Climate change poses new business risks – Clyde & Co report

International law firm Clyde & Co has released a report tackling the legal, commercial, and liability risks caused by climate change and faced by businesses today.

Titled ‘Climate change: a burning issue for businesses and boardrooms’, the report looks at what is driving the heightened risk environment and how most companies are vulnerable to climate-related risks. Even firms not in the energy sector or other carbon-intensive parts of the world economy are subject to these risks.

The report classified the risks faced by businesses and their boards into three main categories:

• Physical risks are those that might impact businesses of all kinds as climate change-related events lead to physical damage to business property, assets or supply chains.
• Transition risks are those that arise as the worldwide shift to a low or zero carbon economy impacts the finances and valuations of organizations and asset portfolios.
• Liability risks are faced by those alleged to be responsible for (for example) contributing to climate change, or failing to avert, minimize, or report on physical or transition risks.

One trend examined in the report is an increase in product liability claims brought by environmental activists and governments against major oil companies. These claims are increasing in number in the United States as well as other territories.

“Climate change is one of the defining issues of our time, with its effects becoming more apparent by the day,” said Nigel Brook, partner at Clyde & Co. “Boards have a responsibility to shareholders and other stakeholders to understand, measure, mitigate and report on the risks that climate change brings, which makes it a critical boardroom issue, not only to the corporations themselves, but to their directors, who are at risk of being held to account.”

The report said that climate change-associated risks have been impacting insurers for a long time, and will continue to do so as weather-related perils become more severe and more common. It also tackles the importance of insurance in mitigating the impacts of climate change and building resilience.

Of particular note were parametric insurance and microinsurance, two novel risk transfer instruments which can result in faster handling of claims.

“Insurers are no strangers to climate change issues and have long played a key role in raising awareness of the physical risks that it poses,” said James Cooper, chair of Clyde & Co’s insurance global practice group. “They have also advanced their thinking on the impact that the transition to a low carbon economy will have on their balance sheets. But there are still significant opportunities for insurers to help businesses, communities, and individuals build resilience to climate change through traditional and novel insurance models.”