As we enter the final week of COP26, climate-related risk is at the top of the agenda along with diversity, equality and inclusion. We look at what is climate-related risk and what needs to be considered.
COP26 has brought climate change back to the forefront of decision making and lawyers whether they realize it or not will all become climate lawyers as climate-related risk becomes a top consideration in decision making and being able to predict and quantify this risk is not easy.
What is climate-related risk?
They are risks created by a range of environmental hazards such as rising sea levels, excess rainfall, wildfires and extreme cold or hot temperatures. These hazards feed into an organisations credit risk, financial risk, operational risk and reputational risk etc. as the knock effect disrupts an organisations ability to run smoothly. This will also vary in different regions as each are affected in different ways by climate change and the robustness of each jurisdictions approach to climate change will also impact where organisations wish to operate in order to minimise the impact to its business.
Assessing climate-related legal risk
As each organisation will face different hazards, being able to first identify them is key to understanding what the risks are.
Corporate – ensuring that strategic plans take account of climate-related risk such as disclosing information to stakeholders that enable them to make an informed investment decision.
Financial Services – this sector is very wide and the FCA recently released its new strategy for a positive sustainable change including a programme to support a transition to a more sustainable economy. The FCA is also committed to seeing climate change being integrated into all financial transactions as well as sustainable finance.
Commercial – engaging with suppliers and entering into commercial contracts can mean that some suppliers behaviours are beyond the control of organisations. Ensuring compliance with relevant policies and carrying out thorough due diligence before engaging with the supplier goes some way in ensuring that not only does the supplier support sustainability but also third parties that they engage with comply.
Litigation – failing to comply with climate policies or disclose specific climate risks can give rise to litigation as not only are organisations affected by climate change but also individuals. The recent case Milieudefensie et al. v. Royal Dutch Shell concerns Shell’s liability for climate damage on a global scale. The claimant’s argument rests on the Paris Agreement 2015 and if the Courts decide that Shell’s carbon footprint accelerated the dangers presented by climate change, it could set a precedent for future climate-related litigation.
Making changes that are impactful to prevent and minimize climate-related risks is something that all organisations will need to consider and where there is forward thinking change there is more public confidence in their efforts to lead more sustainable business.