In the wake of last month’s COP26 conference, Partner Jonathan Williamson outlines the key business risks and reward opportunities that may arise from climate change.

“Whilst failure to visibly engage with decarbonisation may impact on a company’s reputation and brand, a genuine and evidenced strategic, financial and operational commitment to reducing emissions brings material growth opportunities.”

Perhaps unsurprisingly, last month’s COP26 conference brought into even greater focus both the environmental and economic consequences of climate change on communities, Nation states, and businesses alike.

It is clear that companies, regardless of sector, must continue to develop an acute awareness, not only of the impact that climate change may have on their investment decision-making but also the risks it presents to their day-to-day functions, whether they be operational, economic or reputational (as identified in 2015 by Mark Carney, the then Governor of the Bank of England).

Risk

From a legal perspective, the key material risks are litigation and reputational.

Climate change litigation is, increasingly, being used in some jurisdictions (notably, the US) to influence government action and corporate and investment decisions relating to climate change, and to seek compensation for losses already sustained and future adaptation costs. Claims have primarily targeted governments and carbon majors in the US and Europe. Amongst the more high profile of the claims against carbon majors are:

• a 2015 claim against German power utility firm RWE AG by a Peruvian farmer where, for the first time, a court found that climate harms can, in principle, give rise to corporate liability. A Peruvian farmer alleged that the historic GHG emissions of RWE contributed to increased global temperatures, which, in turn, caused the glaciers around Lake Palcacocha, Peru, to melt, with 50,000 residents in the town below facing an increased risk of severe flooding.
• a May 2021 decision by a court in The Netherlands ordering Shell to take preventive action on climate change and reduce its global net carbon emissions by 45% by 2030 compared to 2019 levels.

Decision such as these, albeit seemingly targeting carbon majors, should put businesses of all sizes and in all sectors on notice of the threat of climate change related liability. With at least 37 countries and eight regional and international jurisdictions now having experienced some climate related claim, cases are also likely to be initiated across a growing range of geographies.

Climate change litigation is likely to expand to sectors beyond the fossil fuel industry. Most defendants will continue to be governments and corporations. However, directors, accountants, engineers, architects and even lawyers may find their standard of care and professional judgement scrutinised by the courts.

Boards of directors need to be aware of the relevance of climate change and its relationship with their duties to act in the best interests of the company. This could include consideration of environmental policies, supply chain criteria, risk management procedures and decision-making processes.

Reward

Companies are increasingly expected to report on their climate change risks, set carbon reduction targets and mitigate their climate change impacts. Whilst failure to visibly engage with decarbonisation may impact on a company’s reputation and brand, a genuine and evidenced strategic, financial and operational commitment to reducing emissions brings material growth opportunities, including:

• climate change is more than likely to create new business opportunities across a number of sectors including the obvious such as clean tech and renewable energy. The Chancellor’s stated plans for the UK to become the world’s first net zero aligned financial centre is likely to lead to financial incentives as well as opportunities in new sectors
• addressing the importance of climate change and engaging with employees is likely to have a positive impact on recruitment and retention
• the drive for reduction of emissions and the race in various sectors to net zero will undoubtedly present growth opportunities for companies both in their own existing sectors and in alternative or newly emerging sectors. Those willing and able to take such opportunities by way of M&A and/or fund raising activity should, however, recognise some of the associated considerations such as an enhanced due diligence focus on climate related risks and opportunities and whether the commercial and financial rationale for any transaction is appropriately aligned with existing and future climate related policies and strategies
• the open and transparent provision of financial and operational information about climate change to insurers, lenders, shareholders and investors will enable them to assess the financial impacts on their existing investments and perhaps open up conversations about further investment.

Whatever the view of COP26 in terms of it being a “success”, it is clear that momentum has shifted towards the race to net zero and businesses need to urgently regard this as fundamental to their operational and strategic principles. Companies that are quick to exhibit and invest in genuinely high standards of engagement, planning, ambition, courage and innovation will be best placed to not only navigate the challenges that this new order brings but also to make the most of the opportunities on offer.