Investors and regulators around the world are failing to properly assess companies’ exposure to the threats of climate lawsuits, in an oversight that threatens to cause further instability in the global economy in the coming years.
A study published today in the journal Science warns that the current approach to climate-related financial risk assessment does not sufficiently take into account the growing wave of climate lawsuits building up against polluting companies around the world.
The analysis was carried out by researchers from the University of Oxford’s Sustainable Law program who alerted organizations charged with providing frameworks for assessing climate risks – the International Sustainability Standards Board (ISSB) and the Network for Greening the Financial System (NGFS) – currently “little to no” details on how to evaluate climate-related legal risks.
Neither agency considers liability risk as its own specific climate risk category and instead includes it in the “transition risk” category, despite increasing climate-related litigation and regulatory action around the world.
“This suggests [the ISSB and NGFS] see climate litigation as just a peripheral risk, while recent events in the courts show it is something much bigger,” said Dr Arjuna Dibley, head of sustainable finance research at Melbourne Climate Futures.
More than 2,485 climate lawsuits have been filed to date in more than 52 different jurisdictions, the researchers noted, with claims pursuing a range of objectives from challenging the construction of high-emitting assets, punishing companies for inadequate disclosure of financial risks, or forcing companies to increase their climate ambition. Developments in climate attribution science and social science research are expected to increase the success rate of claims in the coming years.
In a landmark 2021 case, Shell was ordered by a Dutch court to reduce emissions by 45 percent by 2030 compared to 2019, across all activities, including its own and end-use emissions. Other cases before the court call for holding oil and gas companies accountable for their historic role in fueling public uncertainty around climate science.
And yet poor provisions around legal risk accounting in climate-related financial disclosure reviews could cause investors to continue backing projects and companies that could be subject to expensive and reputation-damaging lawsuits, the researchers warned.
Thom Wetzer, lead author and director of the Oxford Sustainable Law Programme, said current climate risk assessments “misrepresent the distribution and scale of climate-related financial risks”.
“That means investors end up investing in the wrong projects and taking on risks that neither they nor regulators understand, further exacerbating the financial risks posed by climate change,” he said.
The report outlines five ways in which climate-related legal risks can be better assessed by investors and regulators, including market impact analysis using the social cost of carbon; attribution of damage caused by climate change; estimating the costs of accelerated climate mitigation and quantitative analysis.
“Policymakers, investors and companies have accepted the need to understand climate risk exposure,” Wetzer said. “But doing so diligently means engaging with the law through research that combines legal reasoning with financial analysis and climate science. Otherwise they will remain blind in their treatment of climate risks.”
The ISSB and the NGFS were considering a response to the investigation at the time of going to press.
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