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January 12, 2024

Investors are ‘flying blind’ to the risk of climate litigation, academics warn

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The researchers have outlined five ways that climate-related legal risks could be assessed by investors and regulators (Photo: Bertholdbrodersen/Pixabay)

Researchers at the University of Oxford find that investors’ current climate risk assessments fail to account for a growing number of climate lawsuits

Investors are leaving themselves open to climate-related financial risk by failing to assess the likelihood that companies within their portfolio will face climate litigation, academics from the University of Oxford have warned.

As climate litigation grows in both scale and sophistication, investors should update their climate risk assessments to fully account for regulatory enforcement action, the researchers add. 

The report presents an alternative framework for assessing climate litigation risk. The research team outlines five ways that climate-related legal risks could be assessed by investors and regulators. These include market-impact analysis; analysis using the social cost of carbon; attribution of climate change damages; estimating costs of accelerated climate mitigation; and qualitative analysis.

“In practical terms, investors need to actively develop plausible scenarios of litigation impacts against which they can test the robustness of their investment portfolios to the associated financial risks,” associate professor Thom Wetzer, lead author and director of the Oxford Sustainable Law Programme, tells Sustainable Views.

“Our work provides examples of how this might be done,” he says.

Since 2015, 2,485 climate lawsuits have been filed worldwide, the report notes. Wetzer adds that an increase in litigation is being driven both by greater availability of evidence of the impacts of climate change and the “increasing professionalisation of the climate litigation ecosystem”.

The researchers estimate that, due to the social cost of carbon, US oil and gas major Chevron could be liable for up to $8.5tn in climate lawsuits. “It’s possible that Chevron’s business may in fact be net value destroying,” says co-author Rupert Stuart-Smith, senior research associate at the Oxford Sustainable Law Programme, in a statement.

Chevron has yet to respond to Sustainable Views’ request for comment. 

The paper says bodies that are typically tasked with assessing climate risks, such as the International Sustainability Standards Board and the Network for Greening the Financial System, consider legal risks in the same category as “transition risks” and provide “little to no” detail on how to evaluate them. “Lumping” legal and financial risks together means that investors often do not consider legal risks in enough detail, the researchers add.

“Financial risk is the dominant frame through which investors and regulators engage with climate change,” says Wetzer.

“Current climate risk assessments misrepresent the distribution and scale of climate-related financial risks. That means investors end up investing in the wrong projects and run risks that neither they nor regulators understand, thereby further aggravating the financial risks climate change entails,” he adds.

The research is available to read here.

A service from the Financial Times