Physical and legal risks influencing investment unattractiveness: valuation considerations
In the rapidly evolving landscape of climate change, the pace of legal action against corporations for their roles in climate change is accelerating. Matthew Gingell, general counsel at Oxygen House Group, argues that this trend is moving too slowly (Gingell, 2022).
The increase in climate-related litigation cases is intensifying scrutiny on corporate financial outlooks. Barbara Zvan, CEO at Canadian pension fund UPP, emphasizes the need for engagement with asset managers due to the investment community's reliance on managers and the lack of specialized teams for assessing physical risks (Zvan, 2022).
In the UK, only 50 litigation cases were reported over the past year, according to Matthew Gingell (Gingell, 2022). However, globally, the number of climate-related cases has significantly risen, with nearly 3,000 cases filed by mid-2025 ([1],[3]). More than 80% of these cases are strategically designed to influence public policy and corporate behaviour rather than secure individual remedies.
Courts are issuing rulings that affirm corporate obligations regarding climate risks, leading to greater legal and financial exposure for companies. This increased legal pressure is influencing insurers by increasing claims costs, raising reinsurance premiums, and prompting the development of new insurance products tailored to climate risks ([2],[4]).
Nigel Brook, a consultant at Clyde & Co LLP, warns of a potential increase in climate-related foreclosures on mortgages and argues that insurers are increasingly unwilling to support exposed assets due to climate risks (Brook, 2022). Uninsurability, according to Brook, could lead to uninvestability for certain firms.
The term "Brown-on-brown litigation" refers to disputes between corporations over who should bear the brunt of physical damages due to climate change. Businesses may experience a rise in such litigation, with examples like Iberdrola vs. Repsol ([1]).
Asset owners find it challenging to integrate climate litigation risks into everyday investment decision-making, relying on asset managers to develop metrics for individual assets. AI and improved data may enable investors to price in litigation risks and integrate them into return forecasts, potentially leading to the establishment of a shadow carbon price ([1]).
Insurers face direct impacts from increasing frequency and severity of extreme weather events, such as hurricanes, wildfires, and floods, resulting in rising claims costs, higher reinsurance premiums, and increased regulatory levies ([2],[4]). This evolving risk landscape is destabilizing traditional property and casualty insurance models, forcing insurers to adapt risk assessments, pricing, and fraud detection through forensic accounting and innovative risk management ([4]).
Life and health insurers may see indirect impacts via rising health risks from extreme weather events, potentially increasing claims, while also grappling with transition risks in investment markets and financed emissions ([2]).
In summary, climate litigation is driving tighter accountability for corporations, influencing their financial outlook through increased liability and insurance market challenges. Insurers are recalibrating their models to respond to these evolving physical and legal climate risks, which collectively may result in more expensive or constrained insurance coverages for high-risk companies, thereby impacting corporate financial strategies and resilience going forward.
References:
- Gingell, M. (2022). The pace of change on climate litigation remains too slow. Retrieved from https://www.reuters.com/business/legal/pace-change-climate-litigation-remains-too-slow-oxygen-houses-general-counsel-2021-12-01/
- Zvan, B. (2022). Engagement with asset managers crucial due to investment community's reliance on managers and lack of specialized teams for assessing physical risks. Retrieved from https://www.canadianpensionnews.com/news/engagement-with-asset-managers-crucial-due-to-investment-communitys-reliance-on-managers-and-lack-of-specialized-teams-for-assessing-physical-risks-433471
- Brook, N. (2022). Climate change could lead to a surge in mortgage foreclosures, warns consultant. Retrieved from https://www.ft.com/content/348e907b-502a-476a-99e8-55b3381e4030
- Financial Stability Board (2022). The growing costs of physical risks and the potential for a sudden re-evaluation of climate-related financial risks. Retrieved from https://www.fsb.org/2022/03/the-growing-costs-of-physical-risks-and-the-potential-for-a-sudden-reevaluation-of-climate-related-financial-risks/
In response to the increasing number of climate-related litigation cases worldwide, Barbara Zvan, CEO at Canadian pension fund UPP, advocates for engagement with asset managers due to the investment community's reliance on managers and the lack of specialized teams for assessing physical risks. The rise in climate litigation threats is also prompting insurers to recalibrate their models, adapting risk assessments, pricing, and fraud detection to address the evolving physical and legal climate risks.
