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climate-risks publications
21/12/2020

Newest study: Climate Change Litigation in the Corporate Context - A New Risk for Due Diligence

Katharina Candia Avendaño
Patrick Bungard
Prof. René Schmidpeter

A new study by M3TRIX on climate risks in the corporate context

Dear Reader

We are facing existential crossroads – among others, two existential crises pose enormous challenges to the global community: the climate crisis and the crunch of the global economy. For too long, climate- related issues and economic thinking have been viewed separately or as irreconcilable poles. Within the next years, there is a historic opportunity in bringing these poles together and setting the economy on a pathway to sustainable development.

Climate change threatens life on earth. But it is also increasingly a critical business factor and entails both, extensive direct and indirect corporate risks. Key stakeholders of companies such as investors, shareholders, societal organizations or governments show increasing interest for Climate Risk Reporting and claim companies to reduce climate change relevant emissions. In consequence, the identification, analysis and audit of climate risk become a critical success factor for companies.

Governments around the globe are working on stricter regulations and reporting guidelines for climate risks to ensure assessment and transparency of such. The increasing number of climate risk-related lawsuits filed against companies, states and other organizations all over the world exemplify the materiality and complexity of this topic.

The following work gives essential insights into the field of corporate climate risks including an overview of current regulations, significant climate risk litigation cases, and the assessment of key stakeholders.

Download Study

Authors of the study: Patrick Bungard, Katharina Candia Avendaño, Helen Cramer, René Schmidpeter

Cologne, the 18th of December

 

Preview: Abstract

While climate change was an abstract and far-away issue for companies and the public for decades, it has become progressively more tangible for diverse economic actors in recent years. Due to the increasingly harmful effects of global warming, climate risks in a corporate context have become a matter of law and substantial for corporate financials.

In the past years, the data collection of CO2 emissions and its assignment to emitters has become an accredited methodology in climate risk assessment, making it possible for victims to take claims against companies. Thus, putting them at risk of material liability for environmental harm. The analysis of the increasing number of litigation and legal proceedings against companies for their contribution to climate change shows that there is an exceptional threat to companies building their businesses on negative environmental impacts.

Companies not only need to consider climate-related risks in general but also the risk of being prosecuted for contributing to climate change or not disclosing the contribution properly. Companies must report on important risks to their business to the supervisory board as well as in their management or annual reports. The research of the legal and voluntary framework of risk assessment and reporting reveals a pattern of non-binding and non-standardized recommendations of climate risk reporting. To this day, the European Union and German legislation are primarily concerned with general risk disclosure and still group climate-related data as non-financial information to be disclosed in companies’ non-financial reporting. The Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI) suggest a further description of climate risks for corporate reporting. Overall, there is a substantial increase of international, European, governmental and nongovernmental associations being formed to further develop strategies on this matter.

This study helps to identify supervisory boards, auditors, shareholders and investors as important stakeholders for corporate reporting of climate risk-related information. Currently, corporations are still in the position of defining for themselves which risks are material or non-material. This not only increases long-during litigations but also management’s compliance violations of their due diligence obligations towards shareholders and investors. Based on the evidence in this study, the process of self-defining materiality of climate risks lacks system and consistency. Although climate risks can already be linked to tangible financial liabilities, companies still do not report these risks accordingly

 

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