Law firm Herbert Smith Freehills (HSF), in its latest report, finds that 1 600 laws and policies about climate change have been created across 164 jurisdictions to date, since 1997, which has obligated companies to mitigate against costs and risks.
This is a 25-fold increase compared with the number of policies in 1997, when the Kyoto Treaty was signed.
The treaty extends the 1992 United Nations Framework Convention on Climate Change and commits States to reduce greenhouse-gas emissions.
An increase in laws and policies related to climate change has resulted in companies needing to manage potential climate change-related costs and risks, which could, in turn, negatively impact on their value and reputation if left unaddressed.
The report by HSF, titled ‘Climate Change: Succeed in a lower-carbon future’ unearths the political, regulatory and commercial pressures arising from climate change and examines the opportunities for corporates leading the charge into a lower-carbon future.
HSF says mounting evidence of damage caused by climate change is pushing the issue up the political agenda, resulting in a significant number of climate change laws being added to the statute books across the world.
However, there is a lack of uniformity of climate change laws globally, meaning global businesses face a challenge with navigating regulations and keeping on top of changes.
Additionally, banks, institutional investors, asset managers, insurers and other capital market players are under pressure from shareholders and regulators to ensure that funds are invested securely, and that finance and insurance flows to those businesses that are committed to a lower-carbon future.
In a 2019 global survey, HSF says 1 250 CEOs rated environmental and climate change risk as the single biggest threat to business growth.
The World Economic Forum, in a survey of 1 000 experts and decision-makers in 2019, found that the top three global risks were all related to climate change, namely extreme weather events, failure of climate change mitigation and adaptation and natural disasters.
HSF notes that the race is on for corporates to understand their environmental impact and to not only mitigate risk, but convert risk into opportunity.
The law firm advises companies to review and stress test their insurance policies with climate change exposures in mind to see what is available in the insurance market and to ensure that policies are as robust as possible.
Companies should also take care at renewal to carefully consider what information needs to be disclosed to insurers, especially those related to the climate impact of their operational activities.
As scrutiny increases, HSF reports that disclosure is becoming critical to demonstrate compliance and avoid litigation.
“Across all industries ranging from financial services to natural resources, businesses are responding to demand for lower-emission products and services by innovating to adhere to higher standards, and factoring carbon pricing into their strategic planning as evidence of their commitment to combat climate change and comply with emerging regulations.
“This enhances their attractiveness not only to consumers but also to investors – giving them further access to funding with which to drive innovation,” HSF highlights.
The law firm recommends that companies of all types be part of the ongoing climate change dialogue, ensuring that their business models are viable for the transition to a lower-carbon world and that they are equipped to take advantage of opportunities such as carbon trading and subsidies.
“Rather than simply reacting, companies should be participating actively in the development of solutions and keep on top of new domestic and international treaties,” the law firm states.
HSF adds that companies need to embed climate change into wider business strategy and focus the corporate mind on addressing and maintaining strong governance over climate-related activities.
Responsibility for climate change risk must be clearly allocated and risk appetite agreed and reviewed. Companies must continue to identify, measure, monitor and report financial risk arising from climate change, developing appropriate tools and metrics and running risk scenarios.
“Banks may want to look at worst-case climate change scenarios; test their exposure to the corporate and the subsequent impact on solvency and liquidity.
“Energy, natural resources, manufacturing and infrastructure businesses should all evaluate how well their assets will withstand the effects of climate change. This means understanding the vulnerability of their operations, value chain, communities and the surrounding environment,” the law firm notes.
HSF offers consultation on the political, regulatory and commercial pressures arising from climate change and examines the opportunities for corporates leading the charge into a lower-carbon future.