New laws and regulations, strategic litigation and duties of care emerging in response to climate change are giving rise to new liability risks that pose a serious risk to companies’ future profitability, according to The coming wave, the third report on climate change from global law firm Clyde & Co.

“Can no longer ignore”

With a twenty-fold increase in climate law and policy in the past 20 years, there are now over 1,500 national laws and executive acts addressing climate change, compared to just 70 when the Kyoto Protocol was adopted in 1997. Nigel Brook, partner at Clyde & Co, says “Businesses, and the directors and officers who run them, can no longer ignore climate change. They are coming under increasing scrutiny from regulators and enforcement bodies and face an ever-growing body of climate-related law and regulation. The physical impacts of climate change are already significantly impacting companies' assets, investments, workforce, supply chains, input costs and outputs, and the cost of capital and insurance. And as the world transitions away from fossil fuels, regulation, policy, changes in consumer habits and investor pressure carry the potential to devalue or ’strand’ carbon-intensive assets, product lines, plant and business models.”

Profitability impact

Mr Brook explained, “Companies that fail to adapt to this changing risk landscape will see an impact to their profitability. They may not be able to bear the costs of physical risks to their operations or infrastructure. They may become unable to attract investment. They might fail to keep pace with changing law and regulation, or they may simply fall below the emerging best practice standards set by their peers and become uncompetitive. All of this might give rise to lawsuits.” In recent years, significant progress has been made by physical climate risk consultancies, insurers, and associations assisting companies in mapping their physical risks. Meanwhile, international organisations, regulators, standard-setting bodies, investor groups and asset managers are seeking to establish standards for transition risks to be integrated in investment decision-making. However, climate-related liability risk is less well understood and less explored,  although this is likely to change as climate change-related litigation becomes more common.