Over the past decade, a series of cases against ExxonMobil was brought by local US governments, private well owners and citizens for the company’s liability to contaminate groundwater. The energy major was alleged to be negligent in adding MTBE to its gasoline, which subsequently leaked from underground storage tanks into local drinking sources across the country. The court ruled in favor of the litigants and awarded them damages to help recover drinkable water, even though contamination was forecasted to not peak for another 20 years in some cases.
To examine the impact of such litigation in adaptation finance and address some of the challenges identified in scaling up adaptation capital from the GCA Adaptation Finance Paper (2019), UNEP FI has collaborated with MinterEllison to produce the paper, “The Forgotten Climate-related Financial Risk: Liability Impacts on Adaptation and Adaptation Finance“, which was launched on 20 April 2021.
This high-level briefing paper explores the legal implications of adaptation (or a lack thereof) to climate change-related impacts. By reference to existing cases and the likely future direction of litigation, it shows how climate litigation can act as both a driver and consequence of adaptation or maladaptation.
As a corollary of the analysis, observations are drawn on the potential for litigation (or the risk/spectre of liability) to help overcome some of the barriers to scaling finance for adaptation identified by UNEP FI, such as weak management of physical climate risk, lack of meaningful disclosure of climate risks, and moral hazard.
The paper indicates that climate litigation and other legal action can act as a driver and consequence of adaptation to the physical risks associated with climate change. However, understanding of the function and magnitude of climate-related litigation remains nascent within the financial services sector. This may lead to a mispricing of physical risks, and of finance for adaptation to those risks.
It also provides a framework by which institutions can consider the range of climate-related liability risks to a borrower, book, portfolio or system – both ex ante and ex post the relevant physical risk.
Last but not least, it presents a key input from which institutions can understand climate litigation as a mechanism to reduce barriers to adaptation finance, and on which to build more holistic climate risk and pricing models.
Listen to the presentation given at the launch of the paper here.
For more information, please contact Paul Smith.