Effective governance is at the heart of addressing climate risk and transitioning to a low carbon economy

Global law firm Clyde & Co has launched its 2021 climate change risk and liability report. It notes the countdown to net zero carbon emissions has truly begun and developments around climate change risk and regulation are accelerating, with implications for all industries.

In particular, the global pandemic has moved the dial on climate change. The COVID crisis has “vividly demonstrated how suddenly the world we live in can change and how quickly policymakers, companies, and individuals can adapt when forced to do so – setting a precedent for climate change transition”.

The 26th UN Climate Change Conference of the Parties (COP26) in Glasgow in November this year is likely to set the pace in terms of defining and strengthening the policy response.

The pandemic offers a foretaste of the kinds of shocks that climate change or a disorderly transition could create in specific industries or economies, it notes. “Businesses may be surprised by the speed of the changes it triggers, with associated implications for boards’ duty of care in terms of assessing, mitigating and reporting on risk.”

Managing COVID-19 may have given businesses a playbook for how to deal with fast-moving challenges or created a sense that major enterprise-wide risks that were previously thought too big or too difficult to deal with can now be addressed.

It has also proved organisations are capable of rapid and large-scale changes if the will to do so is there.

Risk and opportunity

In terms of the risk landscape, organisations face physical, transition and litigation risks linked to climate change. The law firm notes that both the number and type of claims relating to climate change litigation are expanding.

Changing weather patterns, more extreme events and rising sea levels (alone or in combination) can cause damage to property and infrastructure, impacting asset values and insurance premiums and disrupting supply chains.

Meanwhile, the shift to a low-carbon economy will strand assets and may undermine business or investment decisions; if the transition is disorderly it may give rise to “carbon shocks”. Both act as a potential catalyst for a third type of risk: litigation risk. 

Since achieving net zero will require significant investment as well as regulation, this could create major opportunities for businesses, as well as risks.

As companies build resilience, the importance of good governance cannot be overestimated. Putting climate risk awareness at the heart of decision-making and embedding it into both strategy and culture at all levels of an organisation is an important step.

Nigel Brook, partner at Clyde & Co said: “We believe a proactive, rather than reactive, approach to the new risk environment is sensible, drawing on good governance and turning it into action. It represents an opportunity for businesses to build resilience against climate risk and transition to a new, and better, way of operating.”