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.
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