Climate litigation is been on the rise. While we’ve yet to see a verdict on the scale of those seen in tobacco or opioid litigation, it is only a matter of time before a breakthrough case comes along. Investors are recognizing benefits of investing in climate litigation, but few adequately assess that risk in their portfolio companies. A recent article from ESG Clarity examines recent research published in Science which examined climate litigation risk. The article gives the following example of underestimated climate litigation risk:
“As an example of risks companies face, the report authors pointed to their estimate US oil and gas giant Chevron could be liable for up to $8.5trn where between 1990-2019 the company’s profits were $291bn.
‘It’s possible that Chevron’s business may in fact be net value destroying,’ said co-author and senior research associate at the Oxford Sustainable Law Programme, Dr Rupert Stuart-Smith.”
Certainly, this is an extreme case, and would take years to go through the court system before the company had to pay a claim. Even so, the totality of climate litigation may be far larger than companies estimate – especially given emerging novel legal theories. The article offers five strategies for assessing the risk:
- Conduct market-impact analysis;
- Use social cost of carbon to assess potential liability
- Calculate the company’s attribution to climate change damages
- Estimate the cost of accelerated climate transition measures for investee companies
- Conduct qualitative analysis to put quantitative figures into context.
Too often, risks associated with climate litigation are underestimated – or ignored – due to a lack of understanding. While a negative verdict can certainly result in monetary damages, it can also impact stock price and potentially result in injunctions forcing a company to abandon long-held practices and undertake costly new/unanticipated directions. The article and underlying research remind us that climate litigation has multifaceted impacts that should be considered when determining climate litigation risk.
If you aren’t already subscribed to our complimentary ESG blog, sign up here: https://practicalesg.com/subscribe/ for daily updates delivered right to you.
