Companies need to take actions to address climate change

The physical consequences of increasing weather volatility are becoming all too apparent. In February 2021, deadly Winter Storm Uri brought record seasonal cold temperatures to parts of the US, testing the infrastructure to the limit and leaving millions in Texas without power or water. As the world battles against coronavirus, extreme weather events like Uri are a timely reminder of the potentially catastrophic threat posed by extreme weather and climate change.

The last seven years have been the warmest on record, with 2020 joining 2016 as the hottest year on record, according to NASA analysis [1]. Despite the reduced economic activity during the pandemic, the World Meteorological Organization [2] states that greenhouse gas concentrations continued to rise in 2020. Carbon dioxide levels have increased by nearly 50% since the Industrial Revolution 250 years ago, while the amount of methane has more than doubled.

Evidence of climate change and its impact continues to mount, with longer and more heat waves, wildfires and hurricane seasons, as well as sea level rises, on the horizon. The 2020 Atlantic hurricane season [3] produced a record-breaking 30 named storms and 12 US land-falling storms. Australia’s “Black Summer” bushfires of 2019-2020, the most intense bushfire season to date, occurred in Australia’s driest and hottest year on record.

For businesses, coronavirus worries superseded climate change concerns in 2020. Climate change ranked as only the ninth most important risk in the Allianz Risk Barometer 2021, pushed down two places in a year dominated by the pandemic. What the pandemic and climate change have in common is that they are both global systemic risks. It is unsurprising then that in 2021, climate change is back on the agenda as a priority.

“Covid-19 is a reminder of the urgent need to tackle climate change and promote sustainability to build greater resilience in the future. It has demonstrated the potential for environmental and climate issues to inflict enormous damage on society,” says Isabel Naumann, responsible for Sustainable Finance Regulation at Group Regulatory and Public Affairs at Allianz SE.

“The election of President Biden is also significant in pushing the sustainability agenda. There is now a period of policy and regulatory change in the US. Having the US back at the international table is critical if the world is to take an aligned approach to climate change.”

The pandemic has changed the context of the debate around climate change, says Chris Bonnet, Head of Environmental, Social, and Governance (ESG) Business Services at AGCS. “Like climate change, pandemic risk was previously just an abstract exercise, now it is a risk we experience every day. We also are seeing growing activism and societal pressure on governments and companies to address climate change.”

A surge of climate and sustainability-related regulation in combination with inconsistent approaches across jurisdictions and a lack of data availability represents significant operational and compliance challenges for companies, according to Naumann.

With increasing regulation, companies and their directors could face litigation and regulatory action, says Bonnet. While global ESG reporting standards have yet to be agreed, national and regional “hard” legal ESG measures with “teeth” are on the rise, Bonnet explains.

“Climate change-related regulations and ESG requirements make it easier to hold directors and companies to account. Companies closest to fossil fuels will face the highest risk of climate change litigation and regulation, but this is an issue that will become relevant to almost all sectors, from financial institutions to manufacturing and technology.”

Companies are likely to face simultaneous regulatory changes across many fronts, which will not always be aligned. “Climate change-related regulatory and legal developments are likely to emerge over time and be iterative in nature. The pace of regulatory developments will also be unpredictable, accelerating or slowing with changes in governments and policy,” says Bonnet.

The frequency and diversity of legal actions addressing climate change are increasing, including those that are premised on regulatory responses to greenhouse gas emissions and others that arise out of extreme weather events, sea level rise, and other physical impacts of climate change.

Climate change-related litigation might implicate a wide range of issues, including but not limited to potential costs, fines and penalties, prosecution of executives, impacts of valuations and credit ratings and shareholder claims [6].

In total, there were 1,587 cases of climate change litigation in 37 countries between 1986 and the end of May 2020, of which over two thirds were in the US (1,213), Australia (98), UK (62), and EU (57), according to the London School of Economics (LSE) [7]. So far, no company has been found liable for climate change [8], although there are a growing number of cases filed against fossil fuel companies – there are currently at least 40 ongoing climate cases worldwide against “carbon major” companies, mostly in North America, according to the LSE.

“The development of climate change litigation is uncertain, and cases to date have largely been unsuccessful. But the stakes are high. The moment climate change litigation is successful, there would be huge ramifications,” says Bonnet.

Changes in societal and generational attitudes to climate change are also influencing policy and regulation going forward. For example, since 2019, there has been an escalation in the use of litigation by activists and advocacy groups seeking to advance climate policies, drive behavioral shifts and/or create awareness and encourage public debate, according to the LSE.

Climate change activism has stepped up a gear, says Bonnet: “Campaigns have gone to another level in recent years, and are increasingly aligned and sophisticated. Groups lobby governments and pressure companies to effect change, and they are not afraid to resort to litigation.” For example, non-profit law firm, ClientEarth, has gained a reputation for using legislation to hold companies accountable. In September 2020, it secured a major victory by forcing the closure of a giant coal plant in central Poland.

Meanwhile, a number of current lawsuits claim that companies have misrepresented the impacts of climate change, or alleged “greenwashing” where companies make false or misleading ESG claims. A crackdown on “greenwashing” claims could also be on the cards in future with the Task Force on Climate-Related Financial Disclosures, the US Securities and Exchange Commission (SEC) and European supervisors looking into the issue.

Companies that over promise or lag behind on climate change are likely to come under increasing scrutiny, according to Bonnet. “Companies need to ask themselves if promises made are achievable and backed by appropriate action. For example, what does it mean to be ‘carbon-neutral’? This will increasingly raise technical and regulatory questions, as well as raising expectations for consumers and investors,” says Bonnet.

Companies will only have limited possibility to influence societal and political aspects of climate change. However, keeping a finger on the pulse of the climate change debate will help companies anticipate future policy and regulatory developments.

“This is an issue companies need to keep on top of and to keep in-touch with their peers, customers and suppliers about,” Bonnet says. “The boundaries of what is socially acceptable in terms of carbon-based business models are shifting, and society will want to understand that businesses are contributing to the solution to climate change, rather than being the cause of the problem.”

Businesses need to be proactive in addressing climate change liabilities. “The EU’s climate change and wider sustainability agenda will not be postponed. Companies should start thinking about upcoming requirements and changes in policy and regulation now,” says Naumann. “From a risk management perspective, companies need to consider potential climate change-related liabilities alongside physical and transition risks. By engaging early, companies will be able to prepare for what is around the corner.”

Businesses will need to factor-in future climate change-related regulation and legal developments in their risk management and strategic planning, says Bonnet: “However, just including climate change in the risk register will not be sufficient. Businesses need to use targeted data and analysis to identify developments in climate change risks, regulation and litigation and understand how they could impact their business.”