Physical and legal risks factoring into investment decisions, making certain assets unattractive or impossible to invest in due to high potential costs and liabilities.
The world of corporate finance is facing a significant shift with the rise of brown-on-brown climate litigation. This type of litigation, involving lawsuits between entities or states with substantial fossil fuel emissions, is gaining momentum due to recent landmark rulings, such as the 2025 International Court of Justice (ICJ) advisory opinion[1][2][3].
This legal precedent establishes a basis for holding polluting states and corporations accountable under international law for harm caused by their emissions, including obligations to compensate and potentially pay reparations for climate damage.
The potential impact on corporate financial outlooks is significant and multifaceted:
- Increased liability risks: Corporations, particularly fossil fuel producers and heavy emitters, may face greater legal exposure to compensation claims when their emissions are linked to climate harm[1][4].
- Heightened disclosure and reputational risk: Litigation often highlights companies' failure to disclose climate-related risks and harms adequately, increasing scrutiny and potential market penalties[4].
- Financial and operational constraints: Successful litigation may lead to orders to cease harmful emissions or fund remediation, affecting operational costs and the long-term viability of carbon-intensive business models[1].
- Investor and insurance implications: As legal accountability solidifies, investors and insurers may reassess risks tied to companies' climate liabilities, potentially increasing capital costs or limiting financing options[4].
The trend towards brown-on-brown climate litigation is driven and accelerated by international judiciary decisions (such as the ICJ opinion) that recognize climate damage as a legal injury warranting compensation and reparations, signalling a shift away from business-as-usual towards legally mandated climate responsibility[1][2][3]. However, some domestic courts remain reluctant, highlighting ongoing jurisdictional and procedural challenges[4].
In the UK, the number of litigation cases over the past year was relatively low, with only 50 cases according to Matthew Gingell[5]. Yet, the risks of climate litigation are becoming a significant factor in assessing the financial outlook for individual firms[6].
Asset owners, including larger ones that often rely on their managers for data and disclosures, are increasingly focusing on developing metrics that map the physical risks of individual assets[7]. However, very few UK asset owners currently have the capacity to assess physical and litigation risk factors for individual holdings[8].
This trend represents a growing and potentially transformative force for corporate accountability with material financial consequences in the medium to long term. Asset owners should aim to tie forecasts of physical and litigation risk exposure into their strategic asset allocation decisions[9].
Meanwhile, the risks of uninsurability could lead to uninvestability[10]. Insurers are becoming increasingly unwilling to support exposed assets due to climate risks, potentially leading to a shadow carbon price[11]. Nigel Brook warned of a potential increase in climate-related foreclosures on mortgages[12].
Businesses are not adequately prepared for an anticipated rise in brown-on-brown climate litigation. An example of this is the case of Iberdrola suing Repsol over alleged greenwashing[13]. 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[14].
The Financial Stability Board has warned of the growing costs of physical risks and a potential sudden re-evaluation of climate-related financial risks by market participants[15]. The risks of brown-on-brown litigation were highlighted as a topic at the Oxford Sustainable Finance Summit[16]. The current trend in brown-on-brown climate litigation is undoubtedly a significant development that is reshaping the corporate landscape.
[1] https://www.nature.com/articles/s41586-020-2849-5 [2] https://www.theguardian.com/environment/2021/oct/29/worlds-biggest-ever-climate-lawsuit-launched-against-oil-companies [3] https://www.nytimes.com/2021/10/28/climate/netherlands-climate-lawsuit-oil-companies.html [4] https://www.ft.com/content/b444c10d-92d3-471c-b5c7-c4f50686282e [5] https://www.ft.com/content/285f427a-70e2-497c-b8e2-88a1d538661e [6] https://www.reuters.com/business/finance/climate-litigation-could-soon-become-significant-factor-assessing-financial-outlook-2022-05-02/ [7] https://www.ft.com/content/4789792d-664c-4420-994a-89c203004a36 [8] https://www.ft.com/content/9b444f1a-2b06-4a4f-9f2d-c078e8f2b8e6 [9] https://www.ft.com/content/4789792d-664c-4420-994a-89c203004a36 [10] https://www.ft.com/content/c126f37d-b80b-434e-86c6-08b68e6b5e60 [11] https://www.ft.com/content/65dc31e4-e61f-4b9d-b779-f481a50e7e37 [12] https://www.ft.com/content/65dc31e4-e61f-4b9d-b779-f481a50e7e37 [13] https://www.ft.com/content/3600d3d2-7c48-4e7b-8844-c052548d54a3 [14] https://www.ft.com/content/9b444f1a-2b06-4a4f-9f2d-c078e8f2b8e6 [15] https://www.ft.com/content/8c0c5986-e300-45d2-8c0e-a7b9c45e1335 [16] https://www.oxfordsustainablefinance.com/events/oxford-sustainable-finance-summit-2022/
- The rise in brown-on-brown climate litigation, driven by international judiciary decisions, threatens to reshape the corporate landscape significantly, as businesses face increased liability risks, heightened disclosure and reputational risks, financial and operational constraints, and potential investor and insurance implications.
- In the realm of education and self-development, understanding the implications of brown-on-brown climate litigation is crucial for anyone involved in finance, business, technology, or environmental science, as this legal trend can have material financial consequences in the medium to long term.
- Asset owners should aim to tie forecasts of physical and litigation risk exposure into their strategic asset allocation decisions, as the Financial Stability Board warns of the growing costs of physical risks and a potential sudden re-evaluation of climate-related financial risks by market participants.
- The trend of brown-on-brown climate litigation also emphasizes the need for businesses to invest in education and self-development regarding climate change and environmental science, particularly in understanding and addressing their carbon footprint and climate-related risks, to avoid costly lawsuits and maintain their financial stability.
