This report examines the litigation risks arising from the transition in the global energy sector from fossil fuels to renewable energy. It is part of a broader research effort conducted by Energy Transition Risks and Opportunities, a consortium whose purpose is to provide research and tools to assess the financial risk associated with this energy transition. The report argues that litigation risks can be both a material driver and consequence of that transition. Companies, investors and financial services providers will need a strong understanding of those risks to enable a diligent assessment of their bearing on individual valuation.

The report advances a taxonomy of these litigation risks classified as eight categories grouped into three classes. The first class, ‘failure to mitigate’, relates to claims seeking to establish liability for emissions that cause the physical impacts of climate change and the costs attributable to those impacts.

The second class, ‘failure to adapt’ including ‘failure to report or disclose’, relates to claims deriving from commercial failures to take into account the physical and economic transition risks associated with climate change. This also relates to the commercial failure to accurately disclose related exposures. In that respect, the report contains a detailed discussion of the concept of misleading disclosure, why it is important in the context of climate change and its impact on the valuation of corporations and sectors.

The third class, ‘energy transition specific regulatory compliance’, refers to claims relating to emissions related laws and standards introduced to implement energy transition policies as well as related consumer protection law claims.

The legal bases of all claims in the taxonomy include human rights law, the law of torts, securities laws related to misleading disclosure or securities fraud, company directors’ statutory and fiduciary duties, contract law and constitutional law.

The report provides a very detailed discussion of the nature of each of the categories of litigation risk, their potential valuation impacts, leading case study examples, identification of the category as a driver or consequence of the energy transition and those sectors that are high risk in each category.

The report stresses that a full analysis of these litigation risks requires four tiers of examination, the report addressing the first tier only, being the forms of claim that are likely to arise. The remaining tiers are still under investigation. They are the likelihood of litigation over mainstream investment horizons under various energy transition scenarios, the sectors that are materially exposed and the corporations within those sectors.

Even so, the report discusses how all categories of litigation risk have the potential to become material drivers and / or consequences of the energy transition under any transition scenario. The report analyses the potential materiality of climate related litigation risks over mainstream investment horizons. In doing so, the report acknowledges the complexity of pricing litigation risk and discusses how litigation can have a much broader impact than its direct financial impact on a defendant entity.

1. Litigation risks bear financial consequences such as impact on a corporation's earnings, liabilities, discount rates, ratings and outlooks. Other forms of financial harm include reputational damage, loss of political and social capital and market exclusions. Investors must understand these risks to assess their bearing on valuation.
2. Litigation risk factors act as both a driver of the energy transition, as a significant spur to market conduct and policy reform, and as a consequence of that transition, particularly where corporations, who are not strategically positioned for it, suffer loss.
3. From a policy perspective, litigation can be a significant driver to regulatory reform in terms of both emissions restrictions and disclosure requirements. From a market perspective, the prospect of corporate and board liability along with financial, insurance and reputational consequences, will put pressure on corporations to adjust their disclosures, governance and strategy.
4. Litigation risk can be a consequence of the energy transition brought on by policy and market drivers, where parties have suffered loss from a market participant’s failure to manage or disclose energy transition risks. Such claims can have material impacts at all levels of the investment supply chain.
5. Beyond its financial impact on a company and being a driver of regulatory or corporate reform, litigation can be deployed as a strategic tool to raise the profile of a particular issue, to impact on a company's social licence to operate and to apply pressure on governments to introduce relevant regulation.
6. Many litigation risks associated with the energy transition are not dependent on developments in emissions regulation or controls. Rather, litigation risk exposure turns on economic and market factors and broad commercial laws.
7. While all categories of litigation risk can become material drivers and consequences of the energy transition under any transition scenario, the swiftness of or delay in that transition will affect which categories are most at play.
8. Regulatory and investor claims alleging misleading disclosure have emerged as a significant driver and consequence in the energy transition. Such claims are likely to be of particular interest to financial analysts as they may have material valuation and risk rating implications for individual corporations and sectors.
9. Litigation claims related to misleading disclosure will feature more prominently due to the release in 2017 of the final recommendations of the Taskforce on Climate-Related Financial Disclosures which provides an influential benchmark for the true and fair disclosure of material financial risks associated with climate change.
   
10. This report contains a number of tables and diagrams including:
    
    • The taxonomy of litigation risks.
    
    • Observations and conclusions drawn from that taxonomy as applied to case studies in the report.
    
    • Litigation as driver or consequence of energy transition.
    
    • The tiers of examination for analysis of litigation risks.
    
    • Forms of disclosure that may be misleading or deceptive.