Investment insecurity due to incorporation of tangible hazards and lawsuits into valuation
Climate Litigation and Its Impacts on Corporate Finances
Climate litigation is rapidly growing in scale, complexity, and geographic reach, with over 3,000 cases filed worldwide by 2024 [1][3][4]. This trend is significantly impacting the corporate financial outlook, as companies face increased litigation risk, regulatory scrutiny, and potential liabilities [1][2][3][4].
Asset owners find it challenging to integrate high-level discussions about physical and litigation risks into everyday investment decision-making [1]. Barbara Zvan, CEO at Canadian pension fund UPP, emphasized the need for engagement with asset managers due to the investment community investing through them, and the lack of specialized teams within many asset owners [1].
Matthew Gingell, general counsel at Oxygen House Group, argues that the pace of change on climate litigation remains too slow [1]. In the UK, there were only 50 litigation cases over the past year [1]. However, this number may increase as businesses experience an increase in brown-on-brown litigation due to climate-related disputes over accountability [1].
One such dispute occurred between Iberdrola and Repsol, with Iberdrola taking Repsol to court over alleged greenwashing [1]. Brown-on-brown litigation is a topic of debate at the Oxford Sustainable Finance Summit [1].
Nigel Brook, a consultant at Clyde & Co LLP, warns of a potential increase in climate-related foreclosures on mortgages [1]. He also suggests that uninsurability could lead to uninvestability for certain assets [1]. Uninsurability is a growing concern, as insurers become increasingly unwilling to support exposed assets due to climate risks [1].
The risks of climate litigation are becoming a more significant factor in assessing the financial outlook for individual firms [1]. Asset owners are increasingly relying on asset managers to develop metrics that map the physical risks of individual assets [1]. The annual issuance of cat bonds, a vehicle used by insurers to offload liability for physical risks, reached an all-time record of $23 trillion in 2025 [1].
However, very few UK asset owners currently have the capacity to assess physical and litigation risk factors for individual holdings [1]. Awareness of physical risks among asset owners is growing rapidly [1]. Asset owners should aim to tie forecasts of physical and litigation risk exposure into their strategic asset allocation decisions [1].
AI advancements and improved data could enable investors to price in litigation risks and integrate them into return forecasts [1]. The Financial Stability Board has warned of the growing costs of physical risks and the potential for a sudden re-evaluation of climate-related financial risks by market participants [1]. This could potentially lead to the establishment of a shadow carbon price [1].
In conclusion, climate litigation is expanding and maturing globally, imposing increasing legal and financial risks on corporations that directly influence their ability to secure insurance coverage [1]. Some sectors may potentially face uninsurability due to elevated litigation and regulatory risks [1]. Investors and risk managers are advised to closely monitor climate litigation developments to assess financial exposure and insurance market conditions accordingly [1].
- The rapid growth of climate litigation cases worldwide is leading to an increased focus on environmental-science and its implications for business, as companies face more litigation risks, regulatory scrutiny, and potential liabilities.
- As asset owners integrate discussions about physical and litigation risks into investment decision-making, there is a growing need for businesses to demonstrate transparency and accountability in their environmental practices to avoid climate-related disputes, such as greenwashing claims.
- The financial sector is reacting to the risks of climate litigation by developing new investment strategies, such as the annual issuance of cat bonds as a vehicle to offload liability for physical risks, and by relying on AI advancements and improved data to price in litigation risks and integrate them into return forecasts.
