{"id":69271,"date":"2020-12-14T17:01:47","date_gmt":"2020-12-14T17:01:47","guid":{"rendered":"https:\/\/chinadialogue.net\/?p=69271"},"modified":"2024-06-04T18:11:45","modified_gmt":"2024-06-04T17:11:45","slug":"can-the-law-tame-the-impact-of-financial-institutions-on-nature","status":"publish","type":"post","link":"https:\/\/dialogue.earth\/en\/nature\/can-the-law-tame-the-impact-of-financial-institutions-on-nature\/","title":{"rendered":"Can the law tame the impact of financial institutions on nature?"},"content":{"rendered":"\n

Investors, financial regulators and activists alike are turning their attention to the looming ecological crisis of biodiversity loss. While climate litigation continues apace, creating climate-related liability risks for banks and insurers across the globe, biodiversity looks to be the next frontier in nature-related litigation and therefore nature-related liability risks for financial institutions.<\/p>\n\n\n\n

There is a potential risk to financial institutions being sued for financing the destruction of nature. But the near-term priority should be to heed the call of financial supervisors to assess, mitigate and disclose liability risks related to biodiversity as part of the broader assessment of biodiversity-related financial risks.<\/p>\n\n\n\n

Such liability risks are broader than direct litigation risks and, like climate litigation, extend beyond environmental claims across the suite of commercial, human rights, statutory and tort law claims. We explore these in this article, based on the findings of our recent report<\/a> for the Commonwealth Climate and Law Initiative.<\/p>\n\n\n\n

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Since the Bank of England Prudential Regulation Authority (PRA) published its landmark 2015 report<\/a> on the potential impacts of climate change on the insurance sector, there has been exponential growth in our understanding of climate-related financial risks, particularly the physical impacts (whether acute or gradual onset impacts on the natural and built environment) and economic transition risks (harms to an enterprise caused by shifts in government policy\/regulation, technological innovation or shifting preferences of shareholders, financiers, insurers, the community and other stakeholders in the low-carbon transition) described in that report. The 2017 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) have since emerged as the leading framework to assess, manage and disclose climate risks in line with investor expectations and regulatory guidance.<\/p>\n\n\n\n

Less well understood is the third category of climate-related financial risks described by the PRA: climate-related liability risks. Liability risks can arise for both the enterprises responsible for the greenhouse gas emissions that contribute to climate change, and across a broad suite of government, corporate and individual actors who fail to manage the physical or economic transition risks<\/em> associated with the changing climate.<\/p>\n\n\n\n

Over 1,500 climate change cases have been brought in at least 38 countries by a wide range of claimants, including states, cities, investors, NGOs and even children. In this \u201cclimate litigation\u201d, parties who suffer or apprehend loss or injury associated with climate change impacts or the transition seek to employ legal strategies for compensation, to hold others accountable for the loss, or to drive preventative climate action. This climate litigation, as well as regulatory enforcement action beyond the courts, creates liability risks that flow through the financial system.<\/p>\n\n\n\n

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Along with climate change, the World Economic Forum\u2019s 2020 Global Risks Report<\/a> ranked biodiversity loss as one of the five top risks to the global economy of the next decade. The report tracks a growing concern among central banks, regulators and financial market participants about the financial risks presented by loss of biodiversity and ecosystem services.<\/p>\n\n\n\n

In May 2020, the Network for Greening the Financial System (NGFS) published guidance<\/a> for central banks and supervisors on how to integrate environmental risks \u2013 including risks from biodiversity loss \u2013 into prudential supervision. The report by the coalition of central banks and supervisors, including the People\u2019s Bank of China, follows the TCFD characterisation of climate-related risks: physical and transition risks, with liability risks as a subset of these. It called for greater understanding of the transmission and materiality of these environmental risks:<\/p>\n\n\n\n

Supervisors are recommended to determine how climate-related and environmental risks transmit to the economies and financial sectors in their jurisdictions and identify how these risks are likely to be material for the supervised entities. <\/em>(NGFS Recommendation 1)<\/p>\n\n\n\n

With biodiversity loss, just like climate change, there are financial risks, for example related to dependence on vulnerable or disappearing biodiversity, similar to the physical risk from more frequent extreme weather. And there is a transition risk for activities that cause biodiversity loss, just as there is for carbon emitters, for example from new environmental regulation, or changing consumer attitudes.<\/p>\n\n\n\n

A framework for assessing liability risks<\/h2>\n\n\n\n

In our recent report for the Commonwealth Climate and Law Initiative, \u201cThe emergence of foreseeable biodiversity-related liability risks for financial institutions: A gathering storm?\u201d, we propose a framework to assist firms and regulators to assess these liability risks. In the case of claims for causing biodiversity losses, and resulting human, ecological and financial impacts, we can expect these to target the five key drivers of biodiversity loss as set out<\/a> by IPBES, the UN biodiversity panel: changes in land and water use, over-exploitation of organisms, climate change, pollution and invasive alien species.<\/p>\n\n\n\n

Strategic claims are expected as claimants seek to stop these drivers of biodiversity loss. Our framework sets out three high-level categories and 10 sub-categories of biodiversity-related liability risks.<\/p>\n\n\n\n