Investors Who Ignore Climate Risk Could be Sued

Asset managers and pension trustees who ignore the risks of climate change on the value of their stock may run the risk of legal action. The warning comes from a trio of highly-respected experts in the environmental and financial field.

UK-based investment manager Howard Covington, environmental lawyer James Thornton and climate economist Professor Cameron Hepburn argue that systemic climate risk is an issue which investors, who have duties of care, now ignore at their peril.

In an article for Nature, published today, they point out that bringing the first action to court would not be simple, but could succeed.

Covington, trustee of environmental law organisation, ClientEarth, said: “Clients of investment firms and beneficiaries of pension funds might have a legal case to bring if those who manage money for them stand idly by as emissions erode the value of their stock. We are currently exploring such a possibility.”

Thornton, CEO of ClientEarth, added: “To produce a wholesale change in attitude, a court ruling on the obligations of fiduciary investors to control systemic climate risk will probably be needed.

“Because of the uncertainties in estimating future climate damage, this will not be an easy case to bring. But we anticipate that such a case will ultimately succeed.”

The largest 500 companies on the world’s stock markets account for about half of market value and 14 percent of global emissions. Steel firm Arcelor Mittal, utilities firm RWE and oil giant ExxonMobil are among the top ten.

Estimates suggest that listed companies account for around a quarter of global emissions.

Systemic climate risk for investors can be expressed as the likely reduction in the value of a diversified investment portfolio due to expected future climate change.  Initial estimates point to a potential value reduction of 10% – pointing to a potential loss of US$7 trillion of the US$70 trillion of shares on the world’s equity markets.

Hepburn, professor of environmental economics at the Smith School at the University of Oxford said: “The risk exceeds the legal test of materiality and should be too large to ignore. In practice most investors neglect it entirely.

“Because it arises from damage to the economy as a whole, the risk cannot be reduced by hedging investments or by limiting exposure to particular assets. Rather, investors should actively encourage the companies they own to disclose their business strategy for a net zero emissions world, along the lines of the principles of the Oxford Martin Net Zero Carbon Investment Initiative.”

The Paris agreement has provided a major incentive for carbon intensive firms to assess and report on the risks and opportunities facing their organisations as a result of climate change.  But many multi-nationals are not signed up.

Thornton said: “The Paris agreement was a diplomatic triumph. But it will remain largely voluntary until countries translate the promises, their nationally determined contributions (NDCs) into their own legal systems. We will be monitoring their progress so that citizens can hold them to account.”

Covington added: “Investors will play a major part in reducing future emissions, either voluntarily or because they will eventually be forced by the courts to manage climate risk.”