The ‘Liability Risk’ masterclass was the third in a series of six sessions in the Cotton 2040 series co-hosted by WTW and Forum for the Future in October 2022. The sessions cover a range of topics, tailored for brands and retailers, to encourage a shift towards a sustainable, regenerative and climate-resilient cotton sector. The focus of the third masterclass was on the types of climate-related legal risks that affect brands and retailers in the cotton sector and steps that can be taken to reduce exposure to litigation.
Concerns around climate-related liability risks are reshaping the business landscape across every economic sector and are beginning to affect organizations’ decision-making. Addressing climate-related legal risks that emerge from operations, markets, value chains, and transactions, can help to reduce material financial losses, optimise corporate strategy, and unlock new opportunities for growth.
The session on liability risk began with a story. In early 2022, Linus Steinmetz, a Fridays for Future climate activist from Germany, along with eight other plaintiffs filed a constitutional challenge to Germany’s Federal Climate Protection Act (Steinmetz, et al. v. Germany), arguing that the Act’s greenhouse gas (GHG) emission reduction pathway was inconsistent with Germany’s constitutional and international legal obligations. As a result of Steinmetz’s challenge, in 2021 the German parliament passed an amendment to the Climate Protection Act declaring it unconstitutional in parts. The story demonstrates that strategic litigation can involve cases where the claimants’ motives go beyond the concerns of the individual litigant and aim to change the behaviour of industry actors or governments. Although the number of climate laws and policies is increasing, these do not represent the sole basis for climate-related action. Action can also be brought under existing law (e.g. corporate law, constitutional law etc.), resulting in broader liability exposure.
What is liability risk?
To understand liability risk, one must first understand where it fits in regards to both physical and transition risks. Physical risk comprises of the immediate risks arising from extreme weather-related events as well as slow-onset climatic changes such as temperature change. Transition risk involves the financial, reputational, and market risks arising from the transition to a lower-carbon economy. Liability risk is the risk of legal actions for failure to respond adequately to physical and transition risks. Companies can face litigation from individuals, corporates, and class actions, both from new areas of law and from new applications of previously established corporate law. In cotton production, broader social risks will be increasingly featured in the scope of liability; these include conflict, loss of livelihoods, early marriage, forced labour and migration.
“Climate liability issues associated with climate change can affect a company’s reputation. Your reputation is your most valuable asset going forward. In order to protect it, be proactive.”
Nadine Coudel | Director at WTW Climate and Resilience Hub
Why is liability risk important and what are the drivers?
Litigation cases are on the rise. There are several factors that are driving the increase and expansion of types of climate litigation cases. One such factor is the increasing amount of international climate commitments, ranging from taxes on carbon to restrictions on certain materials and processes. Enforcement of these laws can lead to regulatory investigation, sanctions, fines and litigation. Another example is increased awareness. It is not only public awareness of climate change that is growing. There is also public recognition that courts can be a forum for advancing climate action. This has led to a rise in lawsuits, including co-claimant/co-plaintiff suits.
Other drivers include physical and transition risk, availability of funding, evolving standards of care and developments in climate attribution science. As climate related shocks and disruptions increase in frequency and intensity, it is likely to lead to more stringent legislation and increased litigation. In such a context, more attention will be paid to what businesses are doing to decarbonize, support the transition to net zero greenhouse gas emissions, and respond to physical climate risks.
The challenges – what are we already seeing?
The masterclass identified the types of climate-related liability risks faced by brands and retailers, and how these materialise through operations, markets, value chains and transactions. Speakers highlighted ‘greenwashing’ lawsuits and investigations into green claims and credentials driven by regulatory bodies including the UK Competition Markets Authority’s recent investigation of ASOS, Boohoo and George at Asda.
Greenwashing is where a company uses advertising and public messaging to appear more climate friendly and environmentally sustainable than it really is. It is also a technique used by certain companies to distract consumers from the fact that their business model and activities do environmental harm and damage. While greenwashing is not new, there has been a significant uptick in interest among consumers recently around environmentally and socially conscious products. Consumers are also more concerned about making environmentally friendly purchasing decisions. Companies have a real financial incentive to drive systemic change within the cotton sector to ensure it can decarbonise, and support environmental and social regeneration.
The session also discussed the complexities around the cost of climate litigation. The costs associated with litigation are not just the potential pay-out or fine from a case a client might lose. They can include legal and administrative costs, lawyers fees, and insurance costs. There may also be significant reputational costs as legal cases can attract considerable media attention. The simple speculation of a company being sued can trigger reputational costs - not only for the accused parties, but for an entire industry sector. There are also indirect costs companies can face including counterparty credit risk (from clients), the market risk from assets, insurance costs, and reputational costs for the industry/sector.
What are the solutions?
The final part of the masterclass set out practical steps to reduce exposure to litigation. This includes assessing climate-related liability risks, seeking advisory support for regulatory responses and disclosure, conducting a climate contract audit, understanding novel insurance clauses for risk transfer, and developing risk management opportunities that bring together stakeholders.
The presenters then provided a view of the future, speaking of the rising potential for climate litigation cases related to biodiversity loss. Initiatives such as the Taskforce on Nature-related Financial Disclosures have already set the wheels in motion for biodiversity-related litigation against cotton production which harms ecosystems.
Biodiversity describes the enormous variety of life on Earth and can refer to every living thing in one region or ecosystem, including plants, bacteria, animals and humans. From a legal standpoint, this extends beyond a single habitat or species, encompassing broad biodiversity goals, which will have far-reaching impacts for regulation, policy-making, and attendant liability risks to businesses. Financial institutions and companies currently lack the information they need to understand how nature impacts financial performance or longer term financial risks .
Particularly notable is forthcoming guidance from the Task Force on Nature-Related Financial Disclosures (TNFD). The TNFD adopts the same pillars as the TCFD, seeking to provide comparable, financially relevant, decision-useful information. However, instead of addressing climate risks, the TNFD is focused on ensuring that nature-related risks and opportunities are understood and effectively communicated. Although the TCFD and TNFD themselves are not legally binding, many of the climate regulations we are seeing today have been based on the TCFD and it is possible something similar might happen with the TNFD in the future. The TNFD is scheduled for release in September 2023.
This is the session recording from Masterclass 3: Liability Risk held on October 18, 2022. This was the third of a six-part “Insights to Action” masterclass series on climate risks to the cotton and wider apparel sector.
