURITIES with special assistance from United Nations Environment Programme Finance Initiative, Global Climate
36 

change Risk to Bank Loans, https://bit.ly/2XCrJN3

Bank of England Prudential Regulation Authority, Transition in thinking: The impact of climate change on the UK banking sector,
37 
2018, https://bit.ly/31YAOiq
 15

test the ability of the UK financial system
to withstand climate risk and manage the
transition to a carbon neutral economy.
MINING
A scarcity of water in mining operations
can lead to higher operational costs and
potentially increased friction with local
communities or stricter permitting rules. It
may be more difficult to secure approvals
for operations.38 For example, in South
Africa, an authorisation for a mine was
overturned on the basis that the climate
change impact of the mine had not been
properly considered by the authorities.
Climate change effects may also lead to
higher regulatory burdens around tailings
dams and other infrastructure as these
may become more vulnerable to seepage,
increasing the possibility of pollution,
environmental harm and resulting claims.
(RE)INSURANCE
Weather-related losses in the insurance
sector have been increasing from an
average of around USD 50bn per annum
in the 1980s (adjusted for inflation) to
around USD 200bn per annum over the
past decade.39 According to the UN Office
for Disaster Risk Reduction, in the last
20 years there has been a rise of 151%
in direct economic losses from climate-
related disasters.40
A few examples of recent losses include:
–– Hurricanes Florence and Michael, which
hit the US in the second half of 2018,
are believed to have resulted in insured
losses of more than USD 10bn41
–– The extreme freeze that hit the UK
early in 2018 resulted in insurers paying
a record amount for burst pipes –
GBP 194m in a three-month period42
–– 2018’s extreme heatwave led to more
than 10,000 UK households submitting
insurance claims for damage caused
by subsidence, at a cost of more than
GBP 64m43

Scientists anticipate that the incidence of

All of the above will impact insurance and
disaster losses will become more and more
insurability in the future. Climate change’s
frequent.
toll on the (re)insurance industry is already
being keenly felt.

Barbara Lewis, Reuters, Water scarcity tops list of world miners’ worries, 2017, https://reut.rs/2NhXAP8
38 

Julia Kollewe, The Guardian, Lloyd’s call on insurers to take into account climate-change risk, 2014, https://bit.ly/2YeWRzl
39 

UN Office for Disaster Risk Reduction, UN 20-year review: earthquakes and tsunamis kill more people while climate change
40 
is driving up economic losses, https://bit.ly/2Edh434
Association of British Insurers, What’s the impact of climate change on insurance?, https://bit.ly/2vRgzCw
41 

Association of British Insurers, What’s the impact of climate change on insurance?, https://bit.ly/2vRgzCw
42 

Association of British Insurers, What’s the impact of climate change on insurance?, https://bit.ly/2vRgzCw
43 

Lucia Bevere, Swiss Re Institute, Sigma 2/2019: Secondary natural catastrophe risks on the front line, 2019,
44 
https://bit.ly/2ZS1r7Z
Climate risks to business: Physical

Swiss Re reported that 2018 was the

fourth highest year for insured losses due
to natural catastrophes,44 and Munich Re
reported that 2017 was the highest year
of insured losses in history.45 Insurers in
Australia, including QBE, have identified
a “virtually certain” risk of “increased
severity of extreme weather events such
as cyclones and floods.”46

Insurers have warned that the world could

become uninsurable if climate change
continues unabated.47

Munich Re, Natural catastrophe review: Series of hurricanes makes 2017 year of highest insured losses ever, 2018,
45 
https://bit.ly/2CBtn7U
James Purtill, Australian Broadcastign Corporation, This is the climate change future according to Australian corporations, 2019,
46 
https://ab.co/2KG6JyM
Will Bugler, Acclimatise News, World may become ‘uninsurable’ with climate change says IAG, 2019, https://bit.
47 
ly/2Lko7c1;Charlie Wood, Reinsurance News, IAG says climate change could make world ‘uninsurable’: Financial Review,
2018, https://bit.ly/2qQQiE6;
Wall Street Journal, Climate Change Is Forcing Insurance Industry to Recalculate, https://on.wsj.com/2Oww14a;
Environmental Finance, Climate change of +4C could be ‘uninsurable’ says AXA Chairman, https://bit.ly/1OdXNfK;
AXA, AXA accelerates its commitment to fight climate change, 2017, https://bit.ly/2kqB6tK
17
 19

Climate risks
to business:
Transition

Transition risks are the indirect financial
risks that will occur as the economy moves
away from fossil fuels towards a low-
carbon future.
Limiting GHG emissions will require a
profound shift in the fossil fuel-based
economy. Below are some projected 2100
temperature rises, based on various GHG
emissions pathways, measured by billions
of tonnes of CO2 equivalent per year.

POSSIBLE TEMPERATURE RISES BASED ON EMISSIONS PATHWAYS

120 FOSSIL FUEL AND LAND-USE CO2 EMISSIONS

In gigatons, with corresponding temperature rise, projected to 2100 <6°C

100
<5°C
Net CO2 emissions (gigatons)

80

60
<4°C

40

20
<3°C

0
Net-negative global emissions <2°C
-20
2000

2040

2080
2060
1980

2020

2100

Source: Global Carbon Project 2017

Climate risks to business: Transition

Carbon emissions have to decline THE GROWTH OF RENEWABLES

by 45% from 2010 levels over the
next decade in order to reach Even without carbon taxes or subsidies on
renewables, solar and wind technologies
net zero by 2050. This requires a can now produce electricity more cheaply
massive reallocation of capital. than fossil fuels in a growing number of
If some companies and regions.51 The costs for solar photovoltaic
modules have fallen by 38% in the last
industries fail to adjust to this 12 months, and battery prices for storage
new world, they will fail to exist. have decreased by 79% since 2010.52
A recent United Nations Environment
- Mark Carney, François Villeroy de Galhau, Programme study indicates that more
and Frank Elderson48 new power capacity is now generated
from renewable energy than from burning
Transition risks will arise as governments fossil fuels.53
support and subsidise low-carbon McKinsey predicts that energy demand
industries and regulate and tax high- could plateau around the year 2030
carbon ones.49 At the same time, and demand for fossil fuels begin to
improved technologies (often funded decline worldwide due to the increasing
by green investments and policy) are share of services as part of GDP. It is
leading to decreased costs of renewables, anticipated that this will increase energy
improved battery storage, better energy efficiency, rates of electrification, and
efficiency, and carbon capture and significantly expand the deployment of
storage technologies.50 renewable technologies.54

48 Open letter from the Governor of Bank of England Mark Carney, Governor of Banque de France François Villeroy de
Galhau and Chair of the Network for Greening the Financial Services Frank Elderson, Open letter on climate-related
financial risks, 2019, https://bit.ly/2VaUEXs
49 Bank of England, Climate change: what are the risks to financial stability?, https://bit.ly/2ZJDm26

50 ClimateWise, Transition risk framework, Managing the impacts of the low carbon transition on infrastructure investments,
https://bit.ly/2FArKqv and FSB-TCFD, Recommendations of the Task Force on Climate-related Financial Disclosures,
June 2017, https://bit.ly/2EsFKny
51 Nicholas Stern, London School of Economics Grantham Research Institute on Climate Change and the
Environment, Sustainability and internationalism: Driving development in the 21st century, 2019, https://bit.ly/2Xu0dS1
52 Veronika Henze, Bloomberg NEF, Tumbling Costs for Wind, Solar, Batteries Are Squeezing Fossil Fuels, 2018,
https://bit.ly/2uG0ljX
53 Frankfurt School, Global Trends in Renewable Energy Investment 2018, 2018, https://bit.ly/2Tgmbqi

54 McKinsey & Company, The decoupling of GDP and energy growth: A CEO guide, 2019, https://mck.co/2KDO2fj
 21

ENERGY DEMAND MAY PLATEAU

650
Renewables
571
Rapid +1416 overall
industrialisation
in China

Unprecedented rise Fossil fuels

Expansion of global in Western living
and local transport standards
fueled by coal
Industrialisation of and oil
Western economies

Energy use still

largely biomass

1850 1900 1950 2000 2016 2030 2050

Compound annual
0.9% 1.7% 2.9% 1.9% 0.8% 0.1%
growth rate

Source: McKinsey’s Energy Insights Global Perspective, January 201955

55 McKinsey & Company, The decoupling of GDP and energy growth: A CEO guide, 2019, https://mck.co/2KDO2fj
Climate risks to business: Transition

MANAGING THE TRANSITION In addition to the need for a managed

transition, in view of protests in France and
elsewhere around carbon taxes, there is
The transition must be managed carefully;
also growing academic discussion around
too abrupt a transition could destabilise
a ‘just transition’, which takes into account
markets and lead to what Mark Carney
the needs of citizens, including the many
has termed a “climate Minsky moment”56 –
people currently employed in the fossil
a major collapse of asset values because of
fuel industry.59 The major policy shift that
an improper understanding of the market
is required to limit global warming will
risk of climate change.57 Work carried
need to balance the needs and wishes of
out for the UN Principles for Responsible
many who have taken to the streets in
Investment and launched at the Global
the last years, from the ‘gilets jaunes’, to
Climate Action Summit in San Francisco
Extinction Rebellion protestors calling
in 2018 postulates that there is a high
for more ambitious carbon targets, to the
probability that we will see an “inevitable
needs of the next generation participating
policy response” to climate change, most
in the children’s school strikes for climate.
likely between 2025 and 2030.

If there is to be such a global sea-change

in policy in the next five years then the
greater the gap between business as usual
and climate-resilient strategies, the more
disruptive the transition will be. If the
‘inevitable policy response’ does crystallise,
it will hit hardest those businesses and
investments which are most exposed and
least prepared.58
STRANDED ASSETS
If the transition to a low carbon economy is
rapid or disorderly, there is a significant risk
of stranded assets.60
Stranded assets are assets that are impacted
by unanticipated downward revaluations.
Asset-stranding is a natural feature of any
economy, but climate change could strand
assets at an unprecedented scale.

56 Bank of England Prudential Regulation Authority, Transition in thinking: The impact of climate change on the UK banking sector,
2018, https://bit.ly/31YAOiq
57 Richard Partington, The Guardian, Mark Carney warns of climate change threat to financial system, 2018,
https://bit.ly/2v0snqv
58 PRI, The inevitable policy response to climate change, 2018, https://www.unpri.org/download?ac=5363

59 LSE, Climate change and the just transition – A guide for investor action, 2018, https://bit.ly/2XtZakY

60 Lloyd’s of London, Stranded Assets, The transition to a low carbon economy, 2017, https://bit.ly/2YflTOX
The Cambridge Institute for Sustainability Leadership (CISL). Transition risk framework: Managing the impacts
of the low carbon transition on infrastructure investments, 2019, https://bit.ly/2FArKqv
 23

Globally, it is estimated that a third of oil The world is rapidly

reserves, half of gas reserves and over 80% of
transitioning to a low carbon
current coal reserves must remain unused
to meet the Paris Agreement targets.61 If the economy, driven principally by
market (or the companies concerned) were the decisions of governments,
to acknowledge that these resources will
business leaders, investors and
never be exploited, it would lead to changes
in the value of investments held by banks, consumers. Companies that fail
insurance companies and other investors in to respond to these forces risk
coal, oil and gas.62
being left behind.64
Increased physical risks and chronic climate
changes could also render operating costs - Geoff Summerhayes, Executive Board Member,
prohibitive, potentially stranding entire Australian Prudential Regulation Authority
industries or regions.63 Investments being (APRA)
made now could be creating potential
future stranded assets and so this issue The International Energy Agency (IEA)
needs to be an important consideration in estimates that to finance the transition,
any investment decision process. USD 3.5trn of energy sector investments
will be needed on average each year
INVESTMENT CHANGES between 2016 and 2050 (compared with
USD 1.8bn in 2015).65 This refocusing of
international investment priorities will give
To meet the Paris Agreement targets, rise to opportunities as well as risks.
supply-side investments will need to
fall in fossil fuels and rise in renewables.
Demand-side efficiency investments in
buildings, industry and transport will also
need to grow.

61 Christophe McGlade and Paul Ekins, Nature Research, The geographical distribution of fossil fuels unused when limiting
global warming to 2°C, 2015, https://go.nature.com/2EsLr25
62 LSE Grantham Institute, What are stranded assets?, https://bit.ly/2NmFsUu
Bank of England, Climate change: what are the risks to financial stability?, https://bit.ly/2W6kkBW
63 Lloyd’s, Stranded Assets, The transition to a low carbon economy, https://bit.ly/2YflTOX

64 Australian Prudential Regulation Authority, APRA to step up scrutiny of climate risks after releasing survey results, 2019,
https://bit.ly/2TifDCw
65 International Energy Agency, Perspectives For The Energy Transition, 2017, https://bit.ly/2FBZKkQ
Climate risks to business: Transition
INTANGIBLES - REPUTATIONAL RISK
AND CONSUMER PREFERENCE66
Shifts in consumer demand can also
pose a transition risk. As the risks of
climate change are socialised and
mass environmental activism becomes
increasingly prolific in news media, more
citizens are considering moving toward
a ‘circular economy’, arguing for more
ethical and sustainable consumption
practices, boycotting plastic packaging
and advocating ‘zero waste’ societies.
Companies could face reputational risks if
their products are perceived to be harmful
to the environment.
66 CDP, Fast Moving Consumers, Which Consumer
Goods companies are ready for the low-carbon
transition, 2019, https://bit.ly/2YONjf4
“FAST-ACTING” PLASTIC BANS
Faced with public outcry against certain
plastic products, there have been a number
of swift legislative responses in different
jurisdictions. These present interesting
case studies in transition risks, particularly
in the sense that media and public concern
leads to legislation that may effectively
‘strand’ entire product lines, companies
or lines of business. For example:
–– The Scottish Government has brought
in regulations to ban the manufacture
and sale of plastic-stemmed cotton buds
–– England will ban plastic straws, drink
stirrers and cotton buds with plastic
stems starting in April 202067
–– The European Parliament has voted
to ban single-use plastic cutlery, cotton
buds, straws and stirrers by 202168
–– Tanzania has banned all plastic bags,
becoming the 34th African country
to do so69
–– The Canadian Government has
announced a ban on single-use
plastics, which will come into effect
as early as 202170
67 The Guardian, Plastic straws, cotton buds and
drink stirrers to be banned in England, 2019,
https://bit.ly/2WiEGuK
68 The Guardian, European parliament votes to ban
single-use plastics, 2019, https://bit.ly/2YtAWox
69 News24, Tanzania latest African nation to ban
plastic bags, 2019, https://bit.ly/2XB3VZW
70 BBC News, Canada to ban single-use plastics as early
as 2021, 2019, https://bbc.in/2R2ARF8
25
 27

New standards:
Climate laws
and regulation

Even before the adoption of the Paris
Agreement in 2015, there was a growing
body of climate-related law and regulation
seeking to curb GHG emissions and
promote climate-friendly practices.
Since Paris, climate-relevant policy, law
and regulation has been implemented
at an extraordinary rate in jurisdictions
across the world, meaning that companies
must adapt quickly and carefully to
shifting legal and regulatory landscapes.
INTERNATIONAL LAW
The Paris Agreement was the culmination
of years of work by the international
community to bring about a universal
multilateral agreement on climate change.
The Framework Convention on Climate
Change (UNFCCC) came into being in
1992. The next major milestone was the
Kyoto Protocol, which committed certain
countries to quantified reductions of
GHG emissions from 2008 to 2012. Other
important international agreements on
the road to Paris include the Copenhagen
Accord of 2009, Cancun 2010, Durban
2011, Doha 2012, and Warsaw 2013.
The Paris Agreement builds upon rules
set out under the UNFCCC and Kyoto
Protocol. It creates international legal
obligations on ratifying countries to
implement policies, laws and procedures
to bring their emissions in line with global
temperature targets and self-defined
emissions reduction obligations.
New standards: Climate laws and regulation

THE PARIS AGREEMENT AND BEYOND
The 197 ratifying countries of UNFCCC are
called the “Parties to the Convention”.71
At the 21st Conference of the Parties
(“COP21”) in Paris on 12 December 2015,
the Parties to the Convention reached a
landmark agreement on climate change:
The Paris Agreement.
The Paris Agreement sets out a global
action plan to put the world on track
to avoid dangerous climate change by
limiting global warming to well below 2°C
and pursuing efforts to limit it to 1.5°C.72
The Paris Agreement entered into force
on 4 November 2016 and has been ratified
by 185 countries to date.73
Current NDC pledges are not on track to
meet the stated goals of the Agreement.
However, each round of pledging will
be accompanied by five-year collective
reviews – ‘global stocktakes’ –with the
stated aim of ratcheting-up commitments
to achieve GHG emissions consistent with
warming below 2°C.
At the most recent COP24 in Katowice,
Poland in December 2018, the Parties
agreed the ’rulebook’ designed to
make the Paris Agreement operational
from 2020. The rulebook requires that
countries must submit their new or
updated first NDCs in 2020 and report on
their emissions – and progress in cutting
them – every two years.76

The Paris Agreement requires all party

countries to put forward their best efforts
for GHG reductions through “nationally
determined contributions” (NDCs)74, and
to strengthen such efforts in the years
ahead. This includes requirements that
all parties report regularly on their
emissions and on their implementation
efforts.75 Ratifying states have legally
binding commitments to submit and
implement NDCs and increase the level
of ambition over time.

71 UNFCCC secretariat (UN Climate Change), What is the United Nations Framework Convention on Climate Change?,
https://unfccc.int/node/10831/
72 European Union, Paris Agreement, https://bit.ly/2mhoFQi

73 UN Climate Change, Paris Agreement - Status of Ratification, https://bit.ly/2yRc1CN

74 UN Climate Change, Nationally Determined Contributions (NDCs), https://unfccc.int/focus/indc_portal/items/8766.php

75 UN Climate Change, Progress tracker: Work programme resulting from the relevant requests contained in decision 1/CP.21,
2018, https://bit.ly/2EVSoXT
Report of the Conference of the Parties on its twenty-fourth session, held in Katowice from 2 to 15 December 2018,
76 
https://unfccc.int/sites/default/files/resource/10a1.pdf
 29

TIMELINE FOR CLIMATE PLEDGES: THE PARIS “RATCHET MECHANISM”

How countries plan to raise the ambition of their climate pledges.

The Paris ‘ratchet mechanism’ is designed to steadily increase amibition
over time, ensuring that the world reaches net zero emissions in the
second half of the century and keeps temparature rise ‘well below 2C’.

2015 2016 2017 2018 2019

1. Climate plans submitted
Countries submit their first round
of climate pledges (NDCs). Some
cover the period up to 2025, some
up to 2030.
2. Facilitative dialogue
To take stock of collective efforts of
countries in relation to the long-term
goal of the agreement and to inform
the preparation of the next round
of pledges.

2023 2022 2021 2020

4. Global stocktake 3. By 2020
On mitigation, adaptation Countries with 2025 targets communicate
and finance. their second round of climate pledges, while
countries with 2030 targets communicate or
update their pledge. New climate pledges will
then be submitted every 5 years.

2024 2025 2026 2027 2028

5. By 2025 6. Second
Countries submit their third round stocktake
of climate pledges.

2030 2029
New standards: Climate laws and regulation

NATIONAL CLIMATE LAWS adopted in 199778 there were only 70 such

laws and policies, meaning there has been
an over twenty-fold increase in climate
Countries have implemented national
law and policy in the past 20 years.79
climate frameworks to set medium-term
and long-term targets consistent with Over 70% of global GHG emissions are
their NDCs. These frameworks include now covered by nationally binding
mechanisms to measure domestic GHG climate legislation or by executive climate
emissions and to review and “ratchet” strategies with a clearly designated
national ambition on emissions reductions coordinating body.80 These national
over time, as required under the Paris climate laws address both mitigation
Agreement. (reducing emissions) and adaptation
(climate resilience) and cover a wide
Globally, there are now over 1,500 national
range of topics including environmental
laws and executive acts addressing
regulation, forestry, electricity and heating,
climate change.77 To give some sense of
agriculture, transportation, buildings,
the importance of this global legislative
infrastructure and disaster risk reduction.
landscape, when the Kyoto Protocol was

Total number of climate-related legislative and executive acts over time

1600 Executive Legislative

1200

800

400

0
< 1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

77 Grantham Research Institute on Climate Change and the Environment, Global trends in climate change legislation and
litigation: 2018 snapshot, 2018, https://bit.ly/2NfS936
78 UNFCC, Kyoto Protocol – Targets for the first commitment period, https://bit.ly/2LuhRPd

79 Alina Averchenkova, Real Instituto Elcano, Legislating for a low carbon and climate resilient transition: learning from
international experiences, 2019, https://bit.ly/2XwgAxj;
Nachmany, Fankhauster, Setzer, Averchenkova, Grantham Research Institute on Climate Change and the
Environment, Global trends in climate change legislation and litigation, 2017, https://bit.ly/2qO6yHt
80 Alina Averchenkova, Real Instituto Elcano, Legislating for a low carbon and climate resilient transition: learning from
international experiences, 2019, https://bit.ly/2XwgAxj
 31

EXAMPLES OF NATIONAL 2016, agreed to by the Canadian federal

FRAMEWORK CLIMATE
LEGISLATION
UK: The UK Climate Change Act 2008 was
the first national framework legislation to
introduce legally binding emissions targets
and a ratchet mechanism for reductions.
Since the Act’s enactment, the UK power
sector has been transformed; the share
of low carbon sources in the electricity
mix reached over 53% in 2018, up from
20% in 2008.81 The Climate Change Act
2008 also established the Committee
on Climate Change.82
Mexico: The General Law on Climate
Change of 2012 was amended in 2018 to
bring it in line with the Paris Agreement
and Mexico’s NDCs.83
Sweden: Sweden’s Climate Act of 2017
includes one of the most ambitious targets
integrated into national law, aiming to
reach net zero emissions by 2045.84
government and nearly all of the provinces
and territories, aims to reduce Canada’s
GHG emissions by 30% by 2030 against a
2005 baseline.85
European Union: The EU has introduced
various measures relating to climate change.
For example, the “2020 package”, introduced
in 2009, is a set of binding legislation
designed to enable the EU to meet its climate
and energy targets by 2020.86
Finland: The Finnish Climate Change Act
proposes to reduce Finland’s emissions
by 80% by 2050 compared with a
1990 baseline.87 In 2019, the incoming
government announced more ambitious
plans to go carbon-neutral by 2035.88
South Africa: The government published
a Climate Change Bill in June 2018
with the aim of building an effective
climate change response, including the
introduction of carbon budgets for GHG
emitters and sectoral emissions targets.89

Canada: The Pan-Canadian Framework

on Clean Growth and Climate Change

81 Simon Evans and Rosamund Pearce, CarbonBrief, How the UK transformed its electricity supply in just a decade,
https://bit.ly/2RaUISm; and Simon Evans, CarbonBrief, Analysis: UK electricity generation in 2018 falls to lowest level
since 1994, 2019, https://bit.ly/2R4emD5
82 Committee on Climate Change, Independent advice to government on building a low-carbon economy and preparing for climate
change, https://www.theccc.org.uk/
83 Alina Averchenkova, Sandra L Guzman Luna, LSE, Mexico’s General Law on Climate Change: Key achievements and
challenges ahead, 2018, https://bit.ly/2YkPy97
84 UN Climate Change Conference, Sweden Plans to Be Carbon Neutral by 2045, 2017, https://bit.ly/2QiGNsV

85 Government of Canada Publications, Pan-Canadian Framework on Clean Growth and Climate Change, 2016,
https://bit.ly/2I2kplI
86 European Commission, EU climate action, https://ec.europa.eu/clima/citizens/eu_en

87 The London School of Economics and Political Science, Grantham Institute, Climate Change Act, 2015, https://bit.ly/2xccn32;
Finnish Ministry of the Environment, National climate change policy, 2018, https://bit.ly/2RDlhAc
88 Jon Henley, The Guardian, Finland pledges to become carbon neutral by 2035, 2019, https://bit.ly/2HVpvQj

89 Memorandum on the Objects of the Climate Change Bill, 2018, https://bit.ly/2Jh8mQl

New standards: Climate laws and regulation

CARBON PRICING CORPORATES REDUCING THEIR

As a means of incentivising the shift to
cleaner energy and reducing emissions,
governments have introduced a range
of policy measures, such as pricing CO2
emissions. Carbon pricing instruments
are now implemented in over 46 countries
and 25 sub-national jurisdictions, covering
around 20% of global GHG emissions.90
For example, the EU emissions trading
system (ETS), which covers around 45% of
the EU’s emissions, uses a “cap-and-trade”
system to control the total amount of
GHG emissions from large-scale facilities
in power, industry and aviation.91 The
emissions reduction target for these
sectors is set at a level 21% lower than total
emissions in 2005.92
South Africa’s Carbon Tax Act came into
force on 1 June 2019.93 It imposes a carbon
tax on several types of GHG emissions, and
provides for allowances through carbon
offsets.94 Some criticise these measures as
insufficiently stringent to reduce emissions
at the necessary scale, particularly given
the fact that South Africa is amongst the
world’s top GHG emitters.
OWN FOOTPRINTS
Interestingly, whether driven by societal
pressure, corporate social responsibility
(CSR) policies, or by shareholder pressure
(which we explore in more detail later
in this paper on p.40), some companies
have chosen to impose a form of carbon
pricing on themselves. In 2017 almost
1,400 companies were factoring an
internal carbon price into their business
plans, representing an eight-fold leap
over four years.95 For example, in April
2019, Shell announced a plan to invest
USD 300m in a programme to reduce its
carbon footprint by investing in natural
ecosystems and in low-carbon transport
and allowing customers to reduce their
carbon footprint through carbon credits
at the pump.96

90 The World Bank, Carbon Pricing Dashboard,

https://carbonpricingdashboard.worldbank.org/
91 EU Commission, International Action on Climate Change,
https://bit.ly/2Y03oBe
92 Jos Delbeke and Peter Vis, EU Climate Policy Explained,
2016, https://bit.ly/2ItW2yb
93 South African Government, President Cyril Ramaphosa
signs 2019 Carbon Tax Act into law, 2019,
https://bit.ly/2Nfk5Eu 95 CDP, Price on Carbon, https://bit.ly/2hBD8FT

94 Commodities News, Reuters, UPDATE 1-South African 96 Shell, Shell invests in nature as part of broad drive
carbon tax finally becomes law, 2019, to tackle CO2 emissions, 2019,
https://bit.ly/2QszYVQ https://go.shell.com/2UnaWN6
 33

ENVIRONMENTAL REGULATION to peoples’ health or wellbeing, as well as the

Around the world, national, state and
municipal governments committed to a
clean and safe environment are passing
increasingly strict laws on the prevention
and control of pollution, often underpinned
by “polluter pays” compensation regimes.
The EU Environmental Liability Directive (ELD)
took effect across Europe in 2009 to establish a
framework of environmental liability97 based
upon the “polluter pays” principle. Liability
under the ELD has little in common with
standard civil liability rules; it does not give
private parties a right to claim compensation.
Instead, it puts environmental protection in
the hands of competent national authorities.
In China, while the principle of “polluter pays”
has been enshrined in law since the 1980s, the
Environmental Protection Law was amended
in 2014 to provide a significantly enhanced
framework for pollution prevention and
control which includes extensive penalties
for polluters (often imposed on a daily basis),
personal liability attaching to directors
and officers, and creates a new regime of
public interest lawsuits. In 2017, a vigorous
enforcement campaign was launched:
almost 40,000 companies and 10,000
directors have been prosecuted for breaches
of environmental law. 98
In South Africa, the Constitution enshrines a
right to an environment which is not harmful
right to have the environment protected,
for the benefit of present and future
generations. The National Environmental
Management Act enshrines the principle of
“polluter pays”, imposing an obligation to
prevent and remedy pollution, as well as a
mechanism for government authorities to
recoup the cost of remedying pollution from
the party who caused it. Criminal liability
is imposed in addition to civil liability to
compensate government authorities for
clean-up costs and the costs of prosecution,
and mechanisms are built in for private
prosecutions and recovery by civilians of
damages suffered due to pollution.
FUTURE AMBITION:
THE MOVE TO NET ZERO
Many countries are now putting in place
commitments to achieve net zero emissions.
Net zero is the target achieved when every
tonne of CO2 emitted is matched by a tonne
removed from the atmosphere. Compared
with a gross zero target, which would reduce
all emissions, net zero permits residual
emissions,99 providing they are offset through
natural or engineered carbon sinks. Natural
carbon sinks include forests, oceans or soil.
Engineered carbon sinks100 are technologies
that take carbon from the atmosphere, often
called carbon capture and storage.101

97 Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on environmental liability
with regard to the prevention and remedying of environmental damage, https://bit.ly/2L1qVv0
98 Neil Beresford and Michael Pocsay, Lexology, The changing face of environmental regulation: a challenge for
multi-national business, 2019, https://bit.ly/2KPUaRM
99 The London School of Economics and Political Science / Grantham Research Institute on Climate Change and the
Environment, What is net zero?, 2019, https://bit.ly/2FAnJ5H
100 BBC News, David Shukman, Climate change: Can 12 billion tonnes of carbon be sucked from the air?, 2018, https://bbc.in/2Lm6IzS

101 Carbon Capture & Storage Association, What is CCS?, http://www.ccsassociation.org/what-is-ccs/

New standards: Climate laws and regulation

Denmark has passed net zero legislation We conclude that net-zero

to achieve a carbon neutral society by
is necessary, feasible and
2050, and Norway has made moves
towards net zero by the same year, with a cost-effective.
parliamentary agreement to aim for 2030.
- UK Committee on Climate Change
In June 2019, Denmark’s newly elected
government released an ambitious
climate manifesto to further strengthen Soon thereafter, on 27 June 2019, the UK
its decarbonisation ambitions. passed a law amending the Climate Change
Act to commit the UK to eradicating its net
Net zero policies are also pursued at the
contribution to climate change by 2050,
sub-sovereign level. The state of California,
making the UK the first G7 country to
the world’s fifth largest economy, has
legislate for net zero by that date.105
committed to a net zero emission economy
by 2045.102 Queensland, Australia, has also In the US, mayors, governors and business
promised to reach net zero by 2050.103 leaders – including 10 US States and 287
cities and counties – have signed the ‘We
On 2 May 2019, the UK’s Committee on
Are Still In’ declaration as a promise to
Climate Change advised the government to
world leaders that, despite national US
cut GHG emissions to net zero by 2050, calling
policy, a great number of Americans will
for “a major strengthening and acceleration
continue to support action to meet the
of policy effort”.104
Paris Agreement.106

Country Year Status

Suriname – Achieved
Bhutan – Achieved
Norway 2030 In law
Sweden 2045 In law
United Kingdom 2050 In law
France 2050 Proposed legislation
Spain 2050 Proposed legislation
New Zealand 2050 Proposed legislation
Uruguay 2030 In policy department
Finland 2035 In policy department
Iceland 2040 In policy department
Denmark 2050 In policy department
Chile 2050 In policy department
Portugal 2050 In policy department
Costa Rica 2050 In policy department
Fiji 2050 In policy department
Marshall Islands 2050 In policy department
European Union 2050 Target under discussion
Germany 2050 Target under discussion
The Netherlands 2050 Target under discussion
Ireland 2050 Target under discussion

Carbon Brief, UK Emissions, In-depth: The UK should reach ‘net-zero’ climate goal by 2050, says CCC, 2019,
102 
https://bit.ly/2GKOZxO
103 Queensland Government, Advancing Climate Action in Queensland: Making the transition to a low carbon future, 2012,
https://bit.ly/2XF4CkX
104 Carbon Brief, UK Emissions, In-depth Q&A: The UK becomes first major economy to set net-zero climate goal, 2019,
https://bit.ly/31w2Dyz

THE ROLE OF CITIES
Cities have come together to share best
practice on climate policy and GHG
emissions reduction.
Globally, there are currently 4.2bn people
living in cities and the UN predicts that
68% of the world population will live in
urban areas by 2050.107 City governments
are therefore key to achieving the Paris
Agreement’s goals. The organisation C40
Cities connects 94 of the world’s great
cities on climate action - representing 700+
million citizens and one quarter of the
global economy.108
–– Since the Paris Agreement in 2015,
there has been a 90% increase in the
number of cities setting their own
targets to reduce emissions109
–– At the Global Climate Action Summit
in September 2018, 27 of the world’s
largest cities, including Berlin, Sydney
and New York, declared peak emissions
–– London, Copenhagen, Los Angeles,
Montreal, New York City, Paris, San
Jose, Stockholm, Sydney, Tokyo and
Tshwane have pledged to have zero
emissions by 2050110
–– 40 cities including Burlington,
Basel and Reykjavík now use 100%
renewable energy111
35
Year after year, climate-related law,
regulation and policy have increased
around the world. The aim of the Paris
Agreement is to drastically accelerate
this global process by requiring nations
to implement new legal and regulatory
frameworks. Companies operating
domestically and across borders must
understand the relevant emissions targets
and adapt to the changing landscape of
law and regulation.
Put simply, the destination -
a zero-carbon economy - is
certain. It is just a question of
how rapid and how chaotic the
transition is. And therein lies
the risk.112
- Rob Bailey, Director of Climate Resilience,
Marsh & McLennan Insights
105 UK Parliament, Government gives details on setting a UK net
zero emissions target, 2019, https://bit.ly/2FAB5Pd
UK Government Press Release: UK becomes first major
economy to pass net zero emissions law,
https://bit.ly/2NqV6ye
106 We are still in, America is still in, are you?,
https://www.wearestillin.com/
107 UN News, 68% of the world population projected to live
in urban areas by 2050, says UN, 2018,
https://bit.ly/2sR9H9l
108 C40 Cities, Annual Report 2017, 2017,
https://bit.ly/2UcRvXp
109 Paul Simpson, CDP, 2018: A new chapter for
climate action, 2019, https://bit.ly/2ZXH8Ft
110 Kyra Appleby, Global Director Cities, State and Regions, CDP,
Global cities are stepping up on climate action, 2018, https://bit.
ly/2RBrXyw
111 CDP, Over 100 global cities get majority of electricity from
renewables, 2018, https://bit.ly/2CKRmwK
112 Rob Bailey, Director of Climate Resilience at Marsh &
McLennan Insights, Climate Change Has Claimed Its Biggest
Corporate Victim. Now Banks Are on Alert, 2019,
https://bit.ly/2ZNeaYv
 37

New standards:
Market pressures
and the rise of ESG in
investment and lending

Given the myriad physical climate risks to 2019 report: Getting physical: Scenario
businesses, and the risks inherent in the analysis for assessing climate risks, concluded
transition to a low-carbon and climate- that investors have under-priced the risk of
resilient financial system, the integration a changing climate to their investments.113
of climate risk assessments into business
decision-making is increasingly considered Investors who are not thinking
a business imperative.
about climate-related risks, or
who view them as issues far
INVESTMENT RISKS
OF CLIMATE CHANGE off in the future, may need to
recalibrate their expectations.
More and more investors are now seriously - BlackRock114
considering the impact of climate change
risk on their portfolios and there is some
indication that this risk has been under- According to analysis done by the
priced to date. financial think tank Carbon Tracker, a
failure to think about climate risk has
Recently, BlackRock, the world’s largest already cost investors in the form of
asset manager, leveraged 160 terabytes the collapse of US-listed coal stocks115
of data to assess climate-related risks to and the loss of shareholder value in
specific asset classes: municipal bonds, European energy utilities116 as a result
commercial mortgage-backed securities of failing to understand the transition
and electric utilities. The resulting April to renewables.

113 BlackRock, Investors Underappreciate Climate-Related Risks in Their Portfolios, 2019, https://bit.ly/2LiCrlc

114 Financial Times, BlackRock analysis helps define climate-change risk, 2019, https://on.ft.com/2FObXDV

115 Carbon Tracker, The US Coal Crash – Evidence for Structural Change, 2015, https://bit.ly/2Xu3Bwd

116 Carbon Tracker, Lessons from European electricity for global oil & gas, https://bit.ly/2ITdpb3, https://bit.ly/31QCpah
New standards: Market pressures and the rise of ESG in investment and lending

To accurately price and to adequately WHAT ARE ENVIRONMENTAL,

evaluate the climate resilience of their
SOCIAL AND GOVERNANCE
investments, asset managers and
institutional investors are increasingly
(ESG) FACTORS?
demanding that companies demonstrate
they have identified and assessed the risks Examples include:119
of climate change to their businesses.
Environmental
Climate-resilient governance (along with
–– Climate change – including physical
other ESG – environmental, social and
risk and transition risk
governance – criteria) is becoming an
important investment metric. There is –– Resource depletion, including water
increasing understanding and uptake of
–– Waste and pollution
ESG investor frameworks.
–– Deforestation
To date, 2,475 investors worldwide
with more than USD 82trn in assets Social
under management have committed to
–– Working conditions, including slavery
implement the United Nations Principles
and child labour
for Responsible Investment (UN PRI).117
At the heart of the Six Principles for –– Local communities, including
Responsible Investment and other ESG indigenous communities
investor frameworks is the commitment –– Conflict
to integrate ESG factors into corporate
decision-making at all levels.118 –– Health and safety

–– Employee relations and diversity

Governance

–– Executive pay

–– Bribery and corruption

–– Political lobbying and donations

–– Board diversity and structure

–– Tax strategy

117 For total UN Principles for Responsible

Investment signatories, see:
https://www.unpri.org/signatories
For details on the six principles of the UN PRI,
see https://www.unpri.org/pri
118 Grantham Research Institute on Climate
Change and the Environment, Climate change and
the just transition, A guide for investor action, 2018 119 PRI, What is responsible investment?
https://bit.ly/2xfYZei https://bit.ly/2B0Rjif
 39

“INEVITABLE POLICY RESPONSE” Early signs of such a shift may be seen in

the increasingly ambitious net-zero targets
being enacted in national legislation.
In September 2018, the UN PRI published
a thought leadership paper on climate risk The IPR Paper posits that the longer the
to investments: The Inevitable Policy Response world waits to reduce emissions, the greater
(the IPR Paper). the need will be for a rapid transition and
forceful policy action to close the gap, with
The Paper traces the “ambition gap”
serious investment implications. According
between the Paris Agreement goal and
to the Paper, investors today do not fully
current global policy, making the point that
recognise the likelihood and impact of
even with full implementation of current
an inevitable policy response to climate
NDCs120 there will still be unacceptably
change, and so there is currently inadequate
high temperature increases, with estimates
pricing in of climate policy risks.123
varying from warming of 2.6°C to 3.4°C.
Global warming at that scale would have The UN PRI provides a framework to
grave impacts on global society, economies support investors’ portfolio management
and investment portfolios.121 processes, including taking preparatory
action now to anticipate the inevitable
According to the IPR Paper, there will
policy response by reviewing governance
inevitably be an increase in policy
arrangements and risk management
ambition due to a combination of political,
processes, identifying potentially stranded
economic, social and ecological pressures
assets and engaging with policy-makers,
– precipitated by more extreme physical
companies and service providers.124 The
impacts of climate change and continued
UN PRI has also issued guidance to asset
technological advances. It is postulated
owners and investment managers on how
that a global response to climate change
to implement ESG into their investment
is likely to be announced by 2025 and
decisions and processes.125
enacted in the following years, triggering
the “inevitable policy response”.122

120 UNFCCC, Nationally Determined Contributions, https://bit.ly/2w8Sdtg

121 PRI, The inevitable policy response to climate change, 2018, https://bit.ly/2Lug7p9

122 PRI, The Inevitable Policy Response: When, What and How, Policy pathways to below 2°C and estimating the financial impacts, 2018,
https://www.unpri.org/download?ac=5368
123 Ibid.

124 PRI, The Inevitable Policy Response to Climate Change, Investor actions, 2018, https://bit.ly/2XBQ7KG

125 PRI, A Practical Guide to ESG Integration for Equity Investing, https://bit.ly/2NJ9YrC
New standards: Market pressures and the rise of ESG in investment and lending

INVESTOR ACTION – Whilst activist investors continue to push

FROM FRINGE TO MAINSTREAM
Activist investors have often made
headlines. For example, a group, called
Follow This,126 whose motto is “Change the
world: Buy Shell” is a group of Royal Dutch
Shell plc shareholders who organise
shareholder support for the company to
set stricter GHG targets and table climate-
focused resolutions at Shell’s annual
general meetings.
In South Africa, activist investors,
supported by the NGO, Just Share, recently
forced Standard Bank, one of South Africa’s
four biggest banks, to table a resolution to
(1) adopt and disclose a policy on lending to
coal-fired power plants and coal mines; and
(2) report to shareholders its assessment of
GHG emissions resulting from its financing
portfolio and its exposure to climate
change risk in its lending, investment and
financing.127 The first part of the resolution
was successfully passed by a vote of 55%,
whilst the second part was defeated, but
managed to garner 38% of shareholders’
votes. The board had recommended
against the adoption of both resolutions.
for change, climate change is also a
mainstream investor concern. Support
for climate-related corporate engagement
and resolutions is now coming from
institutional investors such as endowment
funds, commercial banks, mutual
funds, hedge funds, pension funds and
insurance companies.
The mainstreaming of this approach
began with the UK-based, Aiming For A,
Investor Coalition started in 2012128 which
came of age with the success of climate-
based shareholder resolutions passed
in 2015 by BP129 and Shell.130 This created
yet another step change in the investor
response to climate change and set the
stage for climate shareholder resolutions
to win support from more conservative
US asset managers, with climate-relevant
resolutions being passed by ExxonMobil
in 2017.131

126 Follow This, Shareholders change the world, https://follow-this.org/en/

127 Ciaran Ryan, Moneyweb, Standard Bank shareholders defy board in vote for greener disclosure, 2019, https://bit.ly/2X6XTkq

128 Climate Home News, Meet the investors pushing climate reality on carbon majors, 2016, https://bit.ly/2X6CXFg

129 Share Action, Investor Report: Two Years After Aiming for A: Where are we now? (BP), 2017, https://bit.ly/2w4Rir4

130 Share Action, Investor Report: Two Years After Aiming for A: Where are we now? (Shell), 2017, https://bit.ly/2z6GrA0

131 Marianne Lavelle, Inside Climate News, Exxon Shareholders Approve Climate Resolution: 62% Vote for Disclosure, 2017,
http://bit.ly/2Nfn5ke
 41

As a sign of the times, the UK’s largest Institutional investors are exerting
investment manager, Legal & General influence beyond their portfolio companies.
Investment Management (LGIM), stated in In April 2019, LGIM along with Hermes
its 2018 Corporate Governance report that Investment Management, Allianz Group
the world is facing a “climate catastrophe” and others asked the influential
and that businesses around the world International Energy Agency (IEA) to
must urgently address it or face their update its benchmark modelling of the
shareholders voting against them.132 In energy sector to take account of the cuts
2017, LGIM set out its climate impact in carbon emissions that will be necessary
pledge, a commitment to engage with 84 to limit global warming.135 It was reported
of the world’s largest companies in order in June 2019 that the IEA will be developing
to accelerate the transition to a low-carbon a scenario for keeping global warming
economy, and in 2018, LGIM published below 1.5˚C which may be included in its
a list of “leaders and laggards” on climate influential annual World Energy Outlook.136
change,133 adding to that list in 2019.134
In a survey of 1,600 global companies, CDP
and the Climate Disclosure Standards
Talks without action are no Board found BlackRock, Vanguard, State
longer fit for purpose given Street and Aviva among the institutional
investors leading the charge on corporate
the urgency to address climate climate risk disclosure.137
change…This is no fad. The
world is truly in the midst of
a climate emergency, which
could have drastic consequences
for markets, companies and,
therefore, our clients’ assets.
- Meryam Omi, Head of Sustainability
and Responsible Investment Strategy, Legal &
General Investment Management

132 BBC News, UK’s biggest money manager warns on climate catastrophe, 2019, https://bbc.in/2KHNINz
Legal & General, Press Release 2019, http://bit.ly/2LlqJqc
Legal & General Investment Management, 2018 Corporate Governance report, 2018, https://bit.ly/2ZZl9xA
133 Legal & General, 2018 LGIM’s Climate Impact Pledge: The results so far, http://bit.ly/2xihChu

134 Jillian Ambrose, The Guardian, Major global investor drops US firms deemed climate crisis laggards, Legal and

General Investment Management cuts companies including ExxonMobil, 2019, http://bit.ly/2XrJdvJ

135 Leslie Hook and Anjli Raval, Financial Times, IEA’s climate models criticized as too fossil-fuel friendly, 2019,
https://on.ft.com/2J6TwMq; Natalie Sauer, Climate Home News, Global energy agency asked to stop normalising
dangerous climate change, 2019, http://bit.ly/2YoLxAw
136 Karl Mathiesen, Climate Home News, IEA develops pathway to ambitious 1.5C climate goal, 2019, http://bit.ly/2NeI3j3

137 Lucas Bifera, S&P Global, U.S. Companies Seen Lagging European Peers in Climate Risk Planning, 2018,
http://bit.ly/2X70Z82
New standards: Market pressures and the rise of ESG in investment and lending

INVESTOR ENGAGEMENT and aims to ensure that the world’s 100+

largest GHG emitters (plus around 60
ON CLIMATE CHANGE:
other companies that have a pivotal role
CLIMATE ACTION 100+ to play in the transition to a low-carbon
economy) take action on climate change,
Launched in 2012, The Global Investor by curbing emissions and strengthening
Coalition on Climate Change138 is a climate-related financial disclosures.
collaboration of four regional organisations
In a statement developed with Climate
aiming to increase investor engagement
Action 100+ investors, on 3 December 2018
on climate change:
Shell announced plans to set short-term
–– Asia Investor Group on Climate Change targets of three to five years from 2020 to
(AIGCC) 2050 as part of an ambition to reduce the
net carbon footprint of its energy products
–– Ceres Investor Network on Climate Risk
and, significantly, link those targets to
and Sustainability (Ceres) - a group of
executive remuneration.
160 institutional investors representing
more than USD 26trn in assets
Meeting the challenge of
–– Investor Group on Climate Change
(IGCC) tackling climate change requires
–– Institutional Investors Group unprecedented collaboration
on Climate Change (IIGCC) and this is demonstrated by our
The Climate Action 100+139 initiative is engagements with investors.
coordinated by the above four regional We are taking important steps
partners and the UN PRI who, along with
towards turning our net carbon
investor representatives from Australian
Super, California Public Employees’ footprint ambition into reality
Retirement System (CalPERS), HSBC by setting shorter-term targets.
Global Asset Management, Ircantec and
This ambition positions the
Manulife Asset Management, form its
global steering committee. company well for the future
Climate Action 100+, with 320 investors and seeks to ensure we thrive
with over USD 33trn in assets under as the world works to meet the
management, is the biggest global
goals of the Paris Agreement
engagement initiative on climate to date.
Climate Action 100+ engages collectively on climate change.
with each company through a lead investor
- Shell Chief Executive Officer Ben van Beurden

138 See: https://globalinvestorcoalition.org/

139 See: http://www.climateaction100.org/; Kelly Gilblom, Climate Group With $32 Trillion Pushes Companies
for Transparency, 2019, https://bloom.bg/2XyUiuF
 43

Coalitions like Climate Action 100+, activist
shareholders, and institutional investors
are not only engaging with companies
on climate risk and encouraging more
comprehensive disclosures, but are using
shareholder resolutions as a powerful tool
for inserting climate-resilient business
planning into publicly listed companies.
Investors have also moved to divest
entirely from certain carbon-intensive
companies or asset classes.
Large institutional investors are
divesting unsustainable assets
Growth in divestment commitments
1,000
800
600
400
A number of global insurers have
divested from coal and have limited their
underwriting of coal projects. For example,
Swiss Re has announced it will not provide
(re)insurance to businesses with more than
30% thermal coal exposure.140 One of the
earliest to divest from coal was France’s
largest insurer AXA141 and when XL Group
became part of AXA in 2018, it ceased
insuring coal-fired power plants and the
extraction of tar sands.142 Generali, Allianz,
Zurich, Swiss Re, Munich Re and SCOR
have also limited their support for coal and
on 1 July 2019, Chubb did, too.143
In 2019, the world’s largest sovereign
wealth fund which manages USD 1trn
of Norway’s assets announced it would
6 divest from firms that undertake oil and
gas exploration.144 A number of pension
5 funds have also divested or are considering
divestment from fossil fuels.145
4
3
2

200
1

0 0
2014

2015

2016

2017

2018

No. of organisations Total asset ($tn)

Sources: Arabella Investment; Generation

140 Swiss Re Group, Zurich, 2018, http://bit.ly/2Ja1Vyz

141 AXA, AXA accelerates its commitment to fight climate change, 2017, http://bit.ly/2Lg07qy

142 Matthieu Protard, Inti Landauro, Reuters, French insurer AXA extends climate change policy to XL, 2018,
https://reut.rs/2LvR4Sn
143 Bethan Moorcraft, Insurance Business, Generali becomes latest insurer to reject coal, 2018, http://bit.ly/31ULzT9

144 Rob Davies, The Guardian, Norway’s $1tn wealth fund to divest from oil and gas exploration, 2019, http://bit.ly/2KGiR2M

145 Julie Ayling & Neil Gunningham, Research Gate, Non-state governance and climate policy: the fossil fuel divestment movement,

2015, http://bit.ly/2X6ynHc ; Attracta Mooney, Financial Times, Growing number of pension funds divest from fossil fuels,
2017, https://on.ft.com/325T2im
New standards: Market pressures and the rise of ESG in investment and lending

PENSIONS to update their SIPs to address the

Pension providers are also recognising
that climate change is financially material
and that investment value may be reduced
by climate change.
In the UK, the Department for Work and
Pensions (DWP) announced in June 2018
that new regulations will require annual
publication of investment principles on ESG
and climate issues. The 2018 consultation
on changes to the Occupational Pension
Schemes (Investment) Regulations 2005
resulted in the Pension Protection Fund
(Pensionable Service) and Occupational
Pension Schemes (Investment and
Disclosure) (Amendment and Modification)
Regulations 2018. Those regulations now
make clear that the financially material
considerations which trustees must
consider when making their investment
decisions include, but are not limited to,
ESG factors, including climate change. The
regulations require trustees to update their
statements of investment principles (“SIP”)
for their pension schemes by 1 October 2019
in order to reflect policies on financially
material considerations (including ESG
factors) over the “appropriate time horizon”.
Further regulations were issued on 6 June
2019 (Occupational Pension Schemes
(Investment and Disclosure) (Amendment)
Regulations) to implement parts of the
EU Shareholders Rights Directive that
relate to pension scheme governance
and stewardship. Trustees will have
extended requirements and in particular
explain how they incentivise managers
to align their investment strategy with
the trustees’ policies. In addition, from 1
October 2020, trustees will be required
to produce an annual disclosure of their
engagement and voting practices.
New Financial Conduct Authority (FCA)
requirements came into force on 10
June 2019 compelling asset managers
to disclose their policies on how they
engage with each other and their invested
companies and how their investment
strategies create long-term value.
CREDIT AND CLIMATE
Climate risk may also affect the availability
of credit and cost of borrowing. There are
indications that ratings agencies and
lenders are increasingly integrating climate
risk and resilience into their analyses.146
Moody’s, Fitch and S&P have all warned
that failure to adapt to climate change
may affect municipal credit ratings.147
For example, in 2017, after the US hurricane
season, ratings agencies warned coastal
cities to prepare for climate change or face
higher borrowing costs on the municipal
bond market, although no downgrades have
yet occurred, owing it is said to measures that
cities are taking to improve their resilience.148

146 S&P Global, Determining The Resilience Benefit Of Climate Adaptation Financing S&P, 2018, http://bit.ly/31Vl1Rv

147 Christopher Flavelle, Bloomberg, Cities Threatened by Climate Risk Still Getting AAA Bond Ratings, 2018,
https://bloom.bg/2CT4SCh
Climate changed; Moody’s Warns Cities to Address Climate Risks or Face Downgrades, 2017, https://bloom.bg/2XzaV9E
148 Christopher Flavelle, Insurance Journal, Critics Say Bond Rating Agencies Ignore Municipalities’ Climate Risk, 2018,
http://bit.ly/31VdxOI
 45

On 11 April 2019, S&P announced a new At the One Planet Summit in December
benchmark for ESG evaluation.149 S&P 2017, the six largest MDBs committed to
Global Ratings has also launched an ESG align their financial flows with the goals
Risk Atlas, an online infographic that of the Paris Agreement and the World
charts exposure to environmental and Bank also announced that it would no
social risk for more than 30 sectors.150 longer finance upstream oil and gas
after 2019, other than in exceptional
circumstances.152 In addition, the World
In addition to episodic event
Bank has announced USD 200bn for its
risk from natural disasters… 2021-2025 climate investment programme,
it is important to consider doubling the USD 100bn for its previous
five-year investment plan up to 2020.153
the current long-term credit
implications of the physical The European Bank for Reconstruction
and Development has outlined a strategy
impact of climate change that to increase green financing to 40% of its
municipal debt issuers must annual business volume by 2020.154 From
contend with.151 2011 to 2017 the Asian Development
Bank approved over USD 25bn in climate
- S&P Global Ratings financing.155

Other notable pro-climate funds include

the Climate Investment Funds,156 the
MULTILATERAL LENDERS
European Union,157 the Global Environment
Facility,158 the Green Climate Fund159 and
Climate resilience will also affect the other bilateral donors.160
availability of capital for development
projects, as pro-Paris policies are
integrated into the lending decisions of
multilateral development banks (MDBs).

149 S&P Global, How Environmental And Climate Risks And Opportunities Factor Into Global Corporate Ratings - An Update, 2017,
http://bit.ly/2ZSmKFl
150 Micahel Wilkins, S&P Global, Navigating the ESG Risk Atlas, 2018, http://bit.ly/2KBGVnL

151 S&P Global Ratings, Credit FAQ: Understanding Climate Change Risk and US Municipal Ratings, 2017, http://bit.ly/31YNBBs

152 Press Release, World Bank, World Bank Group Announcements at One Planet Summit, 2017, https://bit.ly/2T82AU1

153 Press Release, World Bank, World Bank Group Announces $200 billion over Five Years for Climate Action, 2018,
https://bit.ly/2QwTlj5
154 EBRD, What is the EBRD’s Green Economy Transition approach? https://www.ebrd.com/what-we-do/get.html

155 ADB, ADB Support for Climate Change, http://bit.ly/31Ud4fv

156 Climate Investment Funds, Celebrating 10 Years of Climate Action, Morocco, https://www.climateinvestmentfunds.org/

157 Climate Action, International climate finance, https://ec.europa.eu/clima/policies/international/finance_en

158 Global Environment Facility, https://www.thegef.org/

159 Green Climate Fund, https://www.greenclimate.fund/home

160 EBRD, The Green Economy Transition business model, http://bit.ly/2IOz83I

New standards: Market pressures and the rise of ESG in investment and lending
TOOLS FOR MAPPING CLIMATE RISK
For some time now, many companies –
often at the behest of their investors – have
chosen to engage in voluntary disclosure
of climate risks. A number of initiatives
and qualitative and quantitative tools have
emerged to assist institutional investors
and banks to better understand climate
risk to portfolio investments and lending.
Some examples are as follows.
CDP
Formerly the Carbon Disclosure
Project, CDP runs a global disclosure
system for companies, cities, states
and regions to measure and manage
environmental impacts.
CDP requests information on climate
risks and low carbon opportunities on
behalf of over 525 institutional investor
signatories with a combined USD 96trn
in assets. In 2018, over 7,000 companies,
representing over 50% of global market
capitalisation, and over 750 cities, states
and regions disclosed environmental data
through CDP.
The 2018 CDP questionnaire161 included
the following questions:
–– Is there board-level oversight of climate-
related issues within your organisation?
–– Do you provide incentives for the
management of climate-related issues,
including the attainment of targets?
161 Paul Simpson, CDP, 2018: A new chapter for climate action, 2018, https://bit.ly/2ZXH8Ft
162 CDP, Higher Ambition, Higher Expectations, http://bit.ly/2ZIwPou
163 University of Cambridge Institute for Sustainability Leadership, The ClimateWise Principles, https://bit.ly/2Yn4eoh
–– Select the option that best describes
how your organisation’s processes for
identifying, assessing, and managing
climate-related issues are integrated
into your overall risk management
In its Europe Report 2018162 CDP found that
72% of responding European companies
would be using climate scenarios to inform
business strategies in the following year.
CLIMATEWISE
Based in the University of Cambridge’s
Institute for Sustainability Leadership
(CISL), ClimateWise is a network of
insurance industry organisations which
share a commitment to reduce the
impact of climate change on both the
underwriting and asset management
sides of their business. Members include
Allianz, Aviva, Navigators, RSA, Swiss Re,
Willis Towers Watson and Zurich.
The ClimateWise principles163 are to:
–– Lead in risk analysis
–– Inform public policy making
–– Support climate awareness amongst
customers
–– Incorporate climate change into
investment strategies
–– Reduce the environmental impact
of business
–– Enhance reporting
 47

ClimateWise members are required to PRINCIPLES FOR SUSTAINABLE

report annually on their individual actions
INSURANCE
in respect of the principles, allowing
members to benchmark progress against
their peers. An annual, public review Another insurance industry-focused
highlights the overall progress being made initiative, Principles for Sustainable
by the ClimateWise community. Insurance (PSI), is a global framework for
the insurance industry to address ESG
A 2016 ClimateWise report, Investing for risks and opportunities.
Resilience, explored how the insurance
industry could contribute to redirecting Developed by the UN Environment
flows of capital into resilience- Program Finance Initiative (UNEP-FI),
enhancing investments.164 the PSI was launched at the 2012 UN
Conference on Sustainable Development,
In February 2019, ClimateWise published and is the largest collaboration between
two practical frameworks: the UN and the insurance industry.167
–– Physical Risk Framework – to offer Members of PSI represent about 10% of
real estate investors and lenders a world premium and USD 5trn in assets
means of understanding the potential under management.
physical risks of climate change on In February 2019, PSI produced a guide
their portfolios165 to integrating ESG risks into non-life
–– Transition Risk Framework – an open- insurance transactions168 by supporting
source model to quantify transition clients, intermediaries and other
risks and opportunities within stakeholders to provide ESG-related
infrastructure investment portfolios166 information. The guide includes a heat
map for ESG risks – including climate
change risks – across economic sectors.

164 University of Cambridge, Cambridge Institute for Sustainability Leadership, Investing for Resilience 2016, http://bit.ly/2xhO3N6

165 Cambridge Institute for Sustainability Leadership (CISL), Physical risk framework: Understanding the impacts of climate
change on real estate lending and investment portfolios, 2019, http://bit.ly/2RE4aOl
166 Cambridge Institute for Sustainability Leadership (CISL), Transition risk framework: Managing the impacts of the low carbon
transition on infrastructure investments, 2019, http://bit.ly/2YayaE9
167 PSI, UNEP, Finance Initiative, Message from the UN Secretary-General, www.unepfi.org/psi

168 PSI, UNEP, Underwriting environmental, social and governance risks in non-life insurance business, 2019, http://bit.ly/2XBbv6Q
New standards: Market pressures and the rise of ESG in investment and lending

UN PRINCIPLES FOR SUSTAINABLE INSURANCE:169

Economic sectors Principles

Finance (depending on client and/or transaction

Production of fuels/Derivatives from Oil & Gas

Healthcare/Pharma/Bio tech/Life science

Exploration & Construction/Oil & Gas

Food/Beverage/Manufacturing
Agriculture/Paper & Forestry

Infrastructure/Construction
Construction/Hydro dams

Utilities (Waste & Water)

Garment manufacturing
Electronics/Technology

Construction/Nuclear
Agriculture/Livestock
Agriculture/Fishing

Transport/Shipping
Construction/Coal
Energy operation

Real Estate
Chemicals

Gambling
Defence

Mining

UNGC
Risk mitigation examples

SDG

PRI
PSI
Theme Risk criteria & good practice

Disclosure of climate-
related emissions in
13

operations and/or
8
4
6
products (e.g. CO2, CH2,
N2O, HFCs, PCFs, SF6)

Breakdown of fuel/
material/carbon intensity
1, 2, 3
7, 8, 9
7, 12

mix relevant to the client

3

Air pollution, or transaction (e.g. power

greenhouse gas generating mix or by
emissions, and economic sector intensity)
transition risks
Environmental & social
Climate impact assessment (ESIA)
1, 2, 3
7, 8, 9

covering negative heath

1, 5
3.1

change
impacts, mitigation
and decommissioning
where relevant
1, 2, 3
7, 8, 9

Decarbonisation transition
1, 5
7

plan/targets

Physical risks
(e.g. heat,
Nature-based solutions (e.g.
wildfire, extreme
sustainable flood or coastal
1, 2, 3
7, 8, 9
9, 13

precipitation,
defence management,
2

flood, windstorm,
broader climate resilience
tropical cyclones,
adaptation plans)
sea level rise,
water stress)

169 PSI, UNEP, Underwriting environmental, social and governance risks in non-life insurance business, 2019, http://bit.ly/2XBbv6Q
49
 51

Climate-related
financial disclosures:
From TCFD towards
regulation?

Along with the growing acknowledgment TCFD is now supported by

of climate change as a financial risk, has
three-quarters of the world’s
grown the need for decision-useful and
standardised corporate disclosures. globally systemic banks, eight
The preeminent global corporate of the top ten asset managers,
disclosure metric is that articulated by the the world’s leading pension
Task Force on Climate-related Financial funds and insurers, major
Disclosures (“TCFD” or the “Task Force”).
credit rating agencies, the Big
The G20’s Financial Stability Board (FSB)
Four accounting firms, the two
established the TCFD in 2015170 to develop
voluntary, consistent, comparable, climate- dominant shareholder advisory
related financial risk disclosures for firms, and the two dominant
use by companies to support informed
shareholder advisory services,
decision-making by investors, lenders,
and insurance underwriters in allocating all together representing a fifth
capital and underwriting risk. of global GDP.
- Mark Carney, November 2018

170 TCFD, Task Force on Climate-related Financial Disclosures, https://www.fsb-tcfd.org/

Climate-related financial disclosures: From TCFD towards regulation?

In June 2017, the Task Force released its In addition to its general recommendations,
list of recommendations for climate- TCFD has also issued sector-specific
related financial risk disclosures guidance for companies in the financial
in mainstream corporate filings, and non-financial sectors it considers most
covering governance, strategy, risk likely to be affected by climate change and
management and metrics and targets the transition to a lower-carbon economy.
(the TCFD Recommendations).171
The supplemental guidance applies
The TCFD Recommendations are to companies in the following industries:
structured around four thematic areas
Financial sector 172
that represent core elements of how
organisations operate: –– Banks

–– Governance –– Insurance companies

–– Strategy –– Asset owners

–– Risk management –– Asset managers

–– Metrics and targets Non-financial groups

Those four overarching areas are –– Energy

supported by recommended disclosures
–– Transportation
as illustrated below.
–– Materials and buildings

–– Agriculture, food, and forest products

171 TCFD, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures, 2017,
http://bit.ly/2xdpReP
172 TCFD, E Supplemental Guidance for Non-Financial Groups in Implementing the Recommendations of the Task Force on
Climate-related Financial Disclosures, http://bit.ly/2X2FuQH
 53

RECCOMENDATIONS AND SUPPORTING DISCLOSURES

Governance Strategy Risk management Metrics and targets

Disclose the organisation’s Disclose the actual and Disclose how the Disclose the metrics and
governance around potential impacts of organisation identifies, targets used to assess
climate-related risks and climate-related risks assesses and manages and manage relevant
opportunities and opportunities on the climate-related risks climate-related risks and
organisation’s businesses, opportunities where such
strategy, and financial information is material
planning where such
information is material

RECOMMENDED DISCLOSURES

Describe the board’s Describe the Describe the Disclose the

oversight of climate- climate-related risks organisation’s metrics used by
related risks and and opportunities processes for the organisation
opportunities the organisation has identifying and to assess climate
identified over the assessing climate- related risks and
short, medium and related risks opportunities in line
long term with its strategy and
risk management
process

Describe Describe the Describe the Disclose Scope 1,

management’s role impact of climate- organisation’s Scope 2, and, if
in assessing and related risks and processes for appropriate Scope
managing climate- opportunities on managing climate- 3 Greenhouse Gas
related risks and the organisation’s related risks (GHG) emissions,
opportunities business, strategy, and the related risks
and financial
planning

Describe the Describe how Describe the

resilience of the processes for target used by the
organisation’s identifying, organisation to
strategy, taking assessing, and manage climate-
into consideration managing climate- related risks and
different climate- related risks and opportunities and
related scenarios, integrated into the performance against
including a 2º C or organisation’s overall targets
lower scenario risk management
Climate-related financial disclosures: From TCFD towards regulation?
The TCFD Recommendations have to
date received public expressions of
support from nearly 800 organisations
representing more than USD 118trn in
market capitalisation.173
Although many companies support the
TCFD recommendations, there is an
implementation gap. And compliance
with TCFD (for the moment) remains
voluntary, not mandatory.
The TCFD’s 2018 Status Report174 found
that while many companies disclose
climate-related information, few disclose
the financial impact of climate change
on the company and noted that climate-
related financial disclosures were still in
their early stages.
One of the challenges for companies has
been understanding how to integrate
the TCFD recommendations into their
mainstream reports and conduct climate-
related scenario analysis, relevant to
their business.
173 TCFD, Task Force on Climate-related
FinancialDisclosures, 2019 Status Report,
http://bit.ly/2YhrYtW
174 TCFD, Task Force on Climate-related
FinancialDisclosures, 2018 Status Report
http://bit.ly/2FB9KML
IMPLEMENTING THE TCFD
TCFD worked with multiple industry
stakeholders and sought to build the
recommendations, as far as possible, on
existing disclosure frameworks.
The suggested metrics have been linked
to ones already commonly used, such
as those developed by the Sustainability
Accounting Standards Board (SASB), GRI
(Global Reporting Initiative) and CDP. 175
As an example of guidance, the Climate
Disclosure Standards Board (CDSB) and
SASB issued a TCFD implementation
guide in April 2019.176 The Guide
builds on CDSB’s 2017 Practical Action
TCFD Checklist and details key action
steps that companies should take
to prepare themselves for reporting
information aligned with the TCFD
recommendations. The Guide offers
companies the “how-to” to drive
implementation of the 11 recommended
TCFD disclosures. It also provides
TCFD-aligned sample disclosures with
three Mock Disclosures from three
hypothetical companies: OilCo, AgriCo
and AutoCo.
175 ICAEW in Association with The Carbon Trust,Reporting
on climate risks and opportunities. How do the
recommendations fit with other corporate reporting
frameworks and what is being done to align them?, http://
bit.ly/2XD2HgE
176 TCFD, Using SASB Standards and the CDSB
Framework to Enhance Climate-Related Financial
Disclosures in Mainstream Reporting, http://bit.
ly/2Jd1NhV
 55

The TCFD’s second 2019 Status Report was TOWARDS REGULATION?

published on 6 June 2019.177 In preparing
the report, the Task Force used artificial
In the last year, there has been a marked
intelligence (AI) to review annual reports
increase in the pace of financial regulators’
of over 1,000 large companies in multiple
consultations on climate risk. It is highly
sectors and regions over a three-year period.
likely that a number of jurisdictions will
In addition, the Task Force conducted a
be moving to make corporate climate risk
survey on companies’ efforts to implement
disclosures compulsory for some regulated
the TCFD Recommendations. The Task Force
sectors in the near future.
found that disclosure of climate-related
financial information has increased since
2016, but was still insufficient for investors. FRANCE

Based on the TCFD survey, the In France, there is already a legal

requirement for institutional investors to
artificial intelligence review,
disclose physical and transition climate
and input from external risk in their portfolios. Article 173-VI is part
initiatives, the Task Force sees of the French Law on Energy Transition for
Green Growth and is the first law requiring
progress being made to improve
institutional investors to report on how they
the availability and quality incorporate climate change considerations
of climate-related financial into their investment decisions. 178

information. However, given

the speed at which changes are US
needed to limit the rise in the
In the US, Senator Elizabeth Warren has
global average temperature— proposed a bill – the Climate Risk Disclosure
across a wide range of sectors Act – which would direct the US Securities
— more companies need to and Exchange Commission to issue rules
requiring climate-related disclosures. 179
consider the potential impact
of climate change and disclose
material findings.
- TCFD Status Report 2019

177 TCFD, Task Force on Climate-related Financial Disclosures, 2019 Status Report, 2019, http://bit.ly/2YhrYtW

178 LOI n° 2015-992 du août 2015, Relative à la transition énergétique pour la croissance verte - Article 173,
(LAW n ° 2015-992 of August 2015, Relating to the energy transition for green growth - Article 173), http://bit.ly/2Ja4CAb;
Article 173-VI: Understanding the French regulation on investor climate reporting, http://bit.ly/2xgsv3u
179 PRI, PRI reacts to Climate Risk Disclosure Act, 2018, http://bit.ly/2XzDDaz ; A bill to amend to amend the Securities
Exchange Act of 1934 to require issuers to disclose certain activities relating to climate change, and for other
purposes, http://bit.ly/2KLOHeT; Senator Warren, Climate Risk Disclosure Act, https://bit.ly/2FDzdVS
Climate-related financial disclosures: From TCFD towards regulation?

UK related factors into financial decision

making. The outputs from the CFRF
will inform the PRA’s approach to
The Bank of England has been unequivocal
supervising its expectations and
in its warnings on the risks of climate
climate policy
change to the financial system, focusing first
on insurers and then the banking sector.180 –– On 15 April 2019, the PRA became the
first national financial regulator to
–– In 2015, the Bank of England’s Prudential
publish expectations on how banks and
Regulation Authority (PRA) published
insurers should manage the financial
its report: The impact of climate change
risks of climate change by publishing
on the UK insurance sector181 and
Policy Statement 11/19 and Supervisory
in 2018 Transition in thinking: The
Statement 3/19 185
impact of climate change on the UK
banking sector182 –– In June 2019, the PRA sent a letter to the
largest regulated life and general insurers
–– In October 2018, the PRA issued
indicating that its biennial 2019 insurance
consultation paper 23/18 on Enhancing
stress test would include an exploratory
banks’ and insurers’ approaches to
exercise in relation to cyber underwriting
managing the financial risks from
and climate change186
climate change”183 along with a draft
supervisory statement
SPAIN
–– In March 2019, the PRA and Financial
Conduct Authority (FCA) established
the Climate Financial Risk Forum The Spanish government has recently
(CFRF)184 a group of 17 regulated firms approved a legislative proposal to attempt to
- including HSBC, Legal & General, implement the TCFD Recommendations. 187
Lloyd’s of London, and Blackrock - to
support the integration of climate-

180 Bank of England, Climate change: why it matters to the Bank of England, http://bit.ly/2ZQuQhI

181 Bank of England, The impact of climate change on the UK insurance sector, A Climate Change Adaptation Report, 2015,
http://bit.ly/2XyMWHK
182 Bank of England, Transition in thinking: The impact of climate change on the UK banking sector, 2018, http://bit.ly/2Yfn3db

183 Bank of England, Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change, 2019,
http://bit.ly/2RFQBht and https://bit.ly/2Gnle62
184 Financial Conduct Authority, First meeting of the PRA and FCA’s joint Climate Financial Risk Forum, 2019, http://bit.
ly/2KEMwJO
185 Bank of England, Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change,
2019, http://bit.ly/2RFQBht
186 Bank of England, Insurance Stress Test 2019, Letter sent to the largest regulated life and general insurers, 2019,
http://bit.ly/2Jm1ZeX
187 See: ANTEPROYECTO DE LEY DE CAMBIO CLIMÁTICO Y TRANSICIÓN ENERGÉTICA, Artículo 26.
Integración del riesgo del cambio climático por entidades cuyos valores estén admitidos a negociación en
mercados regulados, entidades de crédito, entidades aseguradoras y reaseguradoras y sociedades por razón
de tamaño, http://bit.ly/2NewxnW
 57

PRA SUPERVISORY STATEMENT: In September 2018 the UK’s regulator for

auditors, accountants and actuaries, the
ENHANCING BANKS’ AND
Financial Reporting Council through its
INSURERS’ APPROACHES TO Financial Reporting Lab, launched a project
MANAGING THE FINANCIAL on climate and workforce reporting,189
RISKS FROM CLIMATE CHANGE seeking to identify how climate and
workforce disclosures can be reported most
effectively and to highlight best practice in
In its new supervisory statement,188 the
company reporting.
PRA sets out its expectation that banks
and insurers should focus on four key
areas in relation to climate risk: AUSTRALIA
–– Embedding the consideration of the
financial risks from climate change in The Australian Prudential Regulation
their governance arrangements Authority (APRA) has acknowledged that
the financial risks posed by climate change
–– Incorporating the financial risks from
are: “foreseeable, material and actionable
climate change into existing financial
now”190 and has called on regulated entities
risk management practice
to move from gaining awareness of the
–– Using (long-term) scenario analysis financial risks of climate change to taking
to inform strategy setting and risk action to mitigate them.
assessment and identification
On 20 March 2019, APRA published an
–– Developing an approach to disclosure on Information Paper Climate change: Awareness
the financial risks from climate change to action191 which notes that “APRA expects
to observe continuous improvement in the
The area that stands out most from this list is
awareness and action of regulated entities.”
around governance. The PRA expects regulated
In its latest annual report, APRA stated that
firms to appoint a Senior Manager who will
it has “continued building awareness of
be responsible for identifying and managing
climate-related financial risks” within the
financial risks from climate change.
financial services industry.
These individuals will have quite a task
on their hands, starting with mapping
out their company’s exposure to climate
change risks. For insurers, exposure could
affect both sides of the balance sheet: on
the asset side – in terms of how those risks
could impact regulated firms directly as
major asset owners themselves and asset 189 Bank of England, Insurance Stress Test 2019,

managers for others – and on the risk/ Letter sent to the largest regulated life and general
insurers, 2019, http://bit.ly/2Jm1ZeX
underwriting side, which is currently the
190 APRA, APRA to step up scrutiny of climate risks
principal focus of the PRA.
after releasing survey results, 2019,
188 Bank of England, Enhancing banks’ and insurers’ http://bit.ly/2FBaGRh
approaches to managing the financial risks from 191 APRA, Information Paper: Climate change:
climate change, 2019, http://bit.ly/31SL9ws Awareness to action, 2019, http://bit.ly/2J9qawO
Climate-related financial disclosures: From TCFD towards regulation?

Although APRA has not enacted specific
requirements for regulated entities to
address climate change risks, APRA’s
executive board member and chair of the
global Sustainable Insurance Forum, Geoff
Summerhayes, has said that APRA expects
climate risks to be assessed within existing
prudential risk management standards CPS
220192 and SPS 220,193 and that supervisors
will be factoring this into their ongoing
supervisory activities.194
Regulators have acknowledged that climate
risk reporting requirements are likely to
become more onerous and mandatory. In
February of this year, Mr Summerhayes
stated that “Regulators’ current stance of
merely encouraging climate-risk disclosure
will inevitably harden towards making such
disclosure mandatory”.198

At the end of 2018, the Australian Securities

and Investments Commission (ASIC)
released its 18-273MR report on climate risk
disclosure by listed companies, which found
that very limited climate risk disclosure
occurred outside the top-200 companies.195
The report found that more could be done
to “improve consistency in disclosure
practices across listed companies”. ASIC’s
report REP 593196 found that most ASX100
entities had considered climate risk, but
that disclosures were inconsistent and
many were far too general and limited to be
useful to investors.197

192 APRA, Australia, Objectives and key requirements of this Prudential Standard, 2017, http://bit.ly/2XavCto

193 APRA, Australia, Objectives and key requirements of this Prudential Standard, 2020, http://bit.ly/2Xzccxs

194 APRA, APRA to step up scrutiny of climate risks after releasing survey results, 2019, http://bit.ly/2FBaGRh

195 ASIC, ASIC reports on climate risk disclosure by Australia’s listed companies, 2018, http://bit.ly/2IPy9QC

196 ASIC, Climate risk disclosure by Australia’s listed companies, 2018, http://bit.ly/2JetA1g

197 ASIC, ASIC reports on climate risk disclosure by Australia’s listed companies, 2018, http://bit.ly/2IPy9QC

198 Geoff Summerhayes, Financial exposure: the role of disclosure in addressing the climate data deficit, 2019 http://bit.
ly/2Xc7qXm; See also from the June speech in Singapore: http://bit.ly/2X6C5p0
 59

CANADA The [Canadian] Government

supports the TCFD’s voluntary
In 2018 the Canadian Government international disclosure
commissioned an expert Panel
on Sustainable Finance to consult
standards and a phased
stakeholders on sustainable finance approach to adopting them by
and climate-related risk disclosures.199 major Canadian companies, as
The Panel proposed six “foundational
elements” for sustainable finance:
appropriate. By supporting these
standards, the Government
–– Clarity on climate and carbon policy
aims to raise firms’ awareness
–– Reliable information
of the importance of tracking,
–– Effective climate-related financial
managing and disclosing
disclosures
material climate-related
–– Clear interpretation of fiduciary
and legal duties risks and opportunities in
–– A knowledgeable support ecosystem
a consistent and comparable
way. The Government will also
–– Relevant and consistent financial
regulation200 encourage adoption by federal
The Bank of Canada identified climate
Crown corporations where
change as one of six vulnerabilities in its appropriate and relevant to
2019 financial system review201 and the their business activities.
TCFD Recommendations were mentioned
in the Canadian government’s 2019 budget
as follows:

199 Government of Canada, Expert panel on sustainable finance, http://bit.ly/2XbItv2

200 Government of Canada, The Expert Panel on Sustainable Finance, Executive Summary, http://bit.ly/2ZIzdLY

201 Bank of Canada, Financial System Review 2019, Subsection, Vulnerability 5: Climate change, http://bit.ly/2JePW30
Climate-related financial disclosures: From TCFD towards regulation?

US In 2017, the US Government Accountability

Office (GAO) was asked to review the steps
the SEC has taken to clarify to companies
The US Securities and Exchange
their disclosure requirements for climate-
Commission (SEC) Regulation S-K
related risks and the constraints the SEC
contains disclosure requirements that are
faces when reviewing climate-related
applicable to the nonfinancial statement
disclosures.
portion of annual filings and other periodic
reports filed with SEC. In February 2018, the GAO issued its report
Climate-related risks: SEC Has Taken Steps to
The SEC issued its: Commission Guidance
Clarify Disclosure Requirements.205 The report
Regarding Disclosure Related to Climate Change
noted the SEC’s existing guidance and
in 2010.202 The 2010 Guidance identifies four
that it had no current plans to modify its
items in Regulation S-K that may be most
climate-related disclosure requirements
likely to require climate-related disclosure
and had no specific actions or plans based
in companies’ annual filings.
on the TCFD Recommendations. The GAO
Accordingly, the 2010 Guidance aims to report provided illustrative examples
“...remind companies of their obligations of climate-related disclosures in SEC
under existing federal securities laws and Form 10-K Filings from two companies
regulations to consider climate change in the oil and gas industry, one including
and its consequences as they prepare quantitative information and metrics.
disclosure documents to be filed with us
and provided to investors.”203
EUROPE
The SEC issued reports to Congress in 2012
and 2014.204 examining changes in climate-
At the European level, the wider
related disclosures in select industries. SEC
sustainability of the financial system
found that most of those filings included
is under review with the European
some level of climate-related disclosures,
Commission rolling out its Action Plan for
and reported that there were no notable
Financing Sustainable Growth, which has
year-to-year changes.
as one of its three objectives to “manage
financial risks stemming from climate
change, environmental degradation and
social issues”.206

202 US Securities and Exchange Commission, 17 CFR Parts 211, 231 and 241, Commission Guidance Regarding Disclosure
Related to Climate Change, 2010, https://www.sec.gov/rules/interp/2010/33-9106.pdf
203 Commission Guidance Regarding Disclosure Related to Climate Change; Final Rule, Securities and Exchange
Commission, 2010, https://www.sec.gov/rules/interp/2010/33-9106fr.pdf
204 United States Government Accountability Office, Report to Congressional Requesters, Climate-Related Risks: SEC Has
Taken Steps to Clarify Disclosure Requirements, 2018, https://www.gao.gov/assets/700/690197.pdf
205 United States Government Accountability Office, Report to Congressional Requesters, Climate-Related Risks: SEC Has
Taken Steps to Clarify Disclosure Requirements, 2018, https://www.gao.gov/assets/700/690197.pdf
206 European Commission, Financial Stability, Financial Services and Capital Markets Union, Commission action plan on
financing sustainable growth, 2018, https://ec.europa.eu/info/publications/180308-action-plan-sustainable-growth_en
 61

The European Commission has sustainability within Solvency II.211 The

established a Technical Expert Group
(TEG) on Sustainable Finance.207 The TEG
was asked to make recommendations for
updates to the Commission’s non-binding
guidelines to the Non-Financial Reporting
Directive (2014/95/EU) to provide further
guidance to European companies on how
to disclose climate-related information in
line with TCFD.208
opinion aims to integrate sustainability
considerations in the valuation of assets
and liabilities, investment practices and
underwriting practices of insurers. The
consultation is based on EIOPA’s Technical
Advice on the integration of sustainability
risks and factors in the delegated acts
under Solvency II and the Insurance
Distribution Directive.212

The TEG published its final report on In May 2018, as part of a package of
climate-related disclosures in January legislative proposals on sustainable
2019.209 Based on the TEG report, in June finance, the European Commission
2019 the European Commission published introduced a proposal for fund regimes
its Guidelines on reporting climate-related in the EU which aims to ensure that ESG
information. These guidelines integrate factors are considered and disclosed when
TCFD and are intended to be read together making investment decisions.213 The TEG
with the relevant national legislation has also been working on developing an EU
transposing the EU’s Non-Financial taxonomy for climate change mitigation
Reporting Directive (2014/95/EU).210 and climate change adaptation and an
EU Green Bond Standard to increase
The European Insurance and Occupational
transparency and comparability of the
Pensions Authority (EIOPA) launched
green bond market.214
a consultation on a draft opinion on

207 European Commission, Sustainable finance, http://bit.ly/2J60gKq

208 Kate Levick, E3G, Trends in financial regulation of climate risk challenge the EU’s leadership of sustainable finance, 2019,
http://bit.ly/31WS73u
209 European Commission, Financing a Sustainable European Economy, 2019, http://bit.ly/2J9r9gu
210 European Commission, Financial Stability, Financial Services and Capital Markets Union, Technical expert group on
sustainable finance (TEG), http://bit.ly/2FBTfA5
211 European Insurance and Occupational Pensions Authority, EIOPA launches consultation on opinion on sustainability
within Solvency II, 2019, http://bit.ly/2YfbOkX
212 European Insurance and Occupational Pensions Authority, EIOPA REGULAR USE EIOPA-BoS-19/172 30, 2019,
http://bit.ly/2NhxuvP
213 European Commission, Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on
disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341, 2018,
http://bit.ly/31USUSu
214 EU TECHNICAL EXPERT GROUP ON SUSTAINABLE FINANCE, Financing a Sustainable European Economy, Report on
Climate-related Disclosures, 2019, http://bit.ly/2FBTfA5
Climate-related financial disclosures: From TCFD towards regulation?

POTENTIAL BENEFITS OF CLIMATE-

RELATED DISCLOSURE

Better understanding of the exposure of a company’s operations

to physical and transition risks related to climate change

Inclusion in actively managed investment portfolios and in

sustainability-focused indices, used for passive investment strategies
Listed companies
Climate-related disclosures used to improve credit ratings for bond
issuance and redit worthiness assessment for bank loans

Reduced friction in investor engagement and shareholder acton

and voting

Better understanding of loan portfolio’s exposure

to climate-related risks

Better risk evaluation for the calculation of capital charges

More informed investment and lendiing decisions

Banks (including asset management)

Improved acctiveness to climate-aware clients

Evidence of expertise in climate-related transations, leading further

to climate-related business opportunities

Evidence of risk control for financial regulators (stress testing)

Better understanding and management of climate-exposure

of underwriting portfolio

Better understanding and management of climate-related risks

Insurance and opportunities of the investment portfolio
undertakings
Evidence of risk control for prudential regulators (stress testing)
and control over amount of technical provisions that could be
affected by climate-related risk

EU TECHNICAL EXPERT GROUP ON SUSTAINABLE FINANCE, Financing a Sustainable European Economy, 2019,
215 
http://bit.ly/2J9r9gu
 63

FUTURE HARMONISATION – Certain voluntary disclosure regimes are

moving towards mandatory reporting
A DIRECTION OF TRAVEL
through participating members’
agreement. The UN Principles for
As climate-related financial disclosure Responsible Investment (UN PRI) intends
regimes and the TCFD Recommendations to make certain of its climate indicators
in particular are replicated, reinforced mandatory for signatories to report in
and encouraged, and practical guidance is 2020.220 The indicators include:
issued, companies will inevitably provide
greater and more consistent reporting on –– Outlining overall approach to climate-
climate risks. related risks (SG 01 CC)

There is a direction of travel and it is likely –– Providing an overview of those in

that TCFD-style reporting will eventually
become mandatory in a number of
jurisdictions, at least in certain sectors.
Research by CDSB shows that across the
G20 by 2017, 74% of countries216 already
had some form of mandatory scheme
related to climate reporting in place.217
Many investors, insurers and other
stakeholders have indicated their support
for mandatory reporting requirements.
For example, the UK Parliamentary
Environmental Audit Committee218 has
called for climate disclosure reporting to
be mandatory for large companies and
asset owners by 2022.219
the organisation that have oversight,
accountability and/or management
responsibilities for climate-related
issues (SG 07 CC)
–– Outlining how strategic risks and
opportunities are analysed (SG 13 CC)
The PRI has stated that its other indicators
will remain voluntary, but with a view
to becoming mandatory as good practice
develops.221
PRI has also introduced a delisting model
designed to provide a sanction for its
member investors who fail to take their
commitment to the principles seriously
enough and a number have been placed
on a watch-list.222

216 14 out of 19 countries within the G20 group do - with the exception of Argentina, India, Indonesia,
Russia and Saudi Arabia
217 Nadine Robinson, Climate Disclosure Standards Board, Mandatory climate change disclosure in the G20:
where are we at? European Commission, Guidelines on reporting climate-related information, 2017, http://bit.ly/2X8wcb2
CORPORATE CLIMATE DISCLOSURE SCHEMES IN G20 COUNTRIES AFTER COP 21, http://bit.ly/31YhZvR
218 UK Parliament, The Environmental Audit Committee published its Seventh Report of Session 2017–19, Greening Finance:
embedding sustainability in financial decision making, 2018, http://bit.ly/2XcZbdB
219 UK Parliament, Climate risk reporting should be mandatory by 2022, 2018, http://bit.ly/31UiZBf ; Leslie Hook, MPs call
for UK companies to disclose climate risks, 2018, https://www.ft.com/content/3adcf78e-6711-11e8-8cf3-0c230fa67aec
220 It will remain voluntary to disclose responses publicly.
221 PRI, TCFD-based reporting to become mandatory for PRI signatories in 2020, 2019, http://bit.ly/2YgOrav
222 Jennifer Thompson, Financial Times, UN responsible investing body set to delist 50 groups next year, 2019,
https://on.ft.com/2Lr5rYl
Climate-related financial disclosures: From TCFD towards regulation?

CENTRAL BANKS’ AND and supervisors take climate-related

risks within the remit of their mandates
SUPERVISORS’ NETWORK
and included the following non-binding
FOR GREENING THE FINANCIAL recommendations:
SYSTEM (NGFS)
–– Integrating climate-related risks
into financial stability monitoring
Climate change is becoming a concern and micro- management of some of
amongst central banks223 and there is central supervision
increasing harmonisation amongst central
banks around climate risk disclosures. –– Integrating sustainability factors into
own-portfolio management
34 central banks and supervisors
spanning five continents, from countries –– Helping to bridge data gaps
representing half of the world’s GHG –– Building awareness and intellectual
emissions and supervising two-thirds capacity and encouraging technical
of global systemically important banks assistance and knowledge sharing
and insurers joined forces in 2017 as
–– Achieving robust and internationally
the Network for Greening the Financial
consistent climate and environment-
System (NGFS).224 NGFS members include
related disclosure
the central banks of Spain, Mexico,
Finland, the Netherlands, Denmark, –– Supporting the development of a
Dubai, Norway, China, Austria, Singapore, taxonomy of economic activities
Australia, and Switzerland.
The NGFS’s key recommendations were
The NGFS first progress report was summarised in a 2019 open letter from
published in October 2018225 and in Bank of England Governor, Mark Carney,
April 2019 the NGFS published its first Governor of Banque de France, François
comprehensive report: A call for action: Villeroy de Galhau and Chair of NGFS,
Climate change as a source of financial risk.226 Frank Elderson.227
The report recommended that banks

223 Victor Mendez-Barreira and Karolina Silyte, Central Banking, The calm before the storm – The climate change
2019 survey, Central Banking, 2019, http://bit.ly/2ZPNVRc
For an examination of how failure to take into account environmental protection when designing and
implementing policy could expose the European Central Bank to the risk of litigation see: Solana, Javier,
The Power of the Eurosystem to Promote Environmental Protection (August 30, 2018). University of Oslo Faculty
of Law Research Paper No. 2018-23., http://dx.doi.org/10.2139/ssrn.3241341
224 Banque de France, NGFS - Network for Greening the Financial System First Progress Report, 2019,
http://bit.ly/2ZQtYdg
225 Banque de France, NGFS - Network for Greening the Financial System First Progress Report, 2019,
http://bit.ly/2ZQtYdg
226 Banque de France, Network for Greening the Financial System, A call for action Climate change as a source of financial risk,
2019, http://bit.ly/2Xu8gyd
227 Open letter from the Governor of Bank of England Mark Carney, Governor of Banque de France François Villeroy de
Galhau and Chair of the Network for Greening the Financial Services Frank Elderson, Open letter on climate-related
financial risks, 2019, http://bit.ly/2NfFTjq
 65

The prime responsibility for

climate policy will continue to
sit with governments. And the
private sector will determine
the success of the adjustment.
But as financial policymakers
and prudential supervisors, we
cannot ignore the obvious risks
before our eyes….
The [Network for Greening the
Financial System] is the core of
the response of central banks
and supervisors. But climate
change is a global problem,
which requires global solutions,
in which the whole financial
sector has a crucial role to play.
- Open letter from the Governor of Bank of
England Mark Carney, Governor of Banque de
France François Villeroy de Galhau and Chair of
the Network for Greening the Financial Services
Frank Elderson
 67

New liabilities: Liability

risks to businesses,
directors and officers

Businesses are vulnerable to climate FAILURE TO MITIGATE

change risk and there is a growing body GHG EMISSIONS
of standards in law and regulation
and increasing scrutiny of companies’
approach to climate risk, from investors, In Clyde & Co’s last report on Climate
lenders and regulators. Alongside the Liability Risk, Rising Tide,228 we considered
growing awareness of, and focus on, climate-related cases brought against
climate risk to business is a rising number governments for failure to adhere to and
of climate-related cases. implement policy in line with the Paris
Agreement and other international or other
We have identified seven main international or national commitments.
categories of climate-related claims that We also considered the tort cases that
may be brought: have been brought primarily in the US
–– Failure to mitigate GHG emissions against those considered responsible
for GHG emissions, including oil majors,
–– Failure to adapt to the physical impacts
airlines and others, which seek to link the
of climate change
extraction and sale of fossil fuels to loss
–– Failure to adapt investment strategies and damage caused by climate change.

–– Failure to disclose climate-related risks For example, in Lliuya v RWE, a Peruvian

–– Failure to comply with environmental
and other regulatory obligations
–– Failure to adapt professional advice
or services
–– Failure of fiduciaries related to the
above
farmer is pursuing a case in a German
court against RWE, Germany’s largest
electricity producer, alleging that RWE
knowingly contributed to climate change
by emitting substantial volumes of GHGs
and thus bears a share of responsibility for
the melting of mountain glaciers near Mr
Lliuya’s home town of Huaraz, Peru.

228 Nigel Brook and Neil Beresford, Report: Climate change - the evolving landscape of litigation, 2019,http://bit.ly/2KFGUiG
New liabilities: Liability risks to businesses, directors and officers

In the US, a number of cases have been FAILURE TO ADAPT TO THE

brought by cities and municipalities
including New York, Boulder, Seattle,
San Francisco and Baltimore against oil
majors seeking compensation for the
costs of adapting to climate change. The
tide of direct climate litigation in tort
related to GHG emissions continues to
rise, with reports of Toronto229, Paris230 and
Hawaii231 potentially expanding the list of
city or state governments contemplating
litigation against emitters for costs of
adaptation to climate change.
Litigants against GHG emitters have
shown creativity in both approach and
targets and also by developing new
theories of causation. These cases have
been largely unsuccessful in court.232
However, if any of the current cases result
in successful judgments, the damages
would be substantial and could cause a
ripple effect across jurisdictions. The legal
costs of defending such claims are also
significant. For more detail on these cases,
their bases and the strategies adopted
by the plaintiffs to date, see Clyde & Co’s
Rising Tide report.
PHYSICAL IMPACTS OF
CLIMATE CHANGE
Companies’ failure to adapt to the
changing physical risks in the territories
where they or their suppliers operate
can give rise to liability. As the acute
and chronic effects of climate change
take hold, a company’s risk profile may
shift, increasing its exposure to an array
of claims in public and private nuisance,
negligence, failure to warn, trespass and
unjust enrichment.
There could be an increase in claims
against companies which have failed to
adapt their operations. Such claims may
not necessarily be framed as ’climate‘
litigation. They may be claims that could
have arisen in any event, but which
were made more likely by the increased
stressors of the physical environment in
which the company is operating.
For instance, companies which operate
high-risk physical infrastructure, such
as dams, could be exposed to increased
liability risk due to physical climate risk.
Climate change could impact dam safety;233

229 Marco Poggio, Climate Liability News, Toronto Will Explore Suing Big Oil for Climate Costs, 2019, http://bit.ly/2NhqK0R
230 Ucilia Wang, Climate Liability News, Paris, Inspired by New York City, Considers Climate Suit Against Oil Companies, 2018,
http://bit.ly/2J20eDa
231 Kaitlin Sullivan, Climate Liability News, Hawaii Leaders Mull Potential of Climate Liability Cases, https://bit.ly/2JtxGFv
232 Nigel Brook and Neil Beresford, Clyde & Co, Report: Climate change - the evolving landscape of litigation, 2019,
https://resilience.clydeco.com/articles/climate-change-liability-risks
233 Tyler J. Kelley, The New York Times, The Fight to Tame a Swelling River With Dams That May Be Outmatched by Climate
Change, 2019, https://nyti.ms/325VHbQ

rainfall could affect tolerance levels or
drought could lead to subsidence and so
damage a dam’s infrastructure. This could
make it more likely for the dam to fail,
giving rise to increased risk of third party
claims for the resulting property damage.
The Queensland Floods Class Action
in Australia234 is a case in point: 6,000
plaintiffs are seeking compensation
against the Queensland Bulk Water Supply
Authority (“Seqwater”), SunWater and the
State of Queensland for financial loss and
damage caused by the allegedly negligent
operation of the Wivenhoe and Somerset
dams during the January 2011 flood in
South East Queensland. The action alleges
that the dam operators were negligent
in failing to use rainfall forecasts to
make decisions about the operation
of the dams, thereby contributing to
downstream flooding.
Utility companies regularly face claims
for wildfire damage caused by sparks from
power lines. With many parts of the world
exposed to increased drought conditions,
the risk of wildfire risen dramatically, and
so too has the risk of utilities’ activities
causing outbreaks of fire, and companies
being held legally accountable for
resulting damage.235
234 Supreme Court of New South Wales, Queensland Floods Class Action, http://bit.ly/2X8yres
235 Sarah Brody, et al., McKinsey & Company, Why, and how, utilities should start to manage climate-change risk,
2019, https://mck.co/2NiKqBw
236 Adrien A. Weibgen, The Yale Law Journal, The Right To Be Rescued: Disability Justice in an Age of Disaster, 2017,
http://bit.ly/2xcWY2B
69
Companies can also face liability in the
context of natural disasters caused or
enhanced by climate change, if they
are shown to have taken insufficient
preventive and rescue measures or failed
to warn employees or others of risks.
Coming years could see an uptick in
claims relating to disaster preparedness
and the “right to be rescued”.236
For example, in 2011, following Tropical
Storm Irene, two non-profit organisations
and two individuals (a blind man and a
woman who uses a wheelchair) brought
a class action discrimination suit on
behalf of approximately 900,000 people
with disabilities living in New York City
under the Americans with Disabilities
Act against the City of New York. The
plaintiffs argued that the City’s emergency
preparedness programme failed to
accommodate their needs by, among
other things, inadequately planning for
the evacuation of people with disabilities;
failing to provide an accessible shelter
system; ignoring the unique needs of
people with disabilities in the event of a
power outage; and failing to communicate
adequately with people with special needs
during an emergency. The Court found
that the City’s plans were inadequate to
ensure that people with disabilities could
New liabilities: Liability risks to businesses, directors and officers

evacuate before or during an emergency; due to rising carbon prices, increased

that it failed to provide accessible
shelters; and did not inform people with
disabilities of the availability and location
of accessible emergency services. After
settling the case, the City of New York
revised its emergency response plan to
address the shortcomings identified by
the plaintiffs.237
FAILURE TO ADAPT INVESTMENT
STRATEGIES
competition from cheaper renewables
and the impact of EU energy reforms on
state subsidies for coal power. The case is
considered to be the first time a company
will defend itself in court over allegations
it has failed to manage climate-related
financial risk when making a major
investment decision.238 ClientEarth has
also submitted a written objection to
Drax Power’s plans to build four new
gas turbines at its Selby power plant in
North Yorkshire.239

Climate considerations are leading to

Shareholders may bring claims against
companies and/or their directors and
officers for failing to properly consider
the impacts of physical or transition risks
on investments. Shareholder claims may
arise from stranded assets, operations, or
businesses not properly keeping pace with
climate change, or not taking into account
its impacts on physical assets.
An example of a shareholder action is
the lawsuit brought by activist law firm
ClientEarth against the Polish utility
company Enea, in which ClientEarth
holds shares. The action challenges the
company’s decision to greenlight a EUR
1.2 billion, 1GW Ostrołeka C coal power
plant and also alleges breach of directors’
duties. The action hinges on the financial
risk the project allegedly poses to investors
judicial challenges to planned projects.
In 2017, Earthlife Africa Johannesburg
in what has been called “South Africa’s
first climate change court case”,
successfully challenged a decision of
the Environmental Affairs Minister
in allowing the Thabametsi coal-fired
power station in Limpopo, requiring the
Minister to take into account a full climate
impact assessment report. Following
this reconsideration, the Minister again
granted the environmental authorisation.
This second decision has again been
challenged in the High Court. 240
The need for companies to take into
account projects’ future GHG emissions
was recently highlighted in the Australian
case: Gloucester Resources Limited v Minister

237 Deanna Moran and Elena Mihaly, Meeting of the Minds, Legal Liability Could Catalyze Action on Climate Change,
http://bit.ly/2XaB13l
238 ClientEarth, World-first climate risk case launched over major coal plant in Poland, 2018, http://bit.ly/2J9n4Jh
239 ClientEarth, ClientEarth lodges objection to Drax gas plant on climate grounds, 2018, http://bit.ly/2YbZAcK
Earthlife Africa Johannesburg v Minister of Environmental Affairs and Others (65662/16) [2017] ZAGPPHC 58; [2017]
240 
2 All SA 519 (GP) (8 March 2017) https://bit.ly/2KNy5Dd; and Centre for Environmental Rights, South Africa,
https://bit.ly/2YvOmQJ
 71

for Planning and Groundswell Gloucester.241 He also said:

In 2017, the New South Wales Planning
Assessment Commission had refused
“The Project will be a material
consent for Gloucester Resources Ltd’s
(GRL’s) coking coal mine project, Rocky source of GHG emissions and
Hill. When GRL appealed, the NSW Land contribute to climate change.
and Environment Court confirmed the
Approval of the project will not
refusal for consent partly on the basis of
the proposed mine’s emissions.242 assist in achieving the rapid
In a ruling unprecedented in Australian and deep reductions in GHG
courts for its consideration of climate emissions that are needed now
change,243 Chief Justice Brian Preston in order to balance emissions by
ordered that the project should be
refused not only because of the adverse sources with removals by sinks
social impacts which noise, air and light of GHGs in the second half of
pollution would have, but because it would this century and achieve the
“cause distributive inequity, both within
the current generation and between generally agreed goal of limiting
the current and future generations” the increase in global average
contrary to the principles of ecologically temperature to well below 2ºC
sustainable development.
above pre-industrial levels.”244

Although the court’s jurisdiction is limited

to NSW, it has been observed that the
decision sets a precedent that could have
wide-reaching consequences for all fossil
fuel-dependent industries in Australia.245

241 [2019] NSWLEC 7

242 Environmental Law Australia, Glouchester Resources Case, http://bit.ly/2IPfe8L
243 Dr Peter Holt, Olivia Kember, Energetics Climate risk and the emerging regulatory imperatives, 2019,
http://bit.ly/2Xuau0s
244 Judgment of Preston CJ, Gloucester Resources Limited v Minister for Planning [2019] NSWLEC 7, http://bit.ly/2LnbIUS
245 Dr Peter Holt, Olivia Kember, Energetics, Climate risk and the emerging regulatory imperatives, 2019,
http://bit.ly/2Xuau0s 236 [2019] NSWLEC 7
New liabilities: Liability risks to businesses, directors and officers

In Conservation Law Foundation, Inc. v. Shell
Oil Products US, a suit was filed against Shell
in the federal district court for the District
of Rhode Island. The suit alleges that the
company failed to properly evaluate the
risk of coastal flooding caused by sea
level rise and increased storm risk to its
infrastructure investment, a bulk storage
and fuel terminal in Providence, Rhode
Island, despite having “long been well
aware” of climate change’s impacts and
risks and having incorporated such risks
in “ongoing company investments”. These
investments included projects off the coast
of Nova Scotia and in the North Sea.246
Asset managers could potentially face
claims if they have purchased stocks
without fully considering the risks of
a changing climate to their portfolios,
or if they are deemed to have held on to
assets for too long, where climate change
risks subsequently result in sharp price
corrections. ClientEarth has warned 14 of
the UK’s biggest pension funds, including
the Tesco Pension Scheme, British Airways
Pensions and the BP Pension Fund, that
they could risk legal action if they fail to
consider the effects of climate change on
their portfolios.247

It is alleged that the company failed to

take into account sea level rise, increased
and/or more intense precipitation, and
increased magnitude and frequency of
storm events and storm surges, which
will become, and are becoming, worse as a
result of climate change. It is alleged that
this has put Shell’s Providence Terminal
bulk storage and fuel terminal in Rhode
Island at risk of coastal flooding (and
thus failing to prevent spills of hazardous
materials).

246 1:17-cv-00396, http://climatecasechart.com/case/5619/

247 Financial Times, Pension funds warned of legal action over climate risk, https://on.ft.com/2xchYq4
73
New liabilities: Liability risks to businesses, directors and officers
THE CHURCH OF ENGLAND
PENSIONS BOARD
The Church of England Pensions Board
is a core (and founding) member of the
Church Investors Group (the CIG) which
represents UK church organisations
with combined investment assets of
nearly GBP 20bn.
It has also launched the Transition
Pathway Initiative (TPI),248 an asset
owner-led, and asset manager-
supported global initiative to identify
how prepared companies are for the
transition to the low carbon economy.
The CIG has a clearly stated voting
policy which explains how it will
exercise its voting entitlements at
corporate AGMs. In 2018 this was
updated to state that the re-election
of a company chairman would not be
supported if the company has received
a low grade on a TPI assessment,
indicating a lack of awareness and
action on climate transition risk.
248 http://www.lse.ac.uk/GranthamInstitute/tpi/
249 Attracta Mooney, Financial Times, Investors challenge 55 companies over commitment to climate change, 2018,
https://on.ft.com/2PqiJ9U
The Church of England Pensions Board
sees “climate change as a key issue
and encourages other investors to
partner with [it] to hold companies
accountable to the highest standards
and to adapt their activities to fit with
the Paris Agreement”.
Investors led by the Church of
England Pensions Board targeted 55
European corporations including
seven automakers and ten oil groups
(among them BMW, BP and steelmaker
ArcelorMittal) accusing them of
backing “behind the scenes” lobbying
to undermine efforts to limit climate
change while publicly supporting
carbon reduction, and calling for
greater transparency.249
Major asset owners, acting in this way
have a powerful voice. They are also
taking steps to protect themselves
from the charge of being passive or
failing to take the issue seriously.

Companies could also be found liable for
failing to recognise the opportunities
involved in the transition to a low-
carbon economy. In its June 2019 report,
CDP found that the 215 biggest global
companies report that cumulative gains
from harnessing business opportunities
could be as high as USD 2.1trn, including
increased revenue through demand for
low emission products and services (such
as electric vehicles), shifting consumer
preferences, and increased capital
availability as financial institutions
favour low-emissions producers.250 There
may be missed opportunities for those who
do not move in time with the transition.
FAILURE TO DISCLOSE CLIMATE-
RELATED RISKS
Where legal duties already exist to report
on climate change risks, the very lack of
disclosure could lead to claims.
An example of legal action for failure
to disclose climate risk is the series of
investigations and claims brought against
ExxonMobil by US State Attorneys General
and investors. In 2015, the New York
Attorney General (NYAG) launched an
investigation into ExxonMobil, following
news reports that ExxonMobil’s own
250 CDP, External Press Release, Major Companies Face USD 1 Trillion in Climate Risks, 2019, http://bit.ly/31URW90
251 David Hasemyer, InsideClimate News, 2016: Exxon vs. Climate Change, a Battle With Many Fronts, 2016,
http://bit.ly/2Nc0Awq
252 David Hasemyer, InsideClimate News, U.S. Supreme Court Refuses to Block Exxon Climate Fraud Investigation, 2019,
http://bit.ly/2YeUhta; Exxon Mobil Corp. v. Healey, 2016, http://bit.ly/31UkvmV
75
scientists had warned of the possible
catastrophic consequences of fossil fuels
to the climate. Investigations into the
company by the attorneys general of
Massachusetts and the US Virgin Islands
soon followed. 251
ExxonMobil in turn filed lawsuits in Texas
in an effort to halt the investigations.
While the US Virgin Islands Attorney
General and ExxonMobil agreed to cease
proceedings, ExxonMobil’s lawsuits
against the NYAG and Massachusetts
Attorney General (MAG) continued and
were transferred to the New York Federal
Court. In March 2018, the New York Court
dismissed ExxonMobil’s action to stop
the investigations, finding that “Exxon’s
allegations that the [attorneys general]
are pursuing bad faith investigations in
order to violate Exxon’s constitutional
rights are implausible and therefore must
be dismissed for failure to state a claim.”
ExxonMobil has appealed that decision.
At the same time, the MAG kept fighting
ExxonMobil’s attempts to stymie the
investigation in Massachusetts courts,
which refused to block the investigation.
On 7 January 2019, the US Supreme Court
rejected ExxonMobil’s appeal of the
Massachusetts Supreme Court’s decision,
thus clearing the way for the MAG’s
investigation to proceed. 252
New liabilities: Liability risks to businesses, directors and officers

Further to its investigation into ExxonMobil,
in October 2018, the NYAG filed a fraud
action against the company under the
Martin Act, a law that prohibits companies
and individuals from making “any
representation or statement which is false”,
for allegedly misleading investors over the
risks of climate change regulations to its
business, seeking damages, restitution
for investors, and “such other and further
equitable relief as may be necessary to
redress Exxon’s violations of New York law
and its fraudulent and deceptive acts” 253
ExxonMobil, according to the NYAG, claimed
its oil and gas reserves and other long-term
assets faced little if any risk of becoming
stranded; and that, to simulate the impact
of future climate change regulations,
since 2007 it had applied an escalating
proxy cost of C02 and other GHGs to its
business. However, the NYAG suit alleges
that ExxonMobil did not actually apply
the proxy cost it represented to investors.
The NYAG claims that the company was
deceiving investors as to the company’s true
financial exposure to increasing regulations
and policies adopted to mitigate the adverse
effects of climate change. The NYAG also
accused Rex Tillerson, chief executive of
ExxonMobil from 2006 to 2016, of having
known that the statements about its use of
a proxy cost of carbon were misleading. The
case is set to go to trial in October 2019.254
Exxon has said it “looked forward to
refuting these claims as soon as possible
and getting this meritless civil lawsuit
dismissed”, and that “these base-less
allegations are a product of closed-
door lobbying by special interests,
political opportunism and the attorney
general’s inability to admit that a three-
year investigation has uncovered no
wrongdoing.”255
In 2015 in re Peabody Energy Corp., the New
York Attorney General (NYAG) found
that the coal company, Peabody, had
denied its ability to predict the potential
impacts of climate change policies on
its business, while at the same time
making market projections about the
impact of such policies. It also found that
Peabody misrepresented findings by the
International Energy Agency regarding
global coal demand in SEC filings and
in communications to the investment
community and general public. In
addition, the NYAG held that Peabody
had violated New York’s Martin Act. The
NYAG discontinued the investigation
in return for Peabody agreeing to make
specific disclosures on climate risks in its
next quarterly report and to refrain from
making the misleading statements it had
made previously in future reports.256

253 Letitia James, NY Attorney General, PRESS RELEASE, A.G. Underwood Files Lawsuit Against Exxonmobil For Defrauding
Investors Regarding Financial Risk The Company Faces From Climate Change Regulations, 2018, https://on.ny.gov/2CCsue5
People of the State of New York, by Barbara Underwood v. Exxon Mobil Corporation, 2018, https://on.ny.gov/2IPVxgQ
254 People of the State of New York v. Exxon Mobil Corporation,
http://climatecasechart.com/case/people-v-exxon-mobil-corporation/
255 Financial Times, New York sues Exxon for misleading investors on climate change risks, https://on.ft.com/2PpGKh6
256 In re Peabody Energy Corp., 2007, http://climatecasechart.com/case/in-re-peabody-energy-corp/
 77

Exxon and its officers have also been Exxon and its officers have also been
sued directly by its investors. In Ramirez v sued by its employees under ERISA, who
ExxonMobil, a purchaser of Exxon stock in claimed that the company had affected
2016 filed a securities fraud class action in the value of their retirement accounts
the federal court for the Northern District by fraudulently inflating its stock and
of Texas on behalf of similarly situated misrepresenting what it knows about the
purchasers of Exxon stock against Exxon risks of climate change to its business.
and three officers. The suit alleges: Exxon That case has been dismissed.259
had issued materially false and misleading
In McVeigh v. Australian Retail Employees
public statements which failed to disclose
Superannuation Trust (REST), a beneficiary
that internal reports concerning climate
of the pension fund REST has filed a
change recognised the environmental risks
lawsuit against the fund, arguing
caused by global warming and climate
that its failure to provide adequate
change; that due to risk associated with
information relating to its exposure to
climate change Exxon would not be able
climate-related risks prevents him from
to extract existing hydrocarbon reserves it
making an informed judgment about the
claimed to have; and that Exxon had used
management and financial condition of
an inaccurate price of carbon to calculate
the fund. 260
the value of certain oil and gas prospects.
In August 2017, Environmental Justice
The complaint alleged that as a result
Australia (on behalf of two individual
of Exxon’s statements, the common
shareholders) brought proceedings against
stock price was artificially inflated, and
the Commonwealth Bank of Australia
that Exxon’s release of its third quarter
(CBA) for its alleged failure to disclose
financial results in October 2016, in which
climate change risks in its annual reports
it disclosed it might have to write down
and its failure to note its funding of a coal
20% of its oil and gas assets, resulted in
mine in Queensland. The proceedings
the stock price falling by more than USD 2
were dropped in July 2018 following
per share, erasing billions of dollars in
disclosure of climate change risks by
market capitalisation.257 The lawsuit is
the CBA in its 2017 annual report, which
ongoing.
noted that it considered climate change
More recently, a further lawsuit was filed a “significant long-term driver of both
in Texas against Exxon and its current and financial (credit, market, insurance) and
former executives and board members by non-financial (operational, compliance,
another shareholder, Sarah Von Colditz, reputation) risks.”261
again alleging that the company misled
investors by understating how much risk
climate change poses to its assets. 258
Ramirez v. Exxon Mobil Corp., 2016, http://climatecasechart.com/case/ramirez-v-exxon-mobil-corp/; and
257 
http://climatecasechart.com/case/fentress-v-exxon-mobil-corp/
258 https://www.climateliabilitynews.org/2019/05/07/exxon-shareholder-lawsuit-climate-change/
259 Fentress v Exxon Mobil Corp, https://on.ft.com/2PpGKh6
260 McVeigh v. Retail Employees Superannuation Trust, https://bit.ly/2wJ0oZZ
261 Gareth Hutchens, The Guardian, Commonwealth Bank shareholders drop suit over nondisclosure of climate risks, 2017,
http://bit.ly/2RFSE59
New liabilities: Liability risks to businesses, directors and officers

In Canada, Greenpeace approached CLAIMS FOR GREENWASHING

Alberta’s Securities Commission seeking
to halt Kinder Morgan’s initial public
Claims may be brought for overstating
offering (IPO) in Canada based, in part, on
positive environmental impacts, as well
alleged deficiencies in disclosure of climate-
as understating risks. For example, there
related risks in its IPO prospectus.262 The
have been a number of challenges brought
company amended its prospectus after the
by the Australian Competition and
Commission confirmed it would investigate
Consumer Commission for false green
Greenpeace’s complaint.263
advertising or “greenwashing”.
In August 2018, ClientEarth filed complaints
The Commission challenged De Longhi
with the FCA against three large UK insurers
Australia Pty Ltd for claiming that a
– Lancashire, Admiral and Phoenix – for not
refrigerant gas used in its portable air
mentioning climate change in their annual
conditioners was “environmentally
reports.264 In the complaints, ClientEarth
friendly.” De Longhi provided a court-
stated that without disclosure around
enforceable undertaking that it would
these risks, shareholders could not make a
modify its advertising.266 The Australian
well-informed decision when considering
Commission also filed suit against GM
investing in those companies. ClientEarth
Holden Ltd for wrongly advertising that
also submitted regulatory complaints to the
Saab vehicles provided “carbon neutral
Financial Reporting Council (FRC) against
motoring” and alleging that GM Holden’s
Cairn Energy PLC and SOCO International
claim that planting 17 native trees would
PLC alleging that the oil and gas companies
offset the carbon emissions was not
had failed adequately to disclose climate-
proven and was misleading. The Federal
related risks to investors.265
Court declared that GM Holden had
breached sections 52 and 53(c) of the
Trade Practices Act 1974.267

262 In re Amended and Restated Preliminary

Prospectus of Kinder Morgan Canada Limited’s
Initial Public Offering, 2017,
http://bit.ly/2RGbnOe; Meenal vamburkar, In re
Amended and Restated Preliminary Prospectus
of Kinder Morgan Canada Limited’s Initial
Public Offering, 2017, https://tgam.ca/2Nf4Dbt Australian Competition & Consumer
266 
263 Javier Solana, Climate litigation in financial Commission v. De Longhi Australia Pty. Ltd.,
markets: A typology, Transnational Environmental 2008, http://bit.ly/2Xu16dh;
Law, forthcoming 2019 (manuscript on file Australian Competition & Consumer
with authors) Commission, De Longhi alters
264 Financial Times, UK insurers attacked over climate “environmentally friendly” claims, April
risk omissions, https://on.ft.com/2OhZR8N 2008, http://bit.ly/2XElvfw
265 Financial Times, Law firm calls out Soco and Cairn Australian Competition & Consumer
267 
over climate risk reporting, Commission v. GM Holden Ltd, Federal Court
https://on.ft.com/2bvOYzd of Australia, 2008, http://bit.ly/2ZJEbb6

FAILURE TO ADAPT PROFESSIONAL
ADVICE OR SERVICES
Architects, engineers, builders and others
involved in construction could be targeted
for failure to design, locate and/or build
structures compatible with future climate
conditions, involving more frequent or intense
cyclones, storms, winds, rising water levels,
erosion, hurricanes, floods or droughts. In the
event of structural problems, causing harm
to the client or third parties, such persons
or their insurers could seek recourse or
contribution from design professionals.
In Illinois Farmers Insurance Co. v. Metro Water
Reclamation District of Greater Chicago and
related cases, Illinois Farmers Insurance
Co. filed nine class action suits on behalf
of property insurance companies, affected
policyholders, and property owners against
nearly 200 Chicago-area local governments in
connection with severe rain on 17 April 2014.
The cases alleged that the municipalities
had determined the capacity needed to
avoid floods with historical data that did not
account for the effects of climate change,
despite being aware that climate change
had caused heavier than usual rainfall, and
that the municipalities had not done enough
to prepare sewers and stormwater drains.
The lawsuits have since been withdrawn.268
Similar claims could be envisaged against
private entities, if a duty of care can be
established. For example, after Hurricane
Harvey, 400 homeowners from the
Riverstone Development in Fort Bend
268 Hunter Book, Climate Law Blog, Farmers Insurance Withdraws Class Action Alleging Failure to Adapt to Climate Change,
2014, http://bit.ly/2J8oZ0O
269 Trent Seibert, The Texas Monitor, Lawsuit: Costello negligent in designing stormwater plan, 2018, http://bit.ly/2IPxVcs
270 EasyJet among companies reported to regulator by ClientEarth, 2018, http://bit.ly/2FAMVZF
79
County filed suit against an engineering
firm alleging that the firm’s design for a
levee caused their homes to flood. The
residents claimed the company failed to
exercise “ordinary care in the operation,
design, and maintenance of its pump, levee,
and drainage systems”.269 Where climate
systems and risks of extreme weather
are better understood, such claims could
become more common.
As the nature and extent of climate risk to
businesses becomes better understood, it is
possible that lawyers, accountants and other
professional advisers may face litigation
for failure to provide strategic advice and
recommendations which consider and
integrate climate risk. Even financial
advisers and auditors could be vulnerable
to lawsuits, if they are seen to have failed
in their duty of care when carrying out due
diligence prior to investments being made,
or when audits are conducted. For example,
in 2018, ClientEarth submitted complaints
to the Financial Reporting Council against
four major UK companies EasyJet, Balfour
Beatty, EnQuest and Bodycote as well
as their auditors PwC, KPMG, EY, and
Deloitte in respect of alleged failures to
address climate change risks in reports to
shareholders.270
New liabilities: Liability risks to businesses, directors and officers

FAILURE TO COMPLY WITH company Con Edison to implement

measures to plan for and protect its
ENVIRONMENTAL LAWS AND
electric, gas, and steam systems from the
REGULATORY OBLIGATIONS effects of climate change. 271

In a recent interesting case, the Chinese

The 2015 “Dieselgate” scandal, involving
financial supervisory authorities fined
Volkswagen’s admission that its cars
Ping An Bank for a failure to conduct
were cheating emissions tests in the
pre-loan investigations in relation
US, illustrated how failure to adhere
to its customers’ compliance with
to emissions standards could expose a
environmental standards. 272
company to significant litigation risk.

With a rise in emissions reductions –

standards and enforcement – companies
may face increased scrutiny as well as
increased risks, with more stringent
regulatory thresholds and, therefore,
an enhanced risk of breach. In addition,
the increased focus on climate change,
GHG emissions and air (or other)
pollutants in the popular press may lead
to more rigorous enforcement of existing
environmental laws.
Enforcement bodies may also force
entities within their remit to take steps
to effect climate risk adaptation, and
sanction those that do not comply with
new requirements. For example, on 20
February 2014, the New York State Public
Service Commission ordered the utility
CLAIMS AGAINST FIDUCIARIES
As knowledge of climate risk grows
and greater information and standards
develop, it will become increasingly
important for directors and officers to
demonstrate that these risks have been
considered, that actions have been taken
to mitigate them where necessary, and
that asset values are represented fairly
on their balance sheets, including assets
which could become stranded when there
is a shift to a low-carbon economy.
There has been speculation for some time
as to whether climate change exposures
(particularly around failure to disclose
climate change risks) may result in claims
against directors and officers. However,

271 Ethan I. Strell, Climate Law Blog, Public Service Commission Approves Con Ed Rate Case and Climate Change
Adaptation Settlement, 2014, http://bit.ly/2IPBkYy
272 Javier Solana, “Climate litigation in financial markets: A typology”, Transnational Environmental Law, forthcoming
2019 (manuscript on file with authors); and W.X. Ming, ‘The Banking Regulatory Bureau Imposed Penalties
for the First Time on the Basis of Green Credit Guidelines: How Should the Banking Industry Respond to the New
Requirements for Green Credit?’, Blue Map, 2018, http://bit.ly/2X3XPNr
 81

the increasing interest in this area from
investors, action groups, regulators,
governments and plaintiff law firms,
coupled with the recent action against
ExxonMobil in the US, evidence a direction
of travel which seems increasingly likely
to result in more climate change-related
claims and regulatory investigations
against directors and officers in the
coming years.
The Commonwealth Climate and Law
Initiative (CCLI) 273 has recently examined
the legal basis for directors to take account
of physical climate change risk under
prevailing statutory and common law in four
Commonwealth common law countries:
Australia, Canada, South Africa, and the
UK. The resulting reports (published during
2018) indicated that for claims in respect of
climate risks to be brought against directors
and officers, prospective claimants might
rely on existing legal duties.
In the UK, the duties owed by directors to
a company have their roots in common
law but, through the Companies Act 2006,
the general duties owed by directors to the
company were codified (sections 171 to
177). While recognising the point is yet to
be tested by the courts, the CCLI 274 report
concluded that, to the extent directors
fail to assess, manage and report on the
foreseeable and material financial risk
climate change presents to their company,
two of these general duties, under section
172 (which provides that a director must
act in the way he/she considers, in good
faith would be most likely to promote the
success of the company for the benefit of
the members as a whole 275) and section 174
(the duty to exercise reasonable care, skill
and diligence) may offer a route of recourse
against directors.
The possibility of climate change-related
liability for directors and officers has also
been the subject of recent attention in
Australia. In 2016, the Centre for Policy and
Development (CPD) issued a legal opinion 276
by Noel Hutley SC and Sebastian Hartford-
Davis concluding that Australian company
directors who fail to consider climate
change risks now could be found liable for
breaching their duty of care and diligence
under section 180 of the Corporations
Act. On 29 March 2019, an update 277 to
the 2016 Hutley opinion was issued by
CPD. The supplemental opinion reinforces
the original opinion by highlighting the
financial and economic significance of
climate change and the resulting risks that
should be considered at board-level.

273 Commonwealth Climate and Law Initiative, https://ccli.ouce.ox.ac.uk/publications/

274 Alexia Staker and Alice Garton, Directors’ Liability and Climate Risk: United Kingdom - Country Paper, 2018,
http://bit.ly/2FAle33
275 Section 172 further provides that, in doing so, directors have regarding (amongst other matters) to (a) the
likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the needs to
foster the company’s business relationships with suppliers, consumers and others, (d) the impact of the company’s
operations on the community and the environment,EUR the desirability of the company maintaining a reputation for
high standards of business conduct, and (f) the need to act fairly as between members of the company.
276 The centre for policy development and the future business council, “Climate Change and Directors’ Duties”
Memorandum of Opinion, 2016, http://bit.ly/2RynTPu
277 Luisa Boll, CPD, Updated Hutley opinion on directors’ duties and climate risk, 2019,
https://cpd.org.au/2019/03/directors-duties-2019/
New liabilities: Liability risks to businesses, directors and officers

“These matters elevate the For defined benefit schemes, a failure to

consider whether climate change poses
standard of care that will
material financial implications for the
be expected of a reasonable scheme and, if so, to address them when
director. Company directors making investment decisions is most
likely to result in claims by employers as
who consider climate change
they underwrite the balance of risk.
risks actively, disclose
The fiduciary duties of pension scheme
them properly and respond trustees may be broadening to include
appropriately will reduce ESG considerations as an integral part.
exposure to liability. But as Under trust law, trustees are obliged to
exercise their investment powers for the
time passes, the benchmark proper purposes and in accordance with
is rising.” the “prudent person” test. Trustees cannot
be protected for investment decisions
- Updated Hutley Opinion on directors’ by exoneration clauses/indemnities in
duties and climate risk, 2019 trust deeds. The prudent person test
is undoubtedly evolving but it focuses
on behaviours rather than outcomes.
ClientEarth has warned trustees of UK
The protection for trustees comes from
pension schemes that there is a risk of
taking advice, delegating investment and
legal action if they fail to factor in climate
proper monitoring. The question is to
change risk in line with improving data
what extent are trustees taking account of
and developing market practices. Legal
climate change – and holding their advisers
action has been pursued in the US and
to account.
in Australia where trustees have been
accused of failure to manage sufficiently The law on fiduciary duties sits within
the risk of climate change in defined an economic and market environment
contribution scheme investments. in which climate and other ESG factors
are increasingly relevant to an analysis of
investment risk and return. This changing
environment may in turn change the
standards of conduct required of fiduciaries
to satisfy their legal obligations.278

278 Fiduciary duty in the century21st century, https://www.unpri.org/download?ac=1378

See also Trillion dollar transformation Fiduciary Duty, Divestment, and Fossil Fuels in an Era of Climate Risk,
http://bit.ly/31XhRwz
 83

THE COMING WAVE: The potential for climate change-related

LITIGATION HOTSPOTS
As illustrated above, there are numerous
ways in which companies, directors and
officers may be held liable for climate
change, or could be exposed to increased
risk of litigation as a result of its effects
on the physical environment and the
economy.
Although activist law firms internationally
and the plaintiff bar in the US are
bringing strategic and headline-grabbing
climate cases, there is no longer any
one discernible class or category of
litigants: claims are being brought by
property owners, insurers, municipalities,
states, shareholders, and public interest
organisations.
Moreover, in jurisdictions like Australia,
litigation funders have shown interest in
becoming involved in environmental mass
litigation. For example, IMF Bentham, a
commercial litigation funding company,279
is funding two class actions against the
Australian Government relating to “PFAS”
(Per- and polyfluoroalkyl substances)
contamination from two defence sites,
and investigating the viability of similar
class actions for at least ten other sites.
mass litigation is underscored by a
recent AUD 750m class action lodged
in May 2019 by nine farmers against the
Murray-Darling Basin Authority (MDBA),
the Australian Government authority
responsible for regulating water in
the Murray Darling River System and
catchment. The claim alleges negligent
water management by the MDBA in the
Murray River system, and has the potential
for 2,200 eligible members. While there
are many allegations surrounding the
management by MDBA of water allocation,
it is likely that climate change will come
into issue in how MDBA developed its
plans and allocated licences.
In its 2019 report on Global Trends in
Climate Litigation, LSE’s Grantham
Institute reports its findings that as of
May 2019, climate-related cases have been
identified in at least 28 countries. More
than three-quarters of cases identified
globally to date have been filed in the US.280
In financial markets, almost 30% of all
reported cases were filed in 2018 alone,
with 26% in 2017 and 2016 together, and
the remaining 44% prior to 2015. 281
This rising tide of climate litigation shows
no sign of turning. As loss and damage
due to climate change increases, the
science becomes more certain, new laws
are enacted, and regulatory standards and
duties of care are delineated, more claims
will be brought.

279 Supporting and Funding your Case to a Successful Conclusion, https://www.imf.com.au/

280 Setzer J and Byrnes R, Global trends in climate change litigation: 2019 snapshot. London: Grantham
Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy,
London School of Economics and Political Science, 2019, https://bit.ly/2Xzli9i
Javier Solana, “Climate litigation in financial markets: A typology”, Transnational Environmental Law, forthcoming 2019
281 
(manuscript on file with authors)
 85

The new horizon:

Opportunities and
strategies

Scientists estimate at the current rate,
GHG emissions will use up the remaining
“carbon budget” and lock in warming
above 1.5°C in 11 years’ time (just under
two six-year business cycles)282. In light of
this challenge, two words are repeatedly
being spoken by international leaders:
“Urgency”; and “Ambition”.283 These two
words will undoubtedly feature at the UN
Climate Action Summit in September 2019.
There is an ambition gap...
This ambition gap is of great
concern to investors and needs
to be addressed, with urgency.
- Global Investor Statement to Governments
on Climate Change, 24 June 2019284
With a system of increasingly ambitious
national targets under the Paris Agreement
and the first steps towards net-zero policy
around the world, it is likely we will see
ever-stricter and more comprehensive
emissions reduction regulations and
more stringent enforcement of existing
environmental standards.
As the effects of climate change make
themselves increasingly obvious, it is
likely there will be growing calls for a more
ambitious and urgent response in policy
and law-making: what some are calling
the ‘inevitable policy response’. As the
UN PRI has cautioned, there is individual
and collective benefit in staying ahead
of the curve, as the sudden imposition of
concerted policy could shock the financial
system with an abrupt transition. The
momentum is building.
There is also now a clear direction of
travel in terms of the growing number and
refinement of climate-related financial
disclosures, as well as the endorsement of
the TCFD Recommendations by national
governments, central banks, financial
regulators and investors. Everything
indicates that, over time, reporting on
climate risk will become mandatory across
various sectors of the global economy.

Title inspired by Mark Carney’s speech to the European Commission Conference: A global approach
to sustainable finance: “A New Horizon”, 21 March 2019, https://bit.ly/2FJDXt7
282 Michael Liebreich, Bloomberg NEF, Two Business Cycles to Prepare for a Low-Carbon World, 2018, http://bit.ly/2J73QUA
283 See, for example: https://tgam.ca/2Lg5DJM; and UN Secretary-General’s Remarks at High-Level Meeting on Climate
and Sustainable Development 2019, http://bit.ly/2J9oT95
284 Global investor Statement to Governments on Climate Change, Signed by 477 investors representing USD 34trn in assets, 24 June
2019, https://bit.ly/2XeKyS8 and Simon Jessop, Nina Chestney, Exclusive: Investors with $34 trillion demand urgent climate
change action, 2019, https://reut.rs/2IXMuuy
The new horizon: Opportunities and strategies

A number of companies are already
disclosing climate-related risks under the
auspices of existing voluntary standards.
Many forward-looking companies have set
out on their ’TCFD journeys’, seeking to
understand what their climate risk profile
might look like now, and before such
disclosures become mandatory.
For many, the issue of climate change has
moved definitively out of the corporate
social responsibility box and become part
of the remit of core governance and risk
management teams.288
OPPORTUNITIES

When companies identify and assess the

It is important to remember that climate
climate risks they face, their executives
change presents opportunities as well
have to decide how these risks are
as risks.
to be addressed.
In 2006, The Economics of Climate Change:
Some companies have begun voluntarily
The Stern Review was released by
reducing emissions and strengthening their
the UK Government’s HM Treasury.
climate commitments. For example:
It concluded that:
–– Maersk, the world’s largest container
“Action on climate change will also create
shipping company, has said it plans to
significant business opportunities, as new
cut its net carbon emissions to zero by
markets are created in low-carbon energy
2050285
technologies and other low-carbon goods
–– Shell will tie short-term carbon and services. These markets could grow
emissions targets to executive pay to be worth hundreds of billions of dollars
from 2020286 each year, and employment in these sectors
–– Glencore, currently the world’s largest will expand accordingly.
coal exporter, has vowed to cap
production of thermal and coking coal287

285 Financial Times, Maersk pledges to cut carbon emissions to zero by 2050, 2018, https://on.ft.com/2XAImZw
286 Financial Times Editorial board, Shell’s carbon emissions targets are a clear model for others, 2018,
https://on.ft.com/2IRnW6A
287 Financial Times, Glencore vows to cap global coal production, https://on.ft.com/2JeTQca
288 Mark Carney, Bank of England, Speech, A New Horizon, European Commission Conference: A global approach to
sustainable finance, 2019, http://bit.ly/2Fz70zy
 87

The world does not need Energy source

to choose between averting –– Organisations that shift their energy

climate change and promoting usage to lower-cost decentralised
clean energy sources could save on
growth and development. energy costs
Changes in energy technologies
Products and services
and in the structure of economies
–– Companies that innovate and develop
have created opportunities new low-emission products and services
to decouple growth from can improve their competitive position
and capitalise on shifting consumer and
greenhouse gas emissions.
producer preferences
- The Stern Review on the Economics of Markets
Climate Change
–– New opportunities can be captured
Indeed, ignoring climate change will in new markets for underwriting or
eventually damage economic growth. financing green bonds and infrastructure
(such as low-emission energy production
Tackling climate change is the pro- or transport networks)
growth strategy for the longer term, and
it can be done in a way that does not Resilience
cap the aspirations for growth of rich –– Opportunities to develop adaptive
or poor countries.”289 capacity to respond to climate change
The TCFD Recommendations include risks with new processes and products290
recommended disclosures for climate- Some 225 of the world’s largest companies
related opportunities (with equal billing to reporting to CDP in 2018 identified a wide
the risks): range of opportunities in the short to
Resource efficiency medium term including increased revenue
through demand for low emission products
–– Reducing operating costs across and services (such as electric vehicles);
production and distribution processes, and increased capital availability for low-
buildings, machinery/appliances and emissions producers.282 On the basis of its
transport/mobility research, CDP in its Global Climate Change
Analysis 2018 (published June 2019) found
that in almost all industries, companies
consider that the potential value of climate-
related opportunities is on average almost
seven times the cost of achieving them.291

289 The Economics of Climate Change: The Stern Review final report, 2006, http://bit.ly/31XiaaH
290 TCFD Recommendations, Final Report, 2017, http://bit.ly/2X0mKRX
291 CDP, Major risk or rosy opportunity? Are companies ready for climate change?, http://bit.ly/2Fz7iGE
The new horizon: Opportunities and strategies

Limiting global warming in line with the
Paris Agreement will save vast future
costs – to both life and property – and
the transition to a low-carbon economy
is considered key to the stability of the
international financial system as well as
the climate. It is generally accepted that
the cost of mitigation and adaptation
to climate change is less than the cost
of no mitigation.292
disclosures will bring commercial benefits
given the market demand294 and could
reduce litigation risk.295 Added to this
picture are future investors. Millennials,
who are keenly interested in sustainability,
are set to inherit USD 24trn of wealth in the
US alone over the next 15 years.296
STRATEGIES

Climate adaptation and resilience will Companies considering their exposure to

also deliver green growth. It is estimated
that low-carbon growth could deliver
economic benefits of USD 26trn in the
next ten years and generate over 65m new
low-carbon jobs.293
Whole industries or new lines of business
may develop, deploying current skill-
sets to the task at hand. For example, the
insurance industry is uniquely placed
to assist by deploying its expertise in
modelling and mapping climate risk. Some
insurance companies are already pricing
climate change into their policies and
looking to help their customers become
more resilient to its effects.
Early adopters – of climate governance,
clean technology, green investments,
or adaptation of existing assets – may
experience a first-mover advantage. There
is also an argument that detailed climate
climate change liability risk could keep in
mind the following factors and trends:
–– Companies that understand their
climate change physical and transition
risks will generally be better placed to
understand the consequent exposures
to liability
–– Liability risk faced by a company will
depend on a range of factors such as:
local law and regulation; sector; and
location, exposure and resilience of
physical assets
–– Continuing changes in the climate will
increase exposures, while lowering
operating thresholds and tolerances.
The result will be a higher potential for
externalities and third party claims
–– As climate science continues to develop
and become more settled and general

292 CDP, World’s biggest companies face $1 trillion in climate change risks, 2019, http://bit.ly/2J65Nka
293 Sir James Bevan, Whitehall and Industry Group, Speech, Climate Change: Turning emergency into opportunity, 2019,
http://bit.ly/31YkKNJ and UN News, More than 65 million ‘low-carbon jobs’ can be created by 2030, 2018
https://bit.ly/2NLhDVo
294 Unlocking the Inclusive Growth Story of the 21st Century, Accelerating Climate Action in Urgent Times, 2018 Report,
https://bit.ly/2NK2gZU
295 The London School of Economics and Political Science/ Grantham Research Institute, Financing in a Just Transition,
 http://bit.ly/2X0l1fy and Acclimatise, Voluntary Climate Disclosures can Reduce Litigation Risk, 2019,
https://bit.ly/2XLZlbB
296 Deloitte, The future of wealth in the United States, 2015, http://bit.ly/2KEON7L; and Mark Carney’s speech to the
European Commission Conference: A global approach to sustainable finance: “A New Horizon”, 21 March 2019,
https://bit.ly/2FJDXt7

knowledge grows around the possible
effects of climate change, legal duties
and standards of care and conceptions
of what is “reasonable” will evolve and
professionals or company officers may
be held to higher standards
–– Changing consumer preference and
civil society responses to climate
change could move the dial on scrutiny
and enforcement against companies,
including encouraging more and
stricter climate-friendly legislation and
regulation. These trends also carry
reputational risks
–– Disclosures that are thought to be
inadequate or misleading could give
rise to claims. With their growing
popularity and more advanced
stage of implementation, the TCFD
Recommendations are likely to attract
the attention of potential claimants297
WHAT NEXT?
In view of the wide range of possible liability
exposures related to climate change, there
is no simple or ‘one size fits all’ solution for
companies that wish to limit their exposure
to litigation.
Javier Solana, “Climate litigation in financial markets: A typology”, Transnational Environmental Law, forthcoming
297 
2019 (manuscript on file with authors)
298 US Government’s Fourth National Climate Assessment, Key Message 2, page 1318 https://bit.ly/2Qm6Sdm
89
What is certain is that as climate litigation
grows in frequency, and new standards or
rulings pave the way for new liabilities to
emerge, it will become increasingly important
for companies to understand, mitigate and, if
appropriate, transfer their liability risk.
More and more governments, regulators and
investors consider that climate change poses
a systemic risk to the international financial
system. The pace of change is increasing,
both in terms of the actual physical effects
of climate change as well as the ambition
and urgency of responses from civil society
and governments.
As (re)insurers have known for some time,
climate change requires a fundamental shift
in our approach to risk management. As never
before, companies must operate in a physical
and regulatory environment that is rapidly
evolving. Where such systemic changes
are afoot, companies may not only need to
keep pace, but may in fact need to look one
step ahead. This is reflected in the climate-
relevant scenario planning and stress testing
now being promoted by regulators.
When adapting to climate change and the
risks it presents, the past is no longer a good
guide to the future.298
Contributors

Nigel Brook Avryl Lattin

Partner, London Partner, Australia
T +44 (0) 20 7876 4414 T +61 2 9210 4425

E nigel.brook@clydeco.com E avryl.lattin@clydeco.com

James Cooper Laura Cooke

Partner, London Partner, London
T +44 (0) 20 7876 6388 T +44 (0) 20 7876 6387
E james.cooper@clydeco.com E laura.cooke@clydeco.com

Liz Jenkins Simon Konsta

Partner, London Partner, London
T +44 (0) 20 7876 4248 T +44 (0) 20 7876 6579
E liz.jenkins@clydeco.com E simon.konsta@clydeco.com

Neil Beresford Terry Saeedi

Partner, London Partner, London
T +44 (0) 20 7876 4495 T +44 (0) 113 220 4478
E neil.beresford@clydeco.com E terry.saeedi@clydeco.com

Ned Kirk Peter Whalen

Partner, New York Partner, San Francisco
T +1 212 710 3960 T +1 415 365 9860
E edward.kirk@clydeco.us E peter.whalen@clydeco.us
James P. Koelzer Samie Amanullah, London
Partner, Los Angeles
Rosehana Amin, London
T +1 213 358 7620

E james.koelzer@clydeco.us Holden Benon, San Francisco

Catriona Campbell, London

Taylor Davis, Atlanta

Kristyn Glanville, Sydney

Jacinta Studdert
Partner, Sydney Caroline Hedley, London
T +61 2 9210 4930 Chris MacRoberts, Johannesburg
E jacinta.studdert@clydeco.com
Marlene McConway, London

Patricia Orr, London

Rebecca Podd, London

Clare Hatcher
Rod Smith, London
Partner, London
T +44 (0) 20 7876 4863 Laura Tye, London
E clare.hatcher@clydeco.com Claire Schekeloff, Sydney

Kate Swart, Johannesburg

Jane Warring, Atlanta

Dean Carrgian Lucia Williams, London

Partner, Sydney
Editor:
T +61 2 9210 4401 Wynne Lawrence, London
E dean.carrigan@clydeco.com

External reviewers
Nadine Coudel, Senior Risk Advisor,
Legal Services, Acclimatise

Anthony Hobley, Co-Chair,

Advisory Board, Carbon Tracker

Javier Solana, Lecturer in Commercial

Law, University of Glasgow

Aaron Wu, Senior Teaching Fellow,

School of Law, SOAS
Clyde & Co LLP accepts no responsibility for loss
occasioned to any person acting or refraining from
acting as a result of material contained in this summary.
No part of this summary may be used, reproduced,
stored in a retrieval system or transmitted in any form
or by any means, electronic, mechanical, photocopying,
reading or otherwise without the prior permission of
Clyde & Co LLP.

Clyde & Co LLP is a limited liability partnership

registered in England and Wales. Authorised and
regulated by the Solicitors Regulation Authority.
© Clyde & Co LLP 2019 #clydecoresilience

Clyde & Co LLP www.clydeco.com/resilience

J466355 - July 2019