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Business Climate Risks

Legal risks may arise when companies fail to comply with regulatory requirements (such as laws limiting GHGs), expose themselves to litigation risks related to injuries that may have been prevented with proper consideration of climate change-related harms, or fail to disclose material climate risks to their investors.

Regulatory Risks

Governments around the world are passing laws to address climate change by limiting greenhouse gas emissions. Regulations include pricing emissions and controlling the use of carbon-based energy sources.

Companies, typically in industries with high GHG emissions, are now legally obligated to adhere to certain performance standards to help achieve climate change mitigation goals.

Litigation Risks

Extreme weather has begun to stress infrastructure, and climate change may increase the risk of negligence claims, as more frequent and intense extreme weather events such as flooding increase the risks of harm.

Following industry standards may help prevent liability, but only when these practices themselves are not inherently risky. As climate predictions become more sophisticated, courts could find that extreme weather should have been protected against. In previous cases, the court has considered weather forecasts and expert climatological evidence to show that a defendant should have known that there was a real risk of an accident happening.

Businesses may be expected to make new or different decisions in light of climate change and could face liability if they fail to adapt to new climate information.

Global Warming Tort Litigation

Businesses could be exposed to claims in nuisance or negligence where plaintiffs claim they have suffered loss or damage due to climate change and that those businesses contributed to climate change through high GHG emissions. No such action has been brought to a court yet, and it is likely that a plaintiff would face challenges establishing a connection between their loss and the actions of the defendant. Despite these challenges, such lawsuits may still occur and could cost companies legal fees and their reputation.

Litigation Risks

Corporate disclosure obligation ensures that information that may affect an investor’s decision to buy or sell is available. As understanding of climate impacts increases, investors have raised concerns that long-term shareholder value could be at risk, and seek transparency from companies on risk management strategies.

Risks could include

  • Extreme weather or climatic variation causing damage to physical assets
  • Profit loss due to changes to regulatory standards, needing to be disclosed

Untrue statements and omissions could cause civil liability, and mandatory disclosure has legal compliance and reputational risks if a company doesn’t comply.

Financial Risks

Climate change is likely to drive increases in the cost of energy, raw materials, insurance premiums, and capital expenditures. Additional operational costs are expected as businesses adapt to mitigate the impacts of climate change. Revenues will be impacted by the inability to pass these costs onto consumers while exploiting new market opportunities and maintaining market share. Significant emissions in any industry’s supply chain may still result in increased costs (upstream) or reduced sales (downstream). As payment for GHG emissions may be directed through a carbon tax or emissions trading scheme, or indirectly through increased energy prices, a company’s financial liability can be minimized by reducing absolute emissions and energy use.

Divestment Risks

Fossil fuel divestment campaigns encourage investors to drop fossil fuel-based company shares in their portfolios. As a result, many business models are being questioned and branded unsustainable.

Divestment campaigns are now considered to be part of standard risk mitigation. Other alternative investment strategies have also been developed to achieve optimized, low-carbon portfolios without completely avoiding the fossil energy sector.

Positive Screening | A sustainable strategy that refers to investment in companies, sectors, or projects that are committed to environmental, social, and governance (ESG) criteria in their practices.

Thematic Investing | Companies investing in renewable energy, low-carbon other environmental innovations can be added as a positive thematic element to counterbalance investments in carbon-intensive sectors.

Selective Divestment | Companies with the highest levels of carbon reserves can be sold selectively. Carbon footprints and regulatory risks may also be taken into account.

Carbon Tilts | Instead of eliminating companies completely from the portfolio, investors can underweight those with carbon-reliant assets and overweight those with a smaller carbon footprint.

Rather than see this as an existential threat, the oil and gas industry can see this as an impetus to win back trust through transformation into energy companies and investments in carbon utilization.

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