Insurability equates to investment viability, factoring in the risks of physical damage and litigation
The financial sector is facing a new wave of challenges as climate litigation continues to escalate, with significant implications for the insurability and investability of firms, particularly those heavily reliant on fossil fuels.
Barbara Zvan, CEO at Canadian pension fund UPP, underscores the importance of investors engaging with asset managers, as most invest through them and rely on their expertise. However, the growing tide of climate litigation is causing increasing concern, as physical risks lead to greater economic damage and may affect institutions' ability to continue providing financial services in certain segments and geographies.
Nigel Brook, a consultant at law firm Clyde & Co LLP, argues that insurers are becoming increasingly unwilling to support exposed assets due to climate risks. This unwillingness could lead to uninvestability, as firms may struggle to secure the necessary insurance coverage. Furthermore, Brook warns of a potential increase in climate-related foreclosures on mortgages.
Insurers are gradually rolling out climate-related exclusions, particularly for US energy firms facing mounting lawsuits worth potentially billions of dollars. This trend is expected to continue, as insurers seek to mitigate their exposure to climate risks.
The Financial Stability Board has warned of the growing costs of physical risks and the potential for a "sudden re-evaluation" of climate-related financial risks by market participants. The board's concerns are echoed by investors, who are calling for better physical risk data amid rising climate threats.
As climate litigation enters a more "mature and complex" phase, it is becoming a widely used strategic tool by governments, private actors, and civil society to hold corporations accountable for climate impact and enforce climate policies. Since 2015, there has been a significant increase in climate litigation cases reaching the highest courts globally, including supreme and constitutional courts.
The trend of increased and more complex climate litigation is intensifying the financial risks for firms. Firms implicated in climate-related lawsuits may face financial liabilities from court rulings mandating compensation, stricter regulatory compliance, or project suspensions. This heightens legal and operational risks, affecting their financial stability.
Moreover, as climate litigation risks grow, insurers may reassess the insurability of companies contributing significantly to climate change or at higher risk of facing climate lawsuits. This could lead to higher premiums or withdrawal of coverage, fundamentally altering the cost structures and risk exposure of these firms.
Increasingly, investors and financial regulators incorporate climate litigation risk into assessments of corporate governance and sustainability standards. Firms facing frequent or high-profile climate lawsuits may be deemed "uninvestable" by institutions adhering to ESG (environmental, social, and governance) criteria, limiting their access to capital and increasing their cost of capital.
Climate litigation influences firms to adopt more stringent climate risk management and disclose climate-related risks more transparently. Those failing to align with evolving climate policies and court rulings may encounter reputational damage and financial penalties, further affecting their financial outlook.
An example of brown-on-brown litigation, where parties typically on the same side of an issue contest who should be held accountable for climate damages, is the case of Iberdrola taking Repsol to court over alleged greenwashing.
Asset owners are increasingly reliant on asset managers to develop metrics that map the physical risks of individual assets. The annual issuance of cat bonds, a vehicle used by insurers to offload liability for physical risks, has surged to an all-time record of $23trn in 2025.
Matthew Gingell, general counsel at Oxygen House Group, predicts the advance of AI and improvements in data will enable investors to price in litigation risks and integrate them into return forecasts. However, Gingell argues that the pace of change on climate litigation remains too slow, with only 50 litigation cases in the UK over the past year.
As the financial sector grapples with the implications of climate litigation, asset owners should aim to tie forecasts of physical and litigation risk exposure into their strategic asset allocation decisions. This will help them navigate the complex landscape of climate-related risks and make informed decisions for the future.
- In the wake of the escalating climate litigation, Barbara Zvan, CEO of Canadian pension fund UPP, emphasizes the necessity for investors to engage with asset managers, as they heavily rely on their expertise for investment decisions.
- Nigel Brook, from law firm Clyde & Co LLP, posits that the growing unwillingness of insurers to support exposed assets due to climate risks might progress towards uninvestability for firms, should they struggle to secure necessary insurance coverage.
- As climate litigation cases surge globally, especially those reaching the highest courts since 2015, firms could face financial liabilities from court rulings, stricter regulatory compliance, or project suspensions – threats that can seriously impact their financial stability.
