January 12, 2024

Climate risk assessments must engage with the law

Climate-related financial risk is the dominant frame through which many companies, investors, and regulators engage with climate change. The authors argue that developments in legal action mean that the basis for these assessments, which focus on physical and transition risks, is no longer accurate. Accounting for the legal system substantially alters the distribution of climate-related risk between firms, governments, and the public. Drawing on analysis of climate litigation, regulatory enforcement, and other legal action, the authors propose a framework that accounts for how legal action shifts or amplifies physical and transition risk exposures and creates additional climate risk exposures. They then preview five qualitative and quantitative approaches that can be applied to assess the implications of legal action for firms’ climate-related risk exposure.