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Climate Change Risk: What Does it All Mean in 2022

By Alasdair Cameron, Climate Change advisor at The Law Society

 
 
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The World Economic Forum began 2022 by listing climate action failure, extreme weather events and biodiversity loss and ecosystem collapse as the top three of 10 global risks ranked by severity over the next 10 years in its Global Risks Report published on the 11th January.

This was followed by the UK Government’s third climate risk assessment published on the 17th of January which considered 61 UK wide climate risks across multiple economic sectors, eight of which have been identified for immediate action in the next two years.

In the following weeks, storms Eunice, Dudley and Franklin battered the UK with unprecedented extreme weather.

Irrespective of the degree to which these storms can be entirely attributed to climate change, we can predict the frequency and severity of such storms to only increase in the UK as a result of climate change.

The storms also brought the UK’s resiliency to more extreme weather into sharp focus – whether it be through unprecedented power cuts, property resilience or disruptions to supply chains.

Risks, Risks and More Risks

Climate risk not only manifests in a direct physical sense, but in a variety of other ways including: transition risks, liability risks, financial risks, regulatory risks, and; reputational risks.

For example, climate risks are beginning to be dealt with from a regulatory perspective to build climate resilience into markets. New regulation and guidance is constantly being developed. In March this year the UK Government published guidance to help companies prepare for mandatory climate related financial disclosures in line with the Task Force on Climate-Related Financial Disclosures’ recommendations. The first annual reports which will reflect these disclosures are due in spring this year.

Similarly, The Pensions Regulator has published guidance this month and a step-by-step example showing how trustees should go about meeting their climate change risk governance and reporting duties under the Pension Schemes Act 2021.

Talkin’ ‘Bout My Reputation

Whilst regulatory changes have been marching along steadily, consumers and shareholders have been swift to respond to climate risk, particularly on reputational risks for organisations claiming to be managing climate risk and the transition to net zero or properly adhering to climate regulation.

report by the New Climate Institute has recently found that many large companies are routinely exaggerating or misreporting progress on tackling climate change.

Meanwhile, climate-washing or greenwashing litigation has been identified as a new avenue for a growing wave of legal actions which could be taken against companies.

This risk was recently crystalised for companies and boards by ClientEarth’s unprecedented legal action against Shell, which aims to hold the company’s directors personally liable for failing to manage climate risks, therefore breaching their duties to promote the success of the company under section 172 of the Companies Act 2006.

Whether this claim is successful remains to be seen, but it has the potential to provide a blueprint for other similar claims in the UK.

At a time when their shareholders are paying close attention to this rising area of risk, directors also need to keep a close eye and ask:

  • Whether have they done enough to manage, report and mitigate relevant climate risks?
  • Have they delivered upon their climate commitments in the short and long-term?
  • And, from a broader perspective, are their ESG statements consistent with the provisions within the Financial Services and Markets Act 2000?

What Does This All Mean for Solicitors?

For solicitors, the implications of climate risks to them, their clients and the rule of law itself are immense, particularly as they will often be approached as problem solvers and may be asked to advise on:

  • Whether the property a client is seeking to acquire is at risk from extreme weather such as flooding and whether it will be an acceptable security to lenders in the future?
  • The regulatory and reputational risks businesses clients are looking to purchase carry and what might depress their future value?
  • The strength of ESG credentials claimed by large companies as part of supply chain evaluations.

In 2021, the Law Society published a Climate Change Resolution to inform our own policy on climate action and to urge solicitors to take the lead.

Our resolution urges solicitors to “engage in climate conscious legal practice” by mainstreaming climate change throughout their daily practice.

This includes:

  • Approaching “any matter arising in the course of legal practice with regard to the likely impact of that matter upon the climate crisis” and
  • Providing “competent advice to their clients on (i) how they can achieve their objectives in ways which mitigate the effects of the climate crisis; and (ii) the potential legal risks and liabilities that may arise from action or inaction that negatively contributes to the climate crisis”

We also encourage law firms to adopt “practical measures to reduce the environmental impact of their business and policies which mitigate their contribution to the climate crisis through the provision of legal services”.

Promising developments such as Clifford Chance’s decision to adopt a policy that elects to move away from client matters that present climate risks indicate the pace and direction at which these issues are moving.

Future Work

In pursuit of the commitments made in our Climate Change Resolution, the Law Society’s Climate Change Working Group is collaborating with other expert committees at the Law Society and with external stakeholders to develop practical guidance on how climate change is impacting specific areas of the law and how firms can adopt science-based targets. Lastly, we are also working on delivering guidance on professional conduct issues for solicitors raised by the climate crisis. To keep updated on these developments, keep an eye on our climate change page.



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