No more government blank cheques, as climate risk shifts to insurers and lawsuits

Climate risk is litigation is evolving fast, as well as acknowledgement of the role insurance must play in mitigating the effects of global warming, according to legal firm Clyde & Co.

The case law is still evolving for climate risk lawsuits, noted speakers at a London event co-hosted by insurance broker Willis Towers Watson.

Recent discussions at the UN have focused specifically on the role of insurance to meet the increasing burden of climate change resilience, noted Rowan Douglas, head of capital, science and policy practice, Willis Towers Watson.

“They’re not asking if insurance is involved, but how it needs to be involved,” said Douglas.

Reinsurer Swiss Re has estimated the protection gap between insured losses and the economic costs of climate change to be in the region of $1.8trn.

Insurance is “a critical gearbox”, he explained, bringing governments, climate scientists and the law profession together.

Douglas described an opportunity in blending insurance with other products – particularly municipal debt, as national governments are keen to transfer the risk of having to bail out local governments.

“We’re looking at how municipal finance in the US can be integrated with disaster risk,” he said.

“Suddenly some of these cities are exposed to this risk in a way and to a degree they haven’t been before. Climate risk will be a subset of credit risk,” said Douglas.

“For those cities with extreme weather risk, there are no blank cheques within government any more – that era is over,” Douglas added.

“Resilience is a huge topic for mature and emerging economies. There will be major opportunities and substantial risks, and some novel regulatory issues,” said Nigel Brook, a partner at Clyde & Co.

Jonathan Gascoigne, a senior risk advisor working with Douglas at Willis Towers Watson, highlighted the role of the UK’s Green Finance Taskforce, which in March identified a need to set up a Centre for Climate Analytics involving government, academia and industry.

However, it is the litigation picture that is perhaps evolving fastest, due to several ongoing cases in US state and federal courts.

The phenomenon of climate change litigation is not new, but it is evolving quickly, noted Neil Beresford, partner, Clyde & Co.

Several ongoing cases in US state and federal courts could lead to legal lessons being drawn within weeks, he noted.

“These actions are developing every day; they’re coming in very quickly now,” he said.

“It’s not uniquely a US phenomenon, but predominantly a US phenomenon, and very much a city phenomenon,” said Beresford.

Coastal cities see the most lawsuits, he suggested – as sea level changes can be demonstrated more easily than other inland metrics.

“The case law is starting to move inland,” he continued, noting a case in Colorado as well as coastal litigation in California.

“The allegations are straight out of the big tobacco textbook of the 1970s,” said Beresford, citing external lobbying by oil firms that played down climate risks, while their own data reported internally warned otherwise.

Cases have been based on attribution theory of how much oil has been pulled out of the ground by an energy firm, and therefore its share of CO2 emissions.

Product liability is also being explored in cases, he highlighted: the notion that petroleum is a defective product because of its toxic by-products

“This allegation of petroleum being a defective product is one to think about. They’re potentially onto something here, and the motor industry prime candidate,” he said.

The regulatory environment also needs to evolve, emphasised Alice Garton, from ClientEarth, a non-profit legal firm.

“Existing laws need adapting and evolving, as do financial risks and changing markets,” said Garton.

Her organisation is putting pressure on regulators and firms to stop classifying climate risk as an “ethical issue” and instead start thinking of it primarily as a financial risk.

She suggested that investing in coal should be listed as a “material risk” – commonly something that must be reported to shareholders as a regulatory requirement.

A “whole suite” of existing financial laws if applied by firms and policed by regulators, with respect to climate change, “would go far to achieving climate goals”, she suggested.

ClientEarth’s recent work in the UK has focused on the legal duties of pension fund trustees and the way the law applies to company directors in respect to climate risk.

Tom Herbstein, of the Cambridge Institute for Sustainability Leadership (ClimateWise), focused on “transition risks” as a major threat for investors and companies alike.

He cited the example of the German government’s U-turn away from nuclear energy following 2011’s Fukushima power plant disaster in Japan.

“It highlighted the unpredictability [of transition risk],” he said. “That’s most concerning from a supervisory perspective.”

Such sudden swings in policy – including new regulations to punish investments in fossil fuels and other pollutants – can lead to stranded assets and massive financial losses, Herbstein suggested.