Climate Change Risk & Liability Report - 2nd Edition

Climate Change Risk & Liability Report - 2nd Edition

Stepping up good governance to seize opportunities and reduce exposure Climate change risk and liability report 2021

Second edition – October 2021 First published – April 2021

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Prologue October 2021

In Spring 2021, Clyde & Co published its Climate Change Risk and Liability report “ Stepping up good governance to seize opportunities and reduce exposure” , to help businessesnavigatesomeof thecomplexities involved in the transition to a low carbon economy. By setting out how the landscape is changing in terms of physical, transition and liability risk, and how this might impact on critical issues such as reporting requirements and corporate governance, our aim was clear: to provide insight on how to mitigate those risks, meet evolving duties of care and help companies position themselves to capitalise as opportunities rose. Six months on, as world leaders, policy- makers, businesses and others gather for the COP26 international climate summit, the issues addressed in this report are as pertinent as ever. Progress has been made and challenges in the battle to tackle climate change have continued to develop. Pledges by governments to deliver net zero carbon emissions are being supported by plans to invest more in green technologies and jobs 1 , such as those in the pipeline in the US 2 , China 3 and the EU 4 , and there are now almost 2,350 climate laws and policies in existence 5 . Despite this, concerns remain that still not enough is being done to achieve decarbonisation, with international commitments made to date on course

to reduce emissions by just 12% by 2030, instead of the 45% needed to keep global warming to 1.5˚C or below 6 . ACTIVISMAND LITIGATION Against this backdrop, activism continues to gather pace and take new shape. As of October 2021, almost 1,900 climate-related litigation cases are ongoing or have been concluded globally 7 . Such activism is only likely to be fuelled by landmark rulings such as the decision in the Milieudefensie et al. v. Royal Dutch Shell PLC case in May. This resulted in the oil major being ordered to make a 45% reduction in emissions (both its own and its end-users’) by 2030 on the basis that it owes a duty of care under Dutch law. While that decision is under appeal, it has already inspired similar rights-based cases against motor manufacturers and an oil firm in Germany. In the US, climate change lawsuits have been mired in procedural issues with the energy defendants fighting to keep the cases in federal court, which is seen as more favourable for the petroleum industry. In this regard, the energy defendants received a boost via the Supreme Court’s decision in BP PLC v. Mayor and City Council of Baltimore in May wherein the Supreme Court held that a lower court had wrongly limited its review of the energy defendants’ request to keep the case in federal court. Although the

1 Clean energy investment could create 10 million green jobs,World Economic Forum, 9 July 2021

2 Inside Biden’s Plan To Create Over 10 MillionWell-Paying JobsWith His Clean Energy Initiative, Forbes, 23 April 2021

3 China pours money into green Belt and Road projects, Financial Times, 26 Jan 2021 and China expected to favour green tech over coal in new five-year plan, Thomson Reuters Foundation, 1 March 2021

4 EU invests 122m to help bring low carbon technologies to market, Energy Live News, 29 July 2021

5 Climate Change Laws of theWorld

6 For a livable climate: Net-zero commitments must be backed by credible action, United Nations

7 Climate Change Laws of theWorld

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justices declined to address the overarching arguments that climate torts against energy companies belong in federal court, this decision provides the energy companies with a possible (but not guaranteed) path to stay in federal court that did not exist before. Governments too continue to be held to account via administrative actions. The Constitutional Court in Germany is among the latest to find in favour of claimants, ruling in April that the country’s Federal Climate Protection Act was incompatible with citizens’ rights, due to insufficient greenhouse gas reduction targets (this immediately prompted the government to adopt more ambitious targets). In all, 37 cases challenging governments’ perceived lack of action or ambition on climate targets and policies, on the basis that controlling emissions is a state’s‘systemic’ responsibility, had been identified around the world by May 2021 8 . Meanwhile in France in September, the first ever legal action against a state for its alleged failure to protect biodiversity has been initiated by two NGOs, relating to the authorisation of pesticides. Although this is not a climate lawsuit per se, there are clear links between climate and biodiversity issues (as pointed out in a recent report co- authored by the Intergovernmental Panel on Climate Change 9 ), and distinct parallels in the litigation strategies adopted. This signals that a new type of litigation risk may be emerging, and demonstrates the growing importance of biodiversity alongside climate change as a critical issue when it comes to protecting our environment in the years ahead. TAKING RESPONSIBILITY AND DRIVING INNOVATION The growing focus on biodiversity and natural capital is echoed in the rising prominence of the newTaskforce on Nature- related Financial Disclosures (TNFD), which

is developing a framework for corporate reporting on nature-related risks. Launched earlier this year, its work is already supported by more than 100 organisations 10 . Its inception builds on the success of the Taskforce on Climate-related Financial Disclosures (TCFD), which in June received its most widespread endorsement yet, when G7 finance ministers and central bank governors agreed to make climate-related financial reporting mandatory, in line with TCFD recommendations. Shareholdersarealsoturningupthepressure on companies to improve their approach to, and performance on, environmental protection and sustainability issues. This summer, investors voted in favour of activists’ moves to compel US oil company Chevron to cut its carbon emissions, and for the first time ever voted new directors onto ExxonMobil’s Board against its wishes. Insurers too are signalling a clear direction of travel, with the launch of the Net-Zero Insurance Alliance (NZIA) at the G20 Climate Summit in July, in which eight major insurance and reinsurance companies pledged that their underwriting portfolios would be net zero by 2050 11 . In a similar vein, on 30 June 2021 a group of leading law firms including Clyde & Co. LLP launched the Net Zero Lawyers Alliance (NZLA), a coalition committed to accelerating transition to net zero emissions by 2050, both through their own policies and by assisting their respective clients’ paths to net zero. Regulators, activists and others remain on high alert for potential ‘greenwashing’, where organisations misrepresent their eco- friendly credentials in corporate statements or marketing activities. Over the summer, the International Organisation of Securities Commissions (IOSCO) published reports on climate-related sustainability disclosures in a bid to combat greenwashing, while the Australian Securities and Investments Commission (ASIC) is undertaking targeted surveillance of financial products to identify

misleading ESG statements 12 . In August, the world’s first court action challenging the credibility of a company’s clean energy claims and its net zero emissions targets was launched against Santos, an Australian oil and gas company by shareholder advocacy group the Australasian Centre for Corporate Responsibility 13 . However investors, and companies themselves, are also increasingly aware that as well as posing major risks, the global transition to net zero throws up significant opportunities to be grasped. In the energy sector, global corporates who previously focused their expertise on fossil- based systems of energy production are accelerating their move into the renewable energy sector, particularly offshore wind and solar. The significant increase of renewable energy in the energy supply mix, the continuing progress of electrification, improvements in energy storage systems, and the development of ‘new’ energy sources such as hydrogen are all key drivers of the energy transition. Substantial investment is required to develop and scale the disruptive new technologies that are required to achieve net zero. Corporates, start-ups, investors and funding agencies

are having be more pragmatic and creative to match ‘climate tech’ ideas to capital in new ways, enabling cutting-edge innovations to reach commercialisation and critical mass, as our recent Climate Tech Investment Report outlines. Time is of the essence in the fight against climate change. Though there have been significant developments since we published our Climate Change Risk & Liability Report 2021 , in the wake of the COP26 summit we will need to start seeing even more rapid and radical change. With the much delayed COP15, the UN’s equivalent biodiversity conference, finally due to take place in 2022, the impetus for governments and businesses to face up to a wide variety of environmental, social and governance obligations is growing. But so too is the chance for industry tobepart of the solution by developing innovative new products and services. This report is a vital tool to help companies build resilience and play their part in the orderly and just transition to net zero that is essential if we are to protect the planet and the people and ecosystems within it, while maintaining stability in the global economy.

8 Global trends in climate change litigation: 2021 snapshot, LSE, July 2021

12 Corporate governance update: climate change risk and disclosure, Australian Securities & Investment Commission, 14 October 2021

9 Biodiversity and climate change, June 2021

13 Greenwashing case against Santos shifts the dial on climate lawfare, Financial Review, 2 September 2021

10 Global businesses and financial firms join TNFD to tackle nature-related risks, Taskforce on Nature-related Financial Disclosures, 30 September 2021

11 Net-Zero Insurance Alliance (NZIA) launched at G20 Climate Summit: more insurers are joining, 12th July 2021

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Introduction

NIGEL BROOK PARTNER, CLYDE & CO

Contents

Much has changed since we published our first climate risk report two years ago, at a time when it was still a relatively nascent boardroom issue for businesses outside the energy sector. The countdown to net zero carbon emissions has now truly begun and developments around climate change risk and regulation are accelerating, with implications for all industries. More than 110 countries have now committed to becoming carbon neutral by mid-century, including major emitters such as China (by 2060), the EU, the UK, Japan and South Korea, and around two thirds of total emissions now fall under such pledges 1 . But global emissions need to almost halve by 2030 from 2010 levels, if the world is to have a chance of keeping warming below 1.5 degrees 2 , and policies to achieve that are lacking. Governments are increasingly being held to account if their actions are deemed not to live up to their pledges. Public perception of climate change is shifting rapidly, and growing numbers of people, young and old, are adding their voices to calls to tackle the issue faster. More and more companies of all shapes and sizes are starting to see that beyond the damage caused to the planet, climate change could pose a threat to their business models. They recognise the need to be ahead of the curve to avoid a disorderly transition to a low carbon economy and face up to social, economic, legal and regulatory demands.

It’s a lot to think about, at a time when many othermajor issues – notably the impact of the COVID-19 pandemic – are also clamouring for attention on the boardroom agenda. Despite the challenges,apathway toprogress is essential. This year’s United Nations COP26 climate change summit in Glasgow is likely to set the pace in terms of defining and strengthening the policy response. Since achieving net zero will require significant investment as well as regulation, this could create major opportunities for businesses, as well as risks. As companies build resilience, the importance of good governance cannot be overestimated. Putting climate risk awareness at the heart of decision-making and embedding it into both strategy and culture at all levels of an organisation is an important step. Since legal considerations extend beyond environmental law and regulation to areas like asset management, finance, insurance, tax and many more, businesses are looking to their lawyers for deep knowledge of all the issues and out-of-the-box thinking to guide them through the transition. At Clyde & Co, we have developed market- leading expertise and a reputation for innovation in this space. In this report we look at all the key issues, from recent and emerging developments in this area, to how organisations can best position themselves to withstand shocks and seize the initiative, so that they can help to deliver a future that is sustainable for themselves, and for all of us.

07. Introduction

09. What is the impact of COVID-19 onthe climate change agenda?

13. What does the risk landscape look like today?

25. Reporting requirements: what dobusinesses need to know?

31. How can good governance help address climate risk?

37. What are

40. Conclusion

41. Contributors

the insurance implications of these issues?

UN News https://news.un.org/en/story/2020/12/1078612

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2 UN Climate Change https://www.un.org/en/climatechange/science/key-findings

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What is the impact of COVID-19 on the climate change agenda?

The COVID-19 crisis has vividly demonstrated how suddenly the world we live in can change and how quickly policymakers, companies, and individuals can adapt when forced to do so – setting a precedent for climate change transition. Sucha“blackswan”eventthatunexpectedly exposes businesses’ vulnerabilities may provide a foretaste of the kinds of shocks that climate change or a disorderly transition could create in specific industries or economies. Businesses may be surprised by the speed of the changes it triggers, with associated implications for boards’ duty of care in terms of assessing, mitigating and reporting on risk. At the same time, increasingunderstanding of the interplay between climate change and catastrophic events such as floods and wildfires makes the frequency of this type of event more foreseeable. This has obvious implications on parties’ commercial obligations, from force majeure clauses to insurance policy coverage that is predicated on a certain event or peril being unforeseeable. The novel coronavirus has also focussed attention on how changes in landuse and theunsustainable exploitation of nature can give rise to sudden and catastrophic loss around the world.

Managing COVID-19 may have given businesses a playbook for how to deal with fast-moving challenges or created a sense that major enterprise-wide risks that were previously thought too big or too difficult to deal with can now be addressed. It has in some ways proved that organisations can make rapid and large-scale changes if the will to do so is there, moving climate risk further up the list of priorities. In particular, digital transformation has been fast-tracked, speeding up the adoption of sophisticated tech tools which enable smarter, more efficient processes and better products to be developed in a whole host of sectors, from energy and construction to insurance and law. We can expect to see innovations such as parametric insurance, smart contracts that respond to weather >Page 1 Page 2-3 Page 4-5 Page 6-7 Page 8-9 Page 10-11 Page 12-13 Page 14-15 Page 16-17 Page 18-19 Page 20-21 Page 22-23 Page 24-25 Page 26-27 Page 28-29 Page 30-31 Page 32-33 Page 34-35 Page 36-37 Page 38-39 Page 40-41 Page 42

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