Investors who ignore climate risk could be sued

11th February 2016


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  • Mitigation ,
  • Reporting ,
  • Fossil fuels

Author

Wendy Devall

Asset managers and pension trustees should put more pressure on the companies they invest in to reduce emissions or they could face legal action, according to environmental and financial experts.

In an article for Nature, investment manager Howard Covington, ClientEarth chief executive James Thornton and climate economist Cameron Hepburn argue that systemic climate risk is an issue investors, who have duties of care, must not ignore.

The largest 500 listed companies account for about half the value of the world’s stock markets and 14% of global emissions, they said, with steel firm Arcelor Mittal, energy company RWE and oil giant ExxonMobil are among the top 10.

Covington, who is also a trustee of ClientEarth, said: ‘Clients of investment firms and beneficiaries of pension funds might have a legal case to bring if those who manage money for them stand idly by as emissions erode the value of their stock. We are currently exploring such a possibility.’

The experts pointed to a ruling by the Law Commission in 2014, which stated that those who manage other people’s money have a duty to control material risks, or those that might trigger a 5% or more loss in investment value.

Climate change could potentially reduce values by more than that, according to Hepburn, professor of environmental economics at the Smith School at the University of Oxford: ‘The risk exceeds the legal test of materiality and should be too large to ignore. In practice most investors neglect it entirely.’

The Paris agreement in December has provided a major incentive for carbon-intensive firms to assess and report on the risks and opportunities facing their businesses as a result of climate change, the experts said, but noted that many multinationals do not yet do this.

Investors should actively encourage the companies they own to reduce emissions, for example by urging profitable investment in energy efficiency and by discouraging risky capital expenditure on fossil-fuel exploration and production, they recommended.

Better still, managers could push companies to incorporate the goals of the Paris agreement into their constitutions and publish business plans detailing how they will deal with the transition to a zero-carbon economy.

However, a wholesale change in attitude may only come about after a court ruling, according to Thornton. Bringing the first legal action would not be simple due to the uncertainties in estimating future climate change, but could succeed, he claimed.

ClientEarth has recently assisted investors responsible for more than $8 trillion to co-file shareholder resolutions calling on mining companies Anglo American, Glencore and Rio Tinto to be more transparent over climate change risks. The resolutions received support from four of the world’s 10 largest pension funds.

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