Risk Assessment in Investments: Accounting for Tangible Risks and Legal Fees

Risk Assessment in Investments: Accounting for Tangible Risks and Legal Fees

In a significant development, climate litigation is maturing and expanding, posing substantial implications for corporate insurability and investment decisions worldwide. Since the 2015 Paris Agreement, nearly 3,000 cases have been filed globally, marking a shift from niche legal challenges to a mainstream tool for accountability [1][2][3][4].

The landscape of climate litigation is evolving rapidly, with a broader range of defendants coming under scrutiny. This includes governments, companies, financial institutions, and professional service firms, reflecting accountability claims across emissions, climate strategies, and financial disclosures [1][2]. Furthermore, Supreme and constitutional courts worldwide are playing a pivotal role in developing jurisprudence on corporate climate responsibility, standards of care, and the enforceability of emissions reductions [1][4].

Beyond classic environmental claims, recent litigation increasingly involves rights-based claims, challenges on "climate-washing," financed emissions, and ESG-related disputes [1][4]. The geographic diversification of litigation is also noteworthy, with rapid growth in the Global South, such as Brazil, India, and South Africa, where governments often play a leading role [4].

The evolving climate litigation landscape impacts corporate insurability and investment decisions in several ways. Rising legal risks, especially for high-emitting sectors, expose companies to costly legal defenses, damages, and reputational risks, making insurers more cautious or selective in underwriting related risks [1][3]. Courts are also influencing corporate transparency and standards of care, which in turn affect investor due diligence and risk assessments related to climate-related liabilities [1][3].

Litigation outcomes shape regulatory and social expectations, encouraging investors to factor in litigation risk when making capital allocation decisions, particularly regarding climate resilience and transition strategies [1][3]. Moreover, as claims expand to cover financed emissions and indirect responsibilities, insurers may reevaluate coverage scopes or adjust premiums, impacting corporate risk management and capital costs [1].

Looking ahead, climate litigation is expected to continue growing in strategic importance, driving more litigation centered on "standard of care" and enforcement, despite procedural and evidentiary hurdles [1]. The future outlook is heavily influenced by evolving ESG regulatory and political landscapes, intertwining climate litigation with broader sustainability and governance issues [1].

This trend compels businesses to engage actively with the evolving landscape to safeguard their financial and operational resilience. Specialised teams and experts in specific sectors are increasingly necessary to clearly see costs and do due diligence. Furthermore, asset owners should aim to tie forecasts of physical and litigation risk exposure into their strategic asset allocation decisions [1][3][4].

As awareness of physical risks grows among asset owners, corporate battles over who should bear the brunt of physical damages from climate change are becoming more common. There is also a potential increase in climate-related foreclosures on mortgages, and businesses may experience an increase in brown-on-brown litigation over climate change damages [1].

Matthew Gingell, general counsel at Oxygen House Group, predicts that advancements in AI and data will enable investors to price in litigation risks and potentially establish a shadow carbon price [1]. Meanwhile, Nigel Brook, a consultant at law firm Clyde & Co LLP, argues that insurers are becoming increasingly unwilling to support exposed assets due to climate risks [1].

Barbara Zvan, CEO at Canadian pension fund UPP, stresses the need for engagement with asset managers due to the investment community's reliance on them [1]. Asset owners should also aim to tie forecasts of physical and litigation risk exposure into their strategic asset allocation decisions. Many larger asset owners often rely on their managers for data and disclosures, and asset owners are increasingly relying on asset managers to develop metrics that map the physical risks of individual assets [1].

In conclusion, climate litigation is becoming a powerful driver of change in corporate legal risk, insurance markets, and investment decisions. Businesses must adapt to this evolving landscape to protect their financial and operational resilience. The Financial Stability Board has warned of the growing costs of physical risks from climate change, with the annual issuance of cat bonds, a vehicle used by insurers to offload liability for physical risks, surging to an all-time record of $23trn in 2025 [1]. Iberdrola recently took Repsol to court over alleged greenwashing, signalling a growing trend of corporate accountability in the face of climate change [1].

1. In the realm of environmental science, the ongoing climate-change litigation is not only targeting companies, but also expanding to include financial institutions and professional service firms, as accountability claims broaden beyond emissions to encompass climate strategies and financial disclosures.
2. The burgeoning climate-change litigation scene is influencing business practices, particularly in terms of finance and investing, as courts push for higher transparency and standards of care. This change affects investor decisions, with an increased emphasis on due diligence and risk assessments related to climate-related liabilities.
3. As climate litigation evolves to include challenges on "climate-washing," financed emissions, and ESG-related disputes, it is projected to drive more attention toward "standard of care" and enforcement. This trend, along with the anticipated growth of physical risks from climate change, may lead to an increase in corporate battles over damages and brown-on-brown litigation.

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