Risk managers warned to factor climate change into future scenario planning

Climate change is already altering the litigation landscape across the world and risk managers must factor this into their planning to avoid an escalation of claims against their organisations, according to experts at a recent event in London. They said climate change is a fast-emerging risk that is impacting business in new and unexpected ways, and urged risk managers to include this threat in their overall risk frameworks. Tricia Hobson, global chair and head of the Australia and Asia-Pacific practice at law firm Norton Rose Fulbright, said: “Climate change is gaining prominence rapidly and we are starting to see there are implications in areas where you would not expect to see risks emerging. “The claims that are emerging are posing major risks for boards and companies. For example, in Australia we have seen the first case in which investors have sued for non-disclosure in relation to an investment portfolio of a financial institution, because it had some environmental risks in there,” she added at the Norton Rose Fulbright event, titled: Climate change, natural catastrophes and the implications for the Lloyd’s market. Professor Sir Brian Hoskins CBE FRS, founding director and now chair of the Grantham Institute for Climate Change at Imperial College London, and professor of meteorology at the University of Reading, spoke of the massive risk facing the planet as global warming speeds up. There is a very real risk of sea levels rising 1.5 metres by the end of the century, unless action is taken now, he said. He also pointed to the difficulties of dealing with the problem. “Driving your car down the road today will leave a carbon emission in the atmosphere for thousands of years,” he explained. Mr Hoskins said that as the planet warms up, there will be increased capacity to hold water. If the temperatures rise 6˚C, the atmosphere can hold 50% more water, he said. The implications of this could be extremely severe. As Professor Hoskins explained, it is not just a matter of sea levels rising but the impact on weather patterns and the chance of more extreme weather. Around the world, this is already translating into litigation. Neel Lane, a US partner at Norton Rose Fulbright, pointed to greater storm activity during the past couple of years, including hurricanes, wildfires and floods across the US. There has been a resulting surge in insurance claims, he said. “The question is what risks might follow on andmultiply in the future,” added Mr Lane. “Expect more claims against architects and engineers,” he warned, as companies look to blame the professionals. For example, he cited large corporate and residential developments in the city of Houston, which could be impacted by flooding. “Will the property owners look to blame the professionals?” he asked. “It is not a big stretch to see municipalities suing professionals either,” Mr Lane warned. “New York has already taken on the coal industry for adding to global warming. As professionals learn more about climate change, there will be a need to build to a higher standard but that comes at a cost and in a competitive market, people are always looking to reduce costs,” he added. That conflict, he fears, could result in more litigation in the future. In Canada, people are watching oil and gas developments closely, said Aldo Argento, a partner in the Canadian office of Norton Rose Fulbright. Plans for two new pipelines have recently been approved by the Canadian government, but already the environmental lobby is raising concerns that they might increase the risk of climate change. Arguments from indigenous groups and environmentalists might well cause delays, while regulators may also want to see more protections in place, said Mr Argento. All of this could well cause delays to the overall project. Mr Argento suggested this may result in more business interruption insurance claims. Things could also spill over into more claims against directors and officers of firms involved. “Directors and officers need to be aware of their reporting responsibilities and the risks if they fail to do that,” he warned. Emerging markets are not immune to climate change risks. Although many jurisdictions do not necessarily have legislation allowing class actions as yet, the tide may be turning in favour of plaintiffs. South Africa is one territory where class actions have become established. The number of plaintiff law firm offices in Johannesburg suggests lawyers are seeing opportunities for claims in that market. Norton Rose Fulbright director Maria Philippides said South Africa has been following the US’s lead in terms of claims patterns, but noted local insurers are particularly concerned about political risks around climate change. She pointed to the drought in Cape Town, which has attracted international attention. It has also been raising questions about where firms should site their operations, with some suggesting they should leave the city altogether. “You have to ask what the impact would be if buildings were to be abandoned. In environments where you have poor service delivery, you will often have civil commotions and that can lead to property damage,” said Ms Philippides. However, the Cape Town municipality is being blamed by many for the water shortages. Therefore, if companies try to make claims on their property insurance, they may well be declined because it is fundamentally a political risk, the lawyer believes. Ms Philippides said the problem is by no means limited to Cape Town. South Africa generally has suffered problems around migration, particularly illegal immigrants and cities swelling with people looking for jobs, food and houses. The rest of Africa is not immune either, she warned. “Take Kenya. It is home to the world’s largest refugee camp and it is estimated that 25% of those refugees have moved directly as a result of drought and a loss of their farmland,” said Ms Philippides. “It can lead to more conflict,” she said, “and that takes us right back to political risk and political risk insurance. There is also another D&O risk as investors will start to ask awkward questions of the directors about what they knew and what they did. We are seeing claims from investors around the loss of company values already – in South Africa there are increasing obligations on directors and officers to look after the company and its shareholders.” Professor Hoskins added that political tensions, as well as societal tensions, are only likely to increase as parts of the world become uninhabitable. “A lot of urban conurbations are located on coastal plains,” he said, “while a 5˚C increase in temperatures might make some tropical areas unlivable too. The stresses are rising.”

Risk managers warned to factor climate change into future scenario planning

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