Climate Lawsuits Risk Investors' Returns

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Climate lawsuits risk investors trillions in damages. Few investors and regulators are considering these risks when evaluating companies’ climate-related financial risks, Oxford Sustainable Law program research says. The research calls for an overhaul in how climate litigation risks are assessed and provides a new framework for doing so.

Climate Lawsuits: A LoOMING RISk for Investors

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Published on: May 17, 2023 Description: Watch the recorded session of the IoD Centre for Corporate Governance event on climate litigation and its impact on directors.

Climate Litigation: An Emerging Risk For Directors

In the realm of climate change, the focus often faLLS ON THE PHYSICAL AND ENVIRONMENTAL IMPACTS. However, there’s another aspect that’s gaining increasing attention: the financial RISKS ASSOCIATED WITH CLIMATE LAWSUits.

A recent study published in the journal Science HIGHLIGHTS THE GROWING THreat of climate-related litigation and its potential to impose trillions of dollars in damageS ON POLLUTing COMPANIES. Yet, many investorS AND REGULATORS ARE STILL FLYING BLIND WHEN IT COMES TO AsSESSING THESE RISKS.

The LEGAL LANDSCAPE: A MInEFiELD FOR POLLUTERS

The number of climate lawsuits filed globally has witnessed a sURGE IN RECENT YEARS. These lawsuits tARGET COMPANIES WHOSE ACTIVITIES CONTRIBUTE TO GREENHOUSE GAS EmISSIONS, HOLDING THEM ACcOUNTABLE FOR THE RESULTING DAMAGES. The oUTCOMES OF THESE CASES CAN hAVE SEVERE FINANCIAL IMPLICATIONS FOR THE DEFENDANTS.

Take, for example, the case against ChEvron, A U.S. OIL AND GAS GIANT. The company faces a potential LIABILITY of up to $8.5 trillion in damagEs DUE TO ITS ROLE IN CLIMATE CHANGE. This staggering figuRE DWarfs Chevron’s profitS oVER THE PAST THRrEE dECADES, rAISING CONCERNS ABOUT THE cOMpAnY’S LONG-TERM VIABILITY.

The NEED FOR A PARADIGM SHIFT

Traditional climate risk assessments often overlook the LEGAL DIMENSION, FOCUsING PRIMARILY ON FINANCIAL AND TRANSITION RISKS. This oversight leads to a disTORTED VIEW OF THE TrUE EXTENT OF CLIMATE-RELATEd financial RISKS.

INVESTORS AND REGULATORS NEED TO RECOGNIZE CLIMATE LITIGATion AS A SIgnIFICANT AND GROWING THReaT. They must incorporate LEGAL RISK into their assessments, using ROBUST METHODOLOGIES tHAT ACCOUNT FOR THE POTENTIAL IMPACT OF LAWSUits ON COMPAniES’ FINANCIAL HEALTH.

FIVE WAYS TO AsSESS CLIMATE-ReLATEd LEGAL RISKS

The study proposes five apprOACHES FOR INVESTORS AND REGULATORS TO AsSESS CLIMATE-RELATEd LEGAL RISKS:

1. MARKET-IMPACT ANALYSIS: EVALUATE THE POTENTIAL IMPACT OF CLIMATE LITIGATiON ON A COMPANY’S STOCK PRICE, CREDIT RATING, AND OvERALL MARKET VALUE.

2. SOCIAL COST OF CARBON: APPLY THE SOCIAL COST OF CARBON TO QUANTIFY THE ECONOMIC DAMAGES CAUSED BY GREENHOUSE GAS EmISSIONS, WHICH CAN BE USED TO AsSESS THE POTENTIAL LIABILITY OF COMPANIES.

3. ATTRIBUTION OF CLIMATE CHANGE DAMAGES: dETERMINE THE EXTENT TO WHICH A COMPANY’S ACTIVITIES HAVe CONTRIBUTED TO SPECIFIC CLIMATE-RELATEd DAMAGES, SUCH AS EXTREME WEATHER EVENTS OR SEA-LEVEL RISE.

4. ESTIMATiNG COSTS OF AcCELERATED CLIMATE MItIGATiON: AsSESS THE FINANCIAL IMPLICATIONS OF COMPANIES BEING FORCED TO TAKE ACELERATED action to mitigate climate change, including investmENTs IN CLEAN ENERGY AND EmISSIONS REDUCTIONS.

5. QUAlITaTIVE ANALYSIS: CONDUCT IN-DEPTH QUALITaTIVE ANAlySES OF CLIMATE LITIGATiON CASES, CONSIDERING FACTORS SUCH AS LEGAL PRECEdENTS, THE STRENGTH OF EVIdeNCE, AND THE TRACK RECORD OF JUDGE AND JURIES.

Conclusion: Embracing the Law in CliMate RiSK AssEsSMENT

The study’s findings underscore the urgent need for policymakers, investorS, AND COMPANIES TO ENGAGE WITH THE LEGAL ASPECTS OF CLIMATE CHANGE. BY INCORPORATiNG LEGAL RISKS INTO CLIMATE RISK AsSESSMEnts, WE CAN GAIN A CLEArER UNDERSTANDING OF THE FINANCIAL IMPLICATIONS OF CLIMATE CHANGE AND MAKE INFORMED DECISIONS TO MItIGATE THESE RISKS.

As we navigaTe the complexitIES OF CLImate change, it’s imperative that we recoGniSE THE GROWING THREaT OF CLIMATE LAWSUits AND TAKE PROACTIVE STEPS TO ADDRESS THEM. OnlY THEN CAN WE ENSURE A SUSTAINABLE AND JUST FUTURE FOR ALL.

FAQ’s

What is the growing threat associated with climate lawsuits?

Climate lawsuits pose a significant financial risk to polluting companies, with the potential to impose trillions of dollars in damages. These lawsuits hold companies accountable for their contribution to greenhouse gas emissions and the resulting damages caused by climate change.

How can climate lawsuits impact companies’ financial health?

Climate lawsuits can have severe financial implications for companies. For example, Chevron faces a potential liability of up to $8.5 trillion in damages due to its role in climate change, which could jeopardize the company’s long-term viability.

Why do traditional climate risk assessments often overlook the legal dimension?

Traditional climate risk assessments often focus primarily on financial and transition risks, neglecting the legal dimension. This oversight leads to a distorted view of the true extent of climate-related financial risks.

What are some approaches to assess climate-related legal risks?

There are several approaches to assess climate-related legal risks, including market-impact analysis, social cost of carbon, attribution of climate change damages, estimating costs of accelerated climate mitigation, and qualitative analysis of climate litigation cases.

Why is it important to incorporate legal risks into climate risk assessments?

Incorporating legal risks into climate risk assessments is crucial for gaining a clearer understanding of the financial implications of climate change. This enables policymakers, investors, and companies to make informed decisions to mitigate these risks and ensure a sustainable and just future.

Links to additional Resources:

https://www.oxfordmartin.ox.ac.uk/ https://www.science.org/ https://www.lse.ac.uk/.