Climate change and sustainability disputes risk is a fast-moving area and part of corporate reality. Such claims could inspire imitative cases around the globe. The response of insurance markets will be of particular interest to carbon-intensive energy companies, those transitioning to renewable energy, as well as organisations already operating in the renewables sector that will want to keep abreast of how climate liability is impacting energy sector peers.
Some insurers are already starting to introduce climate harm exclusion clauses on some public liability policies, a trend we expect to continue. These clauses allow insurers to deny cover in the event of liability arising from negative impacts of climate change or instances where an organisation has failed to meet greenhouse gas (GHG) emission targets. Even where insurance policies don’t explicitly exclude climate harms, the policy intent to not cover liabilities around climate change may be implied.
As well as having clarity over policy wordings, risk managers and CFOs in energy companies are well-advised to understand the range of climate liability claims that could potentially face your organisation.
Commentators have already reported on the demise of companies due to climate change, with many also anticipating earlier cases were just the beginning of more businesses failing due to climate liability costs.
Meanwhile, recent research by the Geneva Association, London School of Economics and Clyde & Co indicates a so-called ‘third wave’ of climate litigation – characterised by the expansion of litigation to more jurisdictions, increases in volume and pace, and new types of claims targeting the private sector – is currently underway.
But you need not frame tackling climate liability risk only as a means of mitigating risk of court proceedings. Risk management strategies can also boost resilience and generate competitive advantage.
This insight examines emerging evidence around climate liability risks facing the energy sector. It also outlines steps to identify and reduce your climate liability risk to support the long-term success of your organisation.
High profile instances where energy companies have faced climate liabilities include the 2021 case. This therefore demonstrates that energy companies need to understand their climate-related physical and transition risk exposure, and how to improve their resilience and preparedness for climate-related liability risks.
In the U.K. in February of this year, environmental activism organisation ClientEarth filed a case against the board of directors of a multinational energy company for failing to manage the material and foreseeable risks posed to the company by climate change.
The lawsuit alleges the organisation’s directors have breached their legal duties under the Companies Act by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement. The action has the backing of a range of institutional investors and indicates the potential risks to directors and officers around not adequately addressing climate.
Global Trends in Climate Change Litigation: 2022 Snapshot – a report by The Centre for Climate Change Economics and Policy (CCCEP) and The Grantham Research Institute on Climate Change and the Environment – showed that globally, the cumulative number of climate change litigation cases has more than doubled since 2015. Just over 800 cases were filed between 1986 and 2014, and more than 1,200 cases have been filed in the last eight years, bringing the total to 2,002. That roughly one-quarter of these were filed between 2020 and 2022 indicates an acceleration around claims.
Liability risks arise from a range of areas, including failure to:
Risk also arises from climate/greenwashing, wherein the claims made about your green credentials do not match the realities.
The 2022 Global Trends in Climate Change Litigation report also looks at some of the strategies used by climate litigation claimants; 117 claims sought to ‘enforce climate standards’; a small but notable number of cases (16) related to climate-washing, while 12 cases related to ‘corporate framework’.
Carrying out a climate liability risk assessment independently or as part of a wider climate risk assessment can be a starting point to understand your current and potential future climate liability risks. Climate liability risk assessments can also reveal financial impacts of both physical climate risks (those arising from risks from climatic events, such as wildfires, storms, and floods) and transition risks (those emerging from the transition to a low-carbon economy, such as policies, regulatory or market responses to transition the economy away from fossil fuels).
Liability assessments can consider the unique features and commercial landscape specific to your business model. This can give you the opportunity to test and improve your resilience and preparedness, helping to outline next steps to reduce your exposures or where you may be able to transfer specific risks.
These exercises can also incorporate climate scenario analysis to direct longer-term strategy and how you can manage climate risks over extended time horizons.
While many underwriters are already including specific climate harm exclusions, particularly for carbon intensive industries, others take the view that the intent of existing wording is not to provide cover in this area.
In addition to further exclusions in the wordings of public liability policies for energy companies, more broadly, we can expect underwriters to increasingly require specific information on what actions you’re taking to mitigate climate liability risks. This further expands the environmental, social and governance (ESG) data many are already requesting.
Getting ahead of climate liability risk can not only help you manage insurance costs but also uncover new competitive opportunities.
By using risk management tools like scenario analysis and analytic modelling, you can understand what slow-onset and severe climate events are now within the realms of predictable, checking the outcomes of these scenarios against your current business model, as well as your cover and/or contracts before disputes arise.
Assessing your potential climate liabilities also represents a chance to interrogate your existing business continuity planning. This can narrow the openings where competitors could potentially steal a march in the event of disruptive, climate-related claims.
As targets and legislation become embedded, this not only heightens the risk of climate litigation, but increases the expectations on energy companies. By showing a commitment to good climate-related risk management in the round – including climate liability risk – you position the business for more long-term investment as well as develop recruitment strategies more likely to attract the talent of tomorrow.
To discuss ways you can mitigate your climate liability risk, get in touch.
