Physical and legal risks impacting investment feasibility, deeming assets uninsurable and, consequently, potentially unattractive to investors.
In the rapidly evolving world of finance, climate litigation is making a significant impact, influencing investment decisions and asset allocation. One notable example of brown-on-brown litigation is the case of Iberdrola taking Repsol to court over alleged greenwashing.
This surge in climate-related litigation against corporations is causing investors to take a closer look at corporate climate strategies. The trend is leading investors to scrutinize portfolios more carefully, adjusting them to mitigate exposure to litigation and regulatory risks associated with climate change.
Globally, climate litigation is expanding rapidly. As of mid-2025, over 3,000 cases have been filed, a steep upward trajectory from the 2,550 cases in 2023. Many lawsuits target large corporations, especially fossil fuel supermajors, alleging their activities contribute to climate change damages and demanding emissions reductions or monetary compensation.
These cases create significant uncertainty about future liabilities and regulatory constraints, affecting the risk profile of companies in carbon-intensive sectors. For investors, this litigation surge translates into increased legal and compliance risks. For instance, ongoing cases seeking to impose emissions reduction obligations under laws aligned with IPCC targets or the Paris Agreement underscore the heightened legal responsibilities corporations face.
The litigation in renewable energy projects, often filed due to inadequate community engagement or alleged human rights violations, illustrates additional complexities in the energy transition space. These lawsuits represent hurdles that can delay or increase costs for green investments, compelling investors to incorporate social and governance factors rigorously when allocating capital to clean energy.
Institutional investors and asset managers are increasingly integrating climate litigation risk assessments into their decision-making frameworks. This shift is leading to revised asset allocations away from high-risk sectors and towards companies demonstrating transparent climate accountability. Legal precedents stemming from such cases may also prompt regulatory reforms that reinforce climate-related disclosure and stewardship duties, further influencing investment trends.
In summary, the rising wave of climate litigation acts as both a risk and a signal for investors. It incentivizes shifting capital towards businesses with robust climate governance, transparent emissions targets, and effective stakeholder engagement, thereby reshaping portfolios to mitigate financial and reputational exposure in a rapidly evolving regulatory environment. This dynamic ultimately contributes to broader asset reallocation in favor of more sustainable and legally resilient investments.
Meanwhile, experts like Matthew Gingell and Nigel Brook are emphasizing the need for asset owners to prepare for the risks of climate litigation. Gingell is confident that AI and data improvements will enable investors to price in litigation risks and integrate them into return forecasts. Brook predicts a rise in brown-on-brown litigation, where companies contest accountability for climate-related damages.
Brook also warns of a potential increase in climate-related foreclosures on mortgages and argues that insurers are becoming increasingly unwilling to support exposed assets due to climate risks. Asset owners should aim to tie forecasts of physical and litigation risk exposure into their strategic asset allocation decisions.
However, awareness of these risks is growing rapidly among asset owners. But, very few currently have the capacity to assess physical and litigation risk factors for individual holdings. Asset owners are increasingly reliant on asset managers to develop metrics that map the physical risks of individual assets. This could lead to the establishment of a shadow carbon price, according to Gingell.
In the UK, there had only been 50 litigation cases over the past year, according to Matthew Gingell. Yet, 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. The annual issuance of cat bonds, a vehicle used by insurers to offload liability for physical risks, has surged to an all-time record of $23trn in 2025.
Barbara Zvan, CEO at Canadian pension fund UPP, stresses the need for asset owners to engage with asset managers due to the lack of specialized teams. Zvan emphasizes the importance of having people who are specialists in relevant sectors to clearly see costs and do due diligence.
In conclusion, the risks of climate litigation are becoming a significant factor in assessing the financial outlook for individual firms. As the trend continues to grow, investors, asset owners, and asset managers must adapt and integrate climate litigation risk assessments into their decision-making processes to remain competitive and resilient in this evolving landscape.
- The trend of climate litigation is causing investors to take a closer look at corporations' environmental-science and climate-change strategies, leading them to scrutinize portfolios to mitigate exposure to litigation and regulatory risks.
- Institutional investors and asset managers are increasingly incorporating climate litigation risk assessments into their decision-making frameworks, shifting capital away from high-risk sectors towards companies with transparent climate accountability.
- Experts like Matthew Gingell and Nigel Brook argue that asset owners should aim to tie forecasts of physical and litigation risk exposure into their strategic asset allocation decisions, incorporating social and governance factors to make greener and legally resilient investments.
